<PAGE> 1
As filed with the Securities and Exchange Commission on August 9, 1996
Registration No. 333-3734
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------------
U.S. ALCOHOL TESTING OF AMERICA, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its Charter)
Delaware 3810 22-2806310
- --------------------------- ------------------------- ----------------------
(State or other jurisdic- (Primary Standard (I.R.S. Employer
tion of incorporation Industrial Classifi- Identification No.)
or organization) cation Code Number)
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)
Mr. Robert Stutman
U.S. Alcohol Testing of America, Inc.
10410 Trademark Street
Rancho Cucamonga, California 91730
(909) 466-8378
- --------------------------------------------------------------------------------
(Name, address and telephone number of agent for service)
Copies to:
Robert W. Berend, Esq. Edward H. Cohen, Esq.
Gold & Wachtel, LLP Rosenman & Colin, LLP
110 East 59th Street 575 Madison Avenue
New York, New York 10022 New York, New York 10022
(212) 909-9500 (212) 940-8580
Fax (212) 371-0320 Fax (212) 940-8776
------------------------------
<PAGE> 2
Approximate date of commencement of the proposed sale of the
securities to the public: As soon as practicable after the effective date of
this Registration Statement.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
eneral Instruction G, check the following. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
Proposed
Proposed maximum
Title of each maximum aggregate Amount of
class of securities Amount to be offering price offering registration
to be registered registered(1) per unit(2) price(2) fee(2)
- ------------------- ------------- -------------- --------- ------------
<S> <C> <C> <C> <C>
Common Stock, $.01
par value............ 774,340 $2.00 $1,548,680 $534
Common Stock, $.01
par value,
issuable upon
exercise of
Warrants............. 60,000 $15.00 $ 900,000 $310
Warrants expiring
February 16, 1999.... 60,000
----
Total $844
</TABLE>
(1) The number of shares of Common Stock of U.S. Alcohol Testing of
America, Inc. ("USAT") being registered is based on an estimate as to
(a) the approximate number of shares to be issued to the minority
stockholders of Good Ideas Enterprises, Inc. ("Good Ideas") in
connection with the merger of Good Ideas Acquisition Corp., a
wholly-owned subsidiary of USAT, with and into Good Ideas and (b) an
estimate as to the approximate number of shares to be issued upon the
exercise of USAT Warrants to be issued upon the merger in exchange for
Good Ideas Warrants, in both instances assuming a $2.00 per share
market price for the shares, which is the closing sales price on
August 7, 1996.
(2) Estimated solely for the purpose of calculating the registration fee.
The proposed maximum offering price and the registration fee (a) for
the shares to be issued upon the merger are computed, pursuant to Rule
457(a), on the basis of a $2.00 value per share estimate for the price
to be determined in accordance with the terms of the merger and (b)
for the shares to be issued upon exercise of the USAT Warrants are
computed, pursuant to Rule 457(g), on the basis of the assumed
exercise price of the USAT Warrants if 60,000 shares are subject
thereto.
------------------------------
The Registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the
Registrant shall file a further amendment which specifically states
that this Registration Statement shall thereafter become effective in
accordance with Section 8(a) of the Securities Act of 1933 or until
the Registration Statement shall become effective on such date as the
Commission, acting pursuant to said Section 8(a), may determine.
<PAGE> 3
CROSS REFERENCE SHEET
TO FORM S-4 OF U.S. ALCOHOL TESTING OF AMERICA, INC.
PART I
INFORMATION REQUIRED IN THE PROSPECTUS
<TABLE>
<CAPTION>
Item Number Location in Consent Solicitation
and Caption Statement/Prospectus
----------- --------------------------------
<S> <C> <C>
A. Information About the Transaction
1. Forepart of Registration Statement
and Outside Front Cover Page of
Prospectus........................... Facing Page; Cross Reference Sheet; and
Outside Front Cover Page of Consent
Solicitation Statement/Prospectus.
2. Inside Front and Outside Back Cover
Pages................................ Inside Front Cover Page of Consent
Solicitation Statement/Prospectus; and
Outside Back Cover Page of Consent
Solicitation/Prospectus.
3. Risk Factors, Ratio Earnings to Fixed
Charges and Other Information........ Summary; Summary Historical and Proforma
Combined Financial Data; and Risk Factors;
Computation of Ratio of Earnings to
Combined Fixed Charges and Preferred Stock
Dividends is not applicable.
4. Terms of the Transaction............. Summary; Terms of the Transaction; and The
Merger and Related Matters.
5. Proforma Financial Information...... Summary Historical and Proforma Financial
Data.
6. Material Contacts with the Company
Being Acquired....................... Material Contacts of USAT with Good Ideas;
and The Merger and Related Matters.
7. Additional Information Required for
Reoffering by Persons and Parties
Deemed to be Underwriters............ Not Applicable.
8. Interests of Named Experts and
Counsel.............................. Experts and Legal Opinions.
9. Disclosure of Commission Position
on Indemnification for Securities
Act Liabilities...................... Commission Position on Indemnification.
B. Information About the Registrant
10. Information with Respect to S-3
Registrants.......................... Not Applicable.
11. Incorporation of Certain Information
by Reference......................... Not Applicable.
</TABLE>
<PAGE> 4
<TABLE>
<CAPTION>
Item Number Location in Consent Solicitation
and Caption Statement/Prospectus
----------- --------------------------------
<S><C> <C> <C>
12. Information With Respect to S-2
or S-3 Registrants.................. Not Applicable.
13. Incorporation of Certain Information
by Reference........................ Not Applicable.
14. Information with Respect to
Registrants Other Than S-3 or S-2
Registrants......................... Business of the Company; USAT Market
Information; USAT Management; The
Company's Financial Statements; The
Company's Selected Financial Data; The
Company's Management's Discussion and
Analysis of Financial Condition and
Results of Operations; and Change in
Accountants.
C. Information About the Company Being
Acquired
15. Information with Respect to S-3
Companies........................... Not Applicable.
16. Information with Respect to S-2 or
S-3 Companies....................... Not Applicable.
17. Information with Respect to
Companies Other Than S-2 or S-3
Companies........................... Business of Good Ideas; Good Ideas Market
Information; Good Ideas' Financial
Statements; Good Ideas' Selected Financial
Data; and Good Ideas' Management's
Discussion and Analysis of Financial
Condition and Results of Operations.
D. Voting and Management Information
18. Information if Proxies, Consents
or Authorizations are to be
Solicited........................... Terms of the Transaction; The Merger and
Related Matters; USAT Principal
Stockholders; and Good Ideas Principal
Stockholders.
19. Information if Proxies, Consents or
Authorizations are not to be
Solicited, or in an Exchange Offer.. Not Applicable.
</TABLE>
<PAGE> 5
CONSENT SOLICITATION STATEMENT/PROSPECTUS
U.S. ALCOHOL TESTING OF AMERICA, INC.
PROSPECTUS FOR _______ SHARES OF COMMON STOCK,
WARRANTS TO PURCHASE ____________ SHARES OF COMMON STOCK
AND _________ SHARES OF COMMON STOCK ISSUABLE
UPON EXERCISE OF WARRANTS
AND
CONSENT SOLICITATION STATEMENT TO THE MINORITY
STOCKHOLDERS OF GOOD IDEAS ENTERPRISES, INC.
This Consent Solicitation Statement/Prospectus is being furnished to
the minority stockholders of Good Ideas Enterprises, Inc. ("Good Ideas"), a
Delaware corporation, in connection with the solicitation of consents by U.S.
Alcohol Testing of America, Inc. ("USAT"), a Delaware corporation and a 60.8%
stockholder of Good Ideas , from the holders, other than USAT, of Good Ideas
Common Stock, $.001 par value (the "Good Ideas Common Stock"), in order to
adopt an Agreement and Plan of Merger dated as of April 12, 1996 (the "Merger
Agreement") by and among Good Ideas, USAT and Good Ideas Acquisition
Corp.("Acquisition Corp."), a Delaware corporation and a wholly-owned
subsidiary of USAT , pursuant to which Acquisition Corp. will be merged with
and into Good Ideas (the "Merger").
USAT is offering by this Consent Solicitation Statement/
Prospectus (1) an aggregate of ____________ shares of USAT's Common Stock, $.01
par value (the "USAT Common Stock"), on the basis set forth in the Merger
Agreement, to the stockholders of Good Ideas other than USAT (the "Good Ideas
Minority Stockholders") in exchange for their 1,548,680 shares of the Good
Ideas Common Stock (the "Minority Good Ideas Common Stock") and (2) an
aggregate of __________ shares of the USAT Common Stock issuable upon the
exercise of Common Stock purchase warrants expiring February 16, 1999 (the
"Merger Warrants") to be issued by USAT on the basis set forth in the Merger
Agreement in exchange for Common Stock purchase warrants also expiring February
16, 1999 (the "Good Ideas Warrants") to purchase up to 120,000 shares of the
Good Ideas Common Stock. If the Merger is consummated, the Good Ideas Minority
Stockholders will receive ___ of a share of the USAT Common Stock for each
share of the Good Ideas Common Stock. Assuming that there are no exercises of
outstanding USAT Common Stock purchase warrants or stock options or any
conversions of shares of USAT preferred stock between the date of this Consent
Solicitation Statement/Prospectus and the effective date of the Merger, the
USAT stockholders will own ___% of the outstanding shares of the USAT Common
Stock and the Good Ideas Minority Stockholders will own ___%.
<PAGE> 6
The USAT Common Stock is listed on the American Stock Exchange. On
July 31, 1996, the closing sales price as reported on such Exchange was $2.25
per share.
--------------------------
GOOD IDEAS MINORITY STOCKHOLDERS SHOULD CONSIDER CERTAIN RISK FACTORS
IN CONNECTION WITH THE PROPOSED TRANSACTIONS. SEE "RISK FACTORS" ON PAGE 21.
--------------------------
NEITHER THIS TRANSACTION NOR THESE SECURITIES HAVE BEEN APPROVED OR
DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE FAIRNESS OR MERITS OF THIS TRANSACTION NOR UPON THE ACCURACY OR
ADEQUACY OF THE INFORMATION CONTAINED IN THIS CONSENT SOLICITATION STATEMENT/
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
--------------------------
This Consent Solicitation Statement/Prospectus is dated __________ ___, 1996.
<PAGE> 7
AVAILABLE INFORMATION
USAT and Good Ideas are each subject to the informational requirements
of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and,
in accordance therewith, each files reports, proxy and information statements
and other information with the Securities and Exchange Commission (the
"Commission"). Reports, proxy and information statements and other information
filed with the Commission can be inspected and copied at the public reference
facilities of the Commission at Room 1024, 450 Fifth Street, N.W., Washington,
D.C. 20549, as well as at the following regional offices of the Commission: 7
World Trade Center, Suite 1300, New York, New York 10048 and Northwestern
Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661-2511. Copies of this material relating to both USAT and Good Ideas can
also be obtained at prescribed rates from the Public Reference Section of the
Commission at its principal office at 450 Fifth Street, N.W., Washington, D.C.
20549. Because the USAT Common Stock is traded on the American Stock Exchange,
reports, proxy and information statements and other information concerning USAT
can be inspected by contacting the American Stock Exchange, Inc., 86 Trinity
Place, New York, New York 10006-1881. Because the Good Ideas Common Stock is
traded on the Pacific Stock Exchange, reports, proxy and information statements
and other information concerning Good Ideas can be inspected by contacting The
Pacific Stock Exchange, Incorporated, 301 Pine Street, San Francisco,
California 94104. After the Merger is consummated, USAT, but not Good Ideas,
will be required to continue to file periodic reports, proxy and information
statements and other information with the Commission pursuant to the Exchange
Act.
USAT has filed with the Commission a Registration Statement on Form
S-4, File No. 333-3734 (the "Registration Statement"), under the Securities Act
of 1933, as amended (the "Securities Act"), with respect to the shares of the
USAT Common Stock to be issued upon consummation of the Merger and thereafter
upon the exercise of the Merger Warrants. This Consent Solicitation
Statement/Prospectus, which is Part I of the Registration Statement, omits
certain information contained in the Registration Statement. For further
information with respect to USAT and Good Ideas and the shares of the USAT
Common Stock offered by this Consent Solicitation Statement/Prospectus,
reference is made to the Registration Statement, including the exhibits
thereto. Statements in this Consent Solicitation Statement/Prospectus as to
any document are not necessarily complete and where such document is an exhibit
to the Registration Statement, each such statement is qualified in all respects
by the provisions thereof. Copies of the Registration Statement, with
exhibits, may be obtained from the Commission's Office in Washington, D.C. (at
the address above) upon payment of
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<PAGE> 8
the fees prescribed by the rules and regulations of the Commission, or examined
there without charge.
THIS CONSENT SOLICITATION STATEMENT/PROSPECTUS INCORPORATES DOCUMENTS
BY REFERENCE WHICH ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. THESE
DOCUMENTS ARE AVAILABLE UPON REQUEST TO ROBERT STUTMAN, CHAIRMAN AND CHIEF
EXECUTIVE OFFICER, U.S. ALCOHOL TESTING OF AMERICA, INC., AT THE FOLLOWING
ADDRESS: 4517 NORTH WEST 31ST AVENUE, FT. LAUDERDALE, FLORIDA 33309 OR
TELEPHONE NUMBER: (954) 739-9600. IN ORDER TO ENSURE TIMELY DELIVERY OF THE
DOCUMENTS, ANY REQUEST SHOULD BE MADE BY ____________, 1996.
The information contained in this Consent Solicitation
Statement/Prospectus with respect to Good Ideas has been provided by Good Ideas
and all other information has been provided by USAT.
SUMMARY
The following is a summary of certain information contained elsewhere
in this Consent Solicitation Statement/Prospectus. Reference is made to, and
this summary is qualified in its entirety by, the more detailed information
contained elsewhere herein and in the accompanying Appendices. Each Good Ideas
Minority Stockholder should read the entire Consent Solicitation
Statement/Prospectus and the Appendices hereto prior to taking any action with
respect to the proposals contained herein.
BACKGROUND OF THE COMPANY
USAT was incorporated on April 15, 1987 under the laws of Delaware to
design, manufacture and market instruments which measure blood alcohol
concentration by breath sample and analyzation. USAT maintains its principal
executive offices at 10410 Trademark Street, Rancho Cucamonga, California
91730, and its telephone number is (909) 466- 8378. USAT and its subsidiaries
will be collectively referred to herein as the "Company."
USAT's subsidiaries, which include Good Ideas, operate in several
different industries:
1. Good Ideas, which is 60.8% owned by USAT and whose Good Ideas
Common Stock trades on the Pacific Stock Exchange, designed, markets and
distributes a variety of traditional toy products for children of various ages.
2. U.S. Drug Testing, Inc. ("U.S. Drug"), which is 67.0% owned by
USAT and whose common stock, $.001 par value (the "U.S.
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Drug Common Stock"), also trades on the Pacific Stock Exchange, is developing
proprietary systems that will test for drug use.
3. ProActive Synergies, Inc. ("ProActive"), which is a
wholly-owned subsidiary of USAT incorporated in June 1995, provides single
source services to assist corporations in their hiring practices ranging from
substance abuse testing and background screening to total program management.
4. On May 21, 1996, the Company completed its acquisition of
Robert Stutman & Associates, Inc. ("RSA"), a provider of corporate drug-free
work place programs. Since January 1996, RSA has been designing policies and
programs on substance abuse prevention for customers of the ProActive
subsidiary.
5. Alconet, Inc. ("Alconet"), which is a wholly-owned subsidiary
acquired by USAT in March 1995, has developed an alcohol testing network to
upload test results and information from various alcohol breath testing
devices.
U.S. Rubber Recycling, Inc. ("USRR"), which is a wholly-owned
subsidiary of USAT, manufactured and marketed floor covering products for
office and industrial use from used truck and bus tires. On April 30, 1996,
USRR sold its assets to an unaffiliated third party and discontinued
operations. See "Business of the Company-Subsidiaries-U.S. Rubber Recycling,
Inc."
Acquisition Corp. was incorporated on December 18, 1995 under the laws
of Delaware as a wholly-owned subsidiary of USAT for the sole purpose of
acquiring or being acquired by Good Ideas and, under the terms of the Merger
Agreement, will engage in no business operations. Acquisition Corp.'s Board of
Directors consists of three USAT directors who have no direct affiliation with
Good Ideas.
The USAT Common Stock is currently traded on the American Stock
Exchange under the symbol "AAA". See "USAT Market Information-Market Data."
Good Ideas Enterprises, Inc. ("Good Ideas Texas") was incorporated
under the laws of the State of Texas on December 18, 1987. Pursuant to a Stock
Exchange Agreement and Plan of Reorganization dated May 7, 1992 (the "Good
Ideas Acquisition Agreement"), USAT through a subsidiary acquired a 55%
interest in Good Ideas Texas for which USAT's subsidiary issued shares of its
stock valued at $5,844 and received 1,533,125 shares of Good Ideas Common Stock
effective June 29, 1992. On June 5, 1992, Good Ideas was incorporated under
the laws of the State of Delaware. On December 17, 1992, Good Ideas Texas was
merged with and into Good Ideas and a 27,871-for-1 stock split was effected for
the previously issued shares of Good Ideas Texas (all
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<PAGE> 10
references herein to the number of shares of the Good Ideas Common Stock being
adjusted to reflect this stock split on a retroactive basis). In August 1993,
USAT acquired its subsidiary's interest in Good Ideas, which acquisition
included the issuance of 400,000 shares of the USAT Common Stock valued at
$2.4375 per share to two officer-stockholders, which transaction gave effect to
the $5,844 previously paid. During the fiscal year ended March 31, 1993
("fiscal 1993"), USAT settled litigation against USAT by a person who was also
an investor in Good Ideas and, as part of the settlement, received from such
investor 696,875 shares of the Good Ideas Common Stock. As a result of these
transactions, USAT owned 2,230,000 shares of the Good Ideas Common Stock for
which it had paid for in shares of the USAT Common Stock or of its subsidiary
having an aggregate value of $975,000. On December 15, 1993, USAT received
170,000 shares of the Good Ideas Common Stock as payment for $748,682 in
indebtedness owed by Good Ideas to USAT. In addition, also on December 15,
1993, the two officer-stockholders surrendered 157,500 shares of the Good Ideas
Common Stock to Good Ideas in consideration of receiving new employment
agreements. As a result of this reduction in the outstanding shares of the
Good Ideas Common Stock, USAT's ownership was increased to 2,400,000 or 85.7%
of the 2,800,000 shares of the Good Ideas Common Stock then outstanding. In
February and March 1994, Good Ideas had a public offering of Good Ideas Common
Stock in which an aggregate of 1,320,000 shares were sold. As of June 30,
1996, USAT owned 2,400,000 of the 3,948,680 shares of the Good Ideas Common
Stock outstanding or 60.8%.
As a result of certain of the transactions described in the preceding
paragraph, USAT acquired 2,400,000 shares of the Good Ideas Common Stock for an
aggregate cost, without attempting to value the shares surrendered in the
settlement, of $1,723,682 or $.72 per share of the Good Ideas Common Stock as
compared with a fraction of a share of the USAT Common Stock having a value of
$1.00 per share being offered to the Good Ideas Minority Stockholders for each
share of the Minority Good Ideas Common Stock pursuant to this Consent
Solicitation Statement/Prospectus.
Good Ideas currently has four directors, two of whom are directors and
executive officers of USAT, one of whom is a consultant to the USAT Board of
Directors and all four of whom are stockholders of USAT. See "Risk
Factors-USAT Affiliations of Good Ideas Directors" and "Material Contacts of
USAT with Good Ideas.
Good Ideas designed, markets and distributes a variety of traditional
toy products for children of various ages. Good Ideas' sales historically have
been derived from a line of traditional wooden construction toys. Good Idea's
principal product line, includes classic interlocking log sets marketed under
the trademark Paul Bunyan Log Builders(TM), themed playsets
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<PAGE> 11
such as General Custer's Fort Apache(TM), building block sets marketed under
the trademark Paul Bunyan Log 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, Good Ideas
currently markets one other line of traditional toys which is a line of
equestrian toys consisting of various styles and sizes of flocked plastic
horses and related accessories marketed under the trademark Black Beauty and
Friends(TM). Good Ideas currently shares office space with USAT. See
"Business of Good Ideas."
The Good Ideas Common Stock is currently traded on the Pacific Stock
Exchange under the symbol "KID." See "Good Ideas Market Information-Market
Data." If the Merger is consummated, trading in the Good Ideas Common Stock
will cease on the effective date thereof and the registration of such security
under Section 12(b) of the Exchange Act will be terminated.
USAT is also currently seeking to acquire the minority stock interests
in U.S. Drug by an offer of shares of the USAT Common Stock to the minority
stockholders of U.S. Drug as consideration for their consent to a merger (the
"U.S. Drug Merger") of U.S. Drug into Drug Testing Acquisition Corp., a
newly-incorporated wholly-owned subsidiary of USAT. See "Business of the
Company-Subsidiaries-U.S. Drug Testing, Inc." There can be no assurance that
any such merger will be successfully consummated. The acquisition of U.S. Drug
is not a condition to the Merger.
THE CONSENT PROCEDURE
(1) STATUTORY BASIS
Unless a corporation's certificate of incorporation otherwise
provides, Section 228 of the Delaware General Corporation Law (the "GCL")
permits stockholders' actions without a meeting of stockholders and without
prior notice if a consent or consents in writing, setting forth the action so
taken, is or are signed by the holders of the outstanding voting stock having
not less than the minimum number of votes that would be necessary to take such
action at a meeting at which all shares entitled to vote thereon were present.
Good Ideas' certificate of incorporation does not otherwise provide, so that a
consent procedure pursuant to Section 228 of the GCL may be utilized by USAT.
Under such section of the GCL, an action taken by consent is effective when
written consents from the holders of record of the minimum number of
outstanding shares of the voting stock necessary to authorize the action are
executed and delivered to the corporation within 60 days of the earliest dated
consent delivered in accordance with the GCL to the corporation. Under Section
251 of the GCL, a domestic corporation may be merged with and into another
domestic corporation by the affirmative vote of the record holders of a
majority of the outstanding shares of the
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<PAGE> 12
voting stock acting without a meeting and without prior notice. Accordingly,
USAT as the owner of 60.8% of the Good Ideas Common Stock, which is the sole
voting stock in Good Ideas, could adopt the Merger Agreement without any other
stockholder voting in favor of the adoption of the Merger Agreement.
Notwithstanding the foregoing, the Merger Agreement provides that it is a
condition to the consummation of the Merger that the record holders of more
than 50% of the outstanding shares of the Good Ideas Common Stock owned by Good
Ideas stockholders other than USAT (i.e., the Good Ideas Minority Stockholders)
consent to the adoption of the Merger Agreement. (USAT intends not to include
an aggregate of 210,000 shares of the Good Ideas Common Stock held by two
current directors (one of whom is also an executive officer) of Good Ideas in
determining whether it has a majority. See "Terms of the Transaction-The
Consent Procedure- Miscellaneous.") USAT will execute and deliver a consent to
the adoption of the Merger Agreement as a stockholder of Good Ideas after the
holders of more than 50% of the outstanding shares of the Minority Good Ideas
Common Stock have consented in order to permit the filing of a Certificate of
Merger in Delaware pursuant to the GCL and the terms of the Merger Agreement.
USAT will not execute and deliver its consent if the consents of the holders of
more than 50% of the outstanding shares of the Minority Good Ideas Common Stock
are not obtained.
(2) PROCEDURE TO CONSENT
UNDER THE GCL, ONLY HOLDERS OF RECORD ON THE RECORD DATE (AS DEFINED
BELOW) ARE ELIGIBLE TO GIVE THEIR CONSENT TO THE ADOPTION OF THE MERGER
AGREEMENT. ANYONE OWNING SHARES BENEFICIALLY (BUT NOT OF RECORD), SUCH AS A
PERSON WHOSE OWNERSHIP OF SHARES IS THROUGH A BROKER, BANK OR OTHER FINANCIAL
INSTITUTION, WHO WISHES TO GIVE THEIR CONSENT SHOULD CONTACT THAT BROKER, BANK
OR FINANCIAL INSTITUTION WITH INSTRUCTIONS TO EXECUTE THE WHITE FORM OF CONSENT
ON HIS OR HER BEHALF OR TO HAVE THE BROKER, BANK OR FINANCIAL INSTITUTION'S
NOMINEE EXECUTE THE CONSENT.
USAT is soliciting the written consents referred to herein and, if a
stockholder wishes to consent, the white consent card should be returned to
Georgeson & Company Inc., Wall Street Plaza, New York, New York 10005, in the
enclosed envelope or to Good Ideas Enterprises, Inc., 10410 Trademark Street,
Rancho Cucamonga, California 91730, Attention: Secretary.
(3) REVOCATION
An executed consent card may be revoked at any time before expiration
by marking, dating, signing and delivering a written revocation before the time
that sufficient unrevoked consents have been received to authorize the action
for which consents are solicited. As indicated above, consents must be
received within 60 days after the first consent is delivered to Good Ideas. A
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<PAGE> 13
revocation may be in any written form validly signed by the record holder as
long as it clearly states that the consent previously given is no longer
effective. The delivery of a subsequently dated consent card which is properly
completed will constitute a revocation of any earlier consent. The revocation
may be delivered to Georgeson & Company Inc., Wall Street Plaza, New York, New
York 10005, or to Good Ideas Enterprises, Inc., 10410 Trademark Street, Rancho
Cucamonga, California 91730, Attention: Secretary.
(4) MISCELLANEOUS
ABSTAINING FROM GIVING A CONSENT OR NOT RETURNING A SIGNED CONSENT
WILL HAVE THE SAME EFFECT AS WITHHOLDING CONSENT TO THE PROPOSED ACTION. IF
YOU ARE THE STOCKHOLDER OF RECORD AND WISH TO GIVE YOUR CONSENT, PLEASE SIGN,
DATE AND RETURN THE ENCLOSED WHITE CONSENT CARD PROMPTLY IN THE ENVELOPE
PROVIDED.
IF YOUR SHARES OF GOOD IDEAS COMMON STOCK ARE HELD IN THE NAME OF A
BROKERAGE FIRM, BANK OR NOMINEE, ONLY THEY CAN CONSENT TO THE MERGER AND ONLY
UPON RECEIPT OF YOUR SPECIFIC INSTRUCTIONS. ACCORDINGLY, IF YOU WISH TO GIVE
YOUR CONSENT, PLEASE CONTACT THE PERSON RESPONSIBLE FOR YOUR ACCOUNT AND GIVE
INSTRUCTIONS WITH RESPECT TO SUCH SHARES IMMEDIATELY.
(5) RECORD DATE, QUORUM AND REQUIRED VOTE
Only holders of record of shares of the Good Ideas Common Stock on
August __, 1996 (the "Record Date") will be entitled to consent to adoption of
the Merger Agreement.
On the Record Date, there were 3,948,680 shares of the Good Ideas
Common Stock outstanding, of which 1,548,680 shares were the Minority Good
Ideas Common Stock and were not owned by USAT. The affirmative consent of the
holders of more than 50% of the outstanding shares of the Minority Good Ideas
Common Stock is necessary to adopt the Merger Agreement. Thus, the holders of
at least 774,341 shares of the 1,548,680 shares of the Minority Good Ideas
Common Stock must consent to the adoption of the Merger Agreement. (USAT
intends not to include an aggregate of 210,000 shares held by two current
directors (one of whom is also an executive officer) of Good Ideas in
determining whether it has a majority; however, if the necessary consents are
obtained, these holders will receive shares of the USAT Common Stock on the
same basis as the other Good Ideas Minority Stockholders. See "Terms of the
Transaction-The Consent Procedure- Miscellaneous.") USAT will execute and
deliver a consent to such adoption only after the holders of more than 50% of
the outstanding shares of the Minority Good Ideas Common Stock (excluding the
aforesaid 210,000 shares from such computation) have consented in order to
permit filing of a Certificate of Merger in Delaware pursuant to the GCL and
the terms of the Merger Agreement.
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<PAGE> 14
On February 6, 1996, the Board of Directors of USAT, acting on behalf
of USAT as the sole stockholder of Acquisition Corp., adopted the Merger
Agreement. On April 12, 1996, the Acquisition Board authorized execution of
the Merger Agreement. Accordingly, Acquisition Corp. has approved the Merger.
(6) APPRAISAL RIGHTS
The Good Ideas Minority Stockholders will have no rights of appraisal
under the GCL with respect to the consummation of the Merger. See "Terms of
the Transaction-The Consent Procedure-Rights of Dissenting Good Ideas
Stockholders."
THE MERGER
(1) GENERAL
Pursuant to the Merger Agreement, Acquisition Corp. will be merged
with and into Good Ideas (i.e., the Merger) and each outstanding share of the
Minority Good Ideas Common Stock will be converted into __________ of a share
of the USAT Common Stock. Such exchange ratio reflected an offer of a fraction
of a share of the USAT Common Stock having a value of $1.00 per share
determined on the basis of the average of the closing sales prices of the USAT
Common Stock during the 30 calendar days prior to the Record Date, which
average price was $_______ per share. An aggregate of _________ shares of the
USAT Common Stock will be issued to the Good Ideas Minority Stockholders,
subject to adjustment for fractional shares. Assuming that there are no
exercises of outstanding Common Stock purchase warrants or stock options or any
conversions of USAT preferred stock between the date of this Consent
Solicitation Statement/Prospectus and the effective date of the Merger, the
USAT stockholders will own ___% of the outstanding shares of the USAT Common
Stock and the Good Ideas Minority Stockholders will own ___%. The shares of
the Good Ideas Common Stock owned by USAT, except for ten shares, will be
canceled upon the Merger becoming effective. The shares of Acquisition Corp.
owned by USAT will be canceled upon the Merger becoming effective.
(2) OPTIONS AND WARRANTS
As of the Record Date, there were outstanding options expiring
December 17, 2003 (the "Good Ideas Options") to purchase 22,500 shares of the
Good Ideas Common Stock and Common Stock purchase warrants expiring February
16, 1999 (the "Good Ideas Warrants") to purchase an aggregate of 120,000 shares
of Good Ideas Common Stock. The Good Ideas Options are all owned by three
former members of the Board of Directors of Good Ideas and are exercisable at
$4.40 per share. The holders of the Good Ideas Options have agreed to waive
their rights under the Options
9
<PAGE> 15
upon the consummation of the Merger and, accordingly, no USAT securities will
be issued in lieu thereof.
The Good Ideas Warrants are owned by Baraban Securities, Inc.
("Baraban"), the underwriter of the initial public offering of the Good Ideas
Common Stock, and Baraban's designees. The exercise price of the Good Ideas
Warrants is $7.50 per share and was initially negotiated by Baraban with Good
Ideas at 150% of the public offering price of $5.00 per share of the Good Ideas
Common Stock in Good Ideas' initial public offering. If the Merger is
consummated, as a result of the anti-dilution provisions of the Good Ideas
Warrants, the Good Ideas Warrants will be converted into USAT Common Stock
purchase warrants expiring February 16, 1999 (the "Merger Warrants") to
purchase an aggregate of ___________ shares of the USAT Common Stock, which is
the same number of shares which the holders of the Good Ideas Warrants would
have been entitled to receive after the consummation of the Merger had the Good
Ideas Warrants been exercised immediately prior to the consummation of the
Merger. The exercise price will be proportionately adjusted to $___ per share
in accordance with the anti-dilution provisions of the Good Ideas Warrants.
The same anti-dilution provisions as were applicable to the Good Ideas Warrants
will be applicable to the Merger Warrants. For further information, see "The
Merger and Related Matters-Good Ideas Options and Warrants."
(3) RECOMMENDATIONS BY THE BOARDS OF DIRECTORS
On November 16, 1995, the Board of Directors of USAT approved in
principle seeking the acquisition of the minority stockholder interests in Good
Ideas and, on February 6, 1996, authorized execution of the Merger Agreement,
which included an offer of a fraction of a share of the USAT Common Stock
having a value of $1.00 per share, the determination to be based on the average
of the closing sales prices of the USAT Common Stock during the 30 calendar
days prior to the Record Date. In determining this exchange ratio, the USAT
Board considered, based on an application of the formula, a range as to the
number of shares of the USAT Common Stock to be issued to the Good Ideas
Minority Stockholders - a maximum above which the USAT Board would not want to
proceed with the Merger because it would, in the USAT Board's opinion, be
unfair to the USAT stockholders and a minimum below which the offer would, in
the opinion of the USAT Board, probably be unacceptable to the Good Ideas
Minority Stockholders.
On April 12, 1996, the Good Ideas Board of Directors authorized
execution of, and submission to the Good Ideas Minority Stockholders for
approval of, the Merger Agreement. Also in making its determination as to the
exchange ratio, the Good Ideas Board considered a range as to the number of
shares of the USAT Common Stock to be issued to the Good Ideas Minority
10
<PAGE> 16
Stockholders based on an application of the formula - a minimum below which the
offer would be unacceptable to the Good Ideas Board for offering to the Good
Ideas Minority Stockholders and a maximum above which the USAT Board would, in
the opinion of the Good Ideas Board, reject as being unfair to the USAT
stockholders. Based on such range, the Good Ideas Board concluded that the
offer was fair to the Good Idea Minority Stockholders from a financial point of
view (a conclusion also reached by the USAT Board) and recommended to the Good
Ideas Minority Stockholders adoption of the Merger Agreement. The Good Ideas
Board directs attention to the affiliation of the directors of Good Ideas with
USAT. See the section "The Merger-Affiliation of Good Ideas with USAT" under
this caption "Summary," "Risk Factors-USAT Affiliations of Good Ideas
Directors" and "Material Contacts of USAT with Good Ideas."
For a review of the factors each of the USAT Board and the Good Ideas
Board considered in making its decision, see "The Merger and Related
Matters-Reasons for the Merger and Approval." On August __, 1996, after the
number of shares to be offered to the Good Ideas Minority Stockholders was
calculated pursuant to the exchange ratio, both the USAT Board and the Good
Ideas Board concluded that the number of shares was within the ranges each had
previously considered and deemed appropriate.
(4) AFFILIATION OF GOOD IDEAS WITH USAT
USAT owns 60.8% of the outstanding shares of the Good Ideas Common
Stock. Of the four directors of Good Ideas who approved the Merger Agreement
on April 12, 1996, three were then executive officers (two of whom were also
then directors and the other a former director) of USAT, such three were then
employees of USAT, the fourth director was an employee of Good Ideas and all
four directors were stockholders of USAT. Of the current four directors, two
are executive officers, directors and employees of USAT, one is a consultant to
the USAT Board, the fourth is still an employee of Good Ideas and all four are
securityholders of USAT. As of June 30, 1996, there was a note receivable from
USAT to Good Ideas in the amount of $2,052,000, which, as extended, is due
December 31, 1996. USAT also has been performing management services for Good
Ideas. See "Material Contacts of USAT with Good Ideas."
Because of the foregoing relationships with USAT, the Good Ideas Board
has never been independent of USAT and at least a majority of the directors
have owed fiduciary duties to both USAT and Good Ideas, creating a conflict of
interests. This condition has existed since USAT acquired a majority interest
in Good Ideas in June 1992. As a result of these conflicts of interests, the
Good Ideas Board has approved, with respect to the Merger, certain safeguards
for the Good Ideas Minority Stockholders, i.e, a majority of them must approve
the Merger for it to be
11
<PAGE> 17
consummated, a fairness opinion has been obtained and independent counsel for
Good Ideas was engaged with respect to the Merger.
(5) FAIRNESS OPINION
The Board of Directors of Good Ideas has received an opinion from
Whale Securities Co., L.P. ("Whale Securities") as to the fairness of the
Merger to the Good Ideas Minority Stockholders from a financial point of view
as of the date of the opinion. A copy of such opinion is annexed as Appendix B
hereto and should be read in its entirety. See "The Merger and Related
Matters-Fairness Opinion."
(6) THE MERGER AGREEMENT
Following the satisfaction or waiver of the conditions of the Merger,
the Merger will become effective upon the filing in the State of Delaware of a
Certificate of Merger in accordance with Sections 103 and 251 of the GCL. (The
date of such filing in Delaware is referenced to herein as the "Effective
Date.") As soon as practical after the Effective Date, a notice of
consummation of the Merger, together with a letter of transmittal for use in
surrendering certificates for shares of the Good Ideas Common Stock, will be
mailed to the holders of record as of the Effective Date of the shares of the
Minority Good Ideas Common Stock. The Good Ideas Minority Stockholders are
requested not to surrender their certificates for shares of the Minority Good
Ideas Common Stock until they receive such a letter of transmittal. See "The
Merger and Related Matters-Exchange of Certificates."
(7) CONDITIONS OF THE MERGER
The obligations of USAT, Good Ideas and Acquisition Corp. to
consummate the Merger are subject to the satisfaction of the following
conditions, among others: (1) the Merger Agreement shall have been adopted by
the holders of at least 50% of the outstanding shares of the Minority Good
Ideas Common Stock, even though the consent of USAT alone would have been
sufficient to have adopted the Merger Agreement in accordance with the GCL, and
(2) this Registration Statement shall have been declared effective by the
Commission under the Securities Act and no stop order suspending such
effectiveness shall have been issued or a proceeding for such purpose shall
have been instituted. No party to the Merger Agreement may waive either of the
foregoing conditions. There exist other conditions to consummation of the
Merger that may be waived (other than the requirement of a fairness opinion) if
the respective Board of USAT and U.S. Drug considers such waiver to be in the
best interest of the stockholders of its respective corporation. See "The
Merger and Related Matters-Conditions to the Merger" and the Merger
12
<PAGE> 18
Agreement attached as Appendix A hereto for additional information as to the
conditions of the Merger.
(8) AMENDMENT AND TERMINATION
The Merger Agreement may be amended in writing at any time prior to
the Effective Date by the Boards of Directors of the parties thereto, whether
before or after the adoption by the Good Ideas Minority Stockholders of the
Merger Agreement, but, after such adoption, no amendment may, without further
approval by such stockholders, alter or change the amount or kind of
consideration to be received in exchange for the shares of the Minority Good
Ideas Common Stock.
The Merger Agreement may be terminated and the Merger may be abandoned
at any time prior to the Effective Date, whether before or after the adoption
of the Merger Agreement by the Good Ideas Minority Stockholders: (1) by mutual
written consent of the Boards of Directors of USAT and Good Ideas, (2) by
either USAT or Good Ideas if the respective Board of Directors, based on the
opinion of its outside counsel, determines that making a recommendation to the
Good Ideas Minority Stockholders to adopt the Merger Agreement could reasonably
be deemed to cause the members of such Board of Directors to breach their
fiduciary duties under applicable law to their respective stockholders, or (3)
by either USAT or Good Ideas if there is any statute, rule or regulation which
makes consummation of the Merger illegal or otherwise prohibited or any order,
decree, injunction or judgment enjoining USAT, Good Ideas or Acquisition Corp.
from consummating the Merger and such order, decree, injunction or judgment has
become final and non-appealable. The obligations automatically terminate if
the Merger has not been consummated by December 31, 1996.
For additional information relating to the Merger Agreement, see "The
Merger and Related Matters" and Appendix A hereto.
(9) MARKET PRICES
The following table sets forth the closing sales prices per share for
the USAT Common Stock and the Good Ideas Common Stock as reported by the
American Stock Exchange and the Pacific Stock Exchange, respectively, on
February 5, 1996, the last full day on which these stocks were traded prior to
the initial public announcement of the principal terms of the proposed Merger
and on August __, 1996, the latest available date. See "USAT Market
Information" and "Good Ideas Market Information" for a historical comparison of
market prices of the USAT Common Stock and the Good Ideas Common Stock,
respectively.
13
<PAGE> 19
<TABLE>
<CAPTION>
USAT Good Ideas
Common Stock Common Stock
------------ ------------
<S> <C> <C>
February 5, 1996 $2.375 $.375
August __, 1996 $ $
</TABLE>
(10) FEDERAL INCOME TAX CONSEQUENCES
If the Merger is consummated, there will be no federal income tax
consequences to USAT, Acquisition Corp. or the stockholders of USAT. It is
expected that there will be Federal income tax consequences to the Good Ideas
Minority Stockholders in that they may recognize income or loss on the exchange
of the Minority Good Ideas Common Stock for the USAT Common Stock.
Additionally, stockholders of Good Ideas receiving cash in lieu of fractional
shares may recognize income as to such cash payment. See "The Merger and
Related Matters-Certain Tax Consequences."
(11) REGULATORY APPROVALS
As of the date hereof, the Merger requires no approval by any federal
or state governmental agency, except for compliance with the Securities Act,
the Exchange Act and state "blue sky" or securities laws. Without limiting the
foregoing, no compliance is necessary under the Hart-Scott-Rodino Antitrust
Improvement Act of 1976, as amended, and the rules and regulations thereunder.
See "The Merger and Related Matters-Regulatory Approvals."
(12) ACCOUNTING TREATMENT
The Merger will be accounted for as a "purchase" as such term is used
under generally accepted accounting principles. See "The Merger and Related
Matters-Accounting Treatment."
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) 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,
14
<PAGE> 20
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 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, the following events occurred:
a. the Committee and USAT settled the above litigation;
b. the number of directors of USAT was increased from five to
seven;
d. incumbent directors Glenn A. Bergenfield, William DiTuro and
Gary S. Wolff resigned as directors of USAT; however, they continued to serve
as directors of Good Ideas and U.S. Drug (Mr. Bergenfield and Dr. DiTuro
subsequently resigned as directors of both subsidiaries on November 16, 1995
and Mr. Wolff resigned as a director of both subsidiaries on July 3, 1996);
d. 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;
e. John C. Lawn and Linda H. Masterson were elected as directors
of USAT (prior to their election as directors, neither Mr. Lawn nor Ms.
Masterson had any affiliation with USAT or the Committee, although Ms.
Masterson had been interviewed by he Committee as a possible executive officer
if changes were required as the result of a successful consent solicitation and
Mr. Lawn had been recommended to the Committee as a possible candidate for a
directorship by the Committee's counsel (now general counsel to USAT)); and
f. 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 until April 18, 1996 (see
second succeeding paragraph),
15
<PAGE> 21
while Gary S. Wolff remained as Chief Financial Officer on an interim basis
until his resignation on July 3, 1996. See "USAT Management."
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 until May 31, 1996 to assist in the transition and other matters relating
to the Company, including the Merger. 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, a provider of corporate drug-free work place
programs, 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 Robert Stutman, RSA's President and
founder, was a recognized authority in the area of substance abuse prevention
programs, four of the independent directors of USAT negotiated with Mr. Stutman
on April 17, 1996 the terms for a possible acquisition of RSA. When Mr. Witham
joined the discussions on the next day, 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, Mr. 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 May 21, 1996, the Company completed its acquisition of RSA and RSA
became a 100%-owned subsidiary of USAT. Since
16
<PAGE> 22
January 1996, RSA has been designing policies and programs for the ProActive
subsidiary. See the section "Subsidiaries- ProActive Synergies, Inc./Robert
Stutman & Associates, Inc." under the caption "Business of the Company" for a
description of RSA's prior consulting arrangement and the terms of its
acquisition by RSA.
(14) PROSPECTIVE SALE OF GOOD IDEAS
On February 26, 1996, the USAT Board determined to sell or liquidate
Good Ideas as soon as possible after the Merger is consummated. See "The
Merger and Related Matters-Sale of Good Ideas" and the section "Results of
Operations-Good Ideas Enterprises, Inc." under the caption "The Company's
Management's Discussion and Analysis of Financial Condition and Results of
Operations."
SUMMARY HISTORICAL AND PROFORMA COMBINED FINANCIAL DATA
The following summary historical financial data of the Company for the
five years ended March 31, 1996 is derived from the audited consolidated
financial statements of the Company. The following summary historical
financial data of Good Ideas for the five years ended March 31, 1996 is derived
from the audited financial statements of Good Ideas.
The proforma condensed consolidated balance sheet of the Company as of
March 31, 1996 and the proforma condensed consolidated statement of operations
for the fiscal year ended March 31, 1996 ("fiscal 1996") give effect to the
following:
1. The sale of the assets of USRR on April 30, 1996;
2. The segregation on the consolidated balance sheet of the assets
held for sale or liquidation and the related liabilities of Good Ideas and the
effect of the proposed Merger;
3. The effect of the proposed U.S. Drug Merger;
4. The acquisition of RSA using audited financial statements for
the year ended December 31, 1995 and the related Common Stock purchase warrant
exercise between March 31, 1996 and the acquisition date of May 21, 1996 only
to the extent necessary to generate the $2,100,000 of cash used in the
acquisition transaction.
The proforma statements have been prepared by USAT based upon the
financial statements included elsewhere in this Consent Solicitation
Statement/Prospectus and should be read in conjunction therewith. These pro
forma statements may not be indicative of the results that actually would have
occurred if
17
<PAGE> 23
the transactions would have been in effect on the date indicated or to project
the results of operations for any future date or period.
The following summary of historical and financial data and proforma
financial data should be read in conjunction with "The Company's Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
"Good Ideas' Management's Discussion and Analysis of Financial Condition and
Results of Operation" and the financial statements and related notes for the
Company and Good Ideas included elsewhere in this Consent Solicitation
Statement/Prospectus.
HISTORICAL FINANCIAL DATA
THE COMPANY
<TABLE>
<CAPTION>
For the Year Ended March 31
----------------------------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
(Consolidated)
Income Statement Data:
- ---------------------
Continuing Operations:
Total Revenues $ 1,165,661 $ 1,695,215 $ 442,728 $ 611,739 $ 688,412
============ =========== ============ =========== ===========
Loss from Continuing
Operations ($8,056,045) ($6,706,127) ($9,696,139) ($7,623,615) ($3,490,024)
Loss on Discontinued
Operations ($2,404,541) ($530,296) ($369,896) ($737,638) -
============ =========== ============ =========== ===========
Net Loss ($10,460,586) ($7,236,396) ($10,066,035) ($7,997,253) ($3,490,024)
============ =========== ============ =========== ===========
</TABLE>
<TABLE>
<CAPTION>
For the Year Ended March 31
---------------------------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(Consolidated) (Consolidated) (Consolidated) (Consolidated) (Consolidated)
<S> <C> <C> <C> <C> <C>
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) ($3,916,469)
============ =========== ============ =========== ===========
Net Loss per
Common Share ($ .35) ($ .28) ($ .46) ($ .68) ($ .66)
============ =========== ============ =========== ===========
Weighted Average
Common Share
Outstanding 29,834,502 25,691,674 22,027,068 12,317,743 5,938,747
============ =========== ============ =========== ===========
</TABLE>
18
<PAGE> 24
<TABLE>
<CAPTION>
For the Year Ended March 31
---------------------------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
(Consolidated)
Summary 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
========== =========== =========== ========== ===========
Stockholders' Equity $4,032,330 $ 7,693,942 $ 6,844,375 $1,482,943 $ 8,301,977
========== =========== =========== ========== ===========
</TABLE>
GOOD IDEAS
<TABLE>
<CAPTION>
For the Three For the
For the Year Ended March 31, Months Ended Year Ended
------------------------------------------ March 31, December 31,
1996 1995 1994 1993 1992
---- ---- ---- ----------- ------------
Income Statement Data:
- ---------------------
<S> <C> <C> <C> <C> <C>
Net Sales $ 1,508,819 $4,606,039 $5,544,221 $ 436,015 $3,773,232
=========== ========== ========== ========== ==========
Net Loss ($1,566,292) ($798,307) ($582,331) ($317,443) ($321,648)
=========== ========== ========== ========== ==========
Net Loss per
Common Share ($ .39) ($ .20) ($ .20) ($ .11) ($ .12)
=========== ========== ========== ========== ==========
Weighted Average
Common Shares
Outstanding 3,968,372 4,065,200 2,942,000 2,787,500 2,787,500
=========== ========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
March 31, 1996
--------------
<S> <C>
Summary Balance Sheet Data:
- --------------------------
Working Capital $2,174,525
==========
Total Assets $2,422,732
==========
Net Assets in Liquidation $2,174,525
==========
</TABLE>
19
<PAGE> 25
U.S. ALCOHOL TESTING OF AMERICA, INC.
PROFORMA BALANCE SHEET
<TABLE>
<CAPTION>
MERGER &
PROPOSED MERGER WITH
SALE OR ACQUISITION OPERATIONS
SALE OF LIQUIDATION OF CORP. OF RSA
HISTORICAL USRR GOOD IDEAS USD YE 12/31/95 PROFORMA
ASSETS 3/31/96 DR(CR) DR(CR) DR(CR) DR(CR) 3/31/96
Current Assets: ----------- -------- -------------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Cash and Cash Equivalents 1,286,520 150,000 (1) 4,836(7) 1,441,356
Accounts Receivable (net of
Allowance for Bad Debts of
$187,703 and $112,490) 488,776 (141,038)(2) (61,612)(3) 3,761(7) 289,887
Other Receivables 1,850 200(7) 2,050
Inventories 1,041,261 (174,981)(2) (196,209)(3) 670,071
Prepaid Expenses 265,660 (3,721)(2) (7,358)(3) 2,888(7) 257,469
----------- -------- --------- ---------- ---------- -----------
Total Current Assets 3,084,067 (169,740) (265,179) 11,685 2,660,833
----------- -------- --------- ---------- ---------- -----------
Property and Equipment (Net of
Accumulated Depreciation of
$2,060,568 and $1,890,439) 2,997,066 (281,120)(2) (15,801)(3) 6,027(7) 2,706,172
Other Assets: 871,151 (6,000)(2) (6,808)(3) 858,343
Excess of Cost over Fair Value on Net
Assets Acquired 4,143,804(8) 4,143,804
Estimated Net Realizable Value of Assets
Held for Sale 39,580 (4) 39,580
Notes Receivable - Non Current 300,000 (1) 300,000
----------- -------- --------- ---------- ---------- -----------
6,952,284 (156,860) (248,208) 4,161,516 10,708,732
=========== ======== ========= ========== ========== ===========
Current Liabilities: CR(DR) CR(DR) CR(DR) CR(DR)
Accounts Payable 649,835 (78,613)(2) (86,831)(3) 484,391
Accrued Liabilities 708,620 (65,215) (138,858) 104,326(7) 608,873
Unearned Revenue 285,416(7) 285,416
Current Portion Long Term Debt 32,827 (3,431)(2) (8,337)(3) 21,059
Due to Shareholder 5,250(7) 5,250
Pref. Stock Dividend Payable 7,202 7,202
----------- -------- --------- ---------- ---------- -----------
Total Current Liabilities 1,398,484 (147,259) (234,026) 394,992 1,412,191
----------- -------- --------- ---------- ---------- -----------
Long Term Debt - Net of Current Portion 42,962 (9,601) (14,182)(3) 400,000 419,179
Minority Interest 1,478,508 (911,039)(5) (567,469)(6)
Stockholders' Equity
Preferred Stock Class "A" 412 412
Common Stock $.01 324,800 6,883 (5) 40,178 (6) 14,459(3) 386,320
Additional Paid In Capital 45,176,619 1,541,797 (5) 8,999,797 (6) 3,648,041(3) 59,366,254
Accumulated Deficit (41,469,501) (637,641)(12) (8,472,506)(11) 295,985(8) (50,579,648)
------------ -------- --------- ---------- ---------- -----------
Total Stockholders' Equity 4,032,330 911,039 567,469 3,366,515 8,877,353
----------- -------- --------- ---------- ---------- -----------
TOTAL LIABILITIES AND EQUITY 6,952,284 (156,860) (248,208) 4,161,507 10,708,732
=========== ======== ========== ========== ========== ===========
</TABLE>
20
<PAGE> 26
Notes to Proforma Balance Sheet
(1) Proceeds of sale of USRR
(2) Assets of USRR sold and liabilities assumed by purchaser
(3) Assets of Good Ideas to be sold or liquidated and liabilities assumed
or settled, excluding cash and receivable from parent
(4) Estimated value of assets to be sold or liquidated less liabilities
(5) Purchase of minority interest in Good Ideas
(6) Purchase of minority interest in U.S. Drug
(7) Assets Acquired and Liabilities Assumed in Purchase of Robert Stutman
& Associates, Inc. (RSA)
(8) RSA-Excess of Cost over Fair Value of Assets Acquired
Consideration Paid:
<TABLE>
<S> <C>
Cash $2,100,000
Note Payable 400,000
Stock 500,000 shares of Common @ 3.125 1,562,500
Estimated Expenses 65,000
----------
Total Price Paid 4,127,500
Accumulated Deficit 316,280
Common Stock (4,000)
----------
Purchase Price in excess of net asset value $4,439,780
==========
</TABLE>
Amortization of purchase price in excess of net asset value is based
on a 15 year life and amounts to $295,985 per year.
(9) The cash portion of the Robert Stutman acquisition was provided by the
exercise of Common Stock Purchase Warrants subsequent to 3/31/96. The
Proforma was calculated using the exercise of 945,946 warrants at an
average price of $2.22
(10) Operations of RSA for the year ended 12/31/95
Calculation of number of shares assumed in Merger Transactions with USD and Good
Ideas
<TABLE>
<CAPTION>
USD GI
--------- ---------
<S> <C> <C>
Agreed price 5.25 1.00
Estimated Average USAT price 2.25 2.25
Agreed Price/Est. Ave. USAT price 2.33 0.44
OS USD Minority Shares 1,721,900 1,548,680
--------- ---------
Estimated Number of USAT Share to be issued 4,017,767 688,302
========= =========
</TABLE>
(11) Charge to operations of incomplete research and development due to
the value of USAT stock issued in the merger to purchase the minority
interest of U.S. Drug in excess of its historical amount.
(12) Charge to loss on disposal of discontinued operations due to the
value of the USAT stock issued to purchase the minority interest of
Good Ideas in excess of its historical cost.
(13) Elimination of minority interest.
21
<PAGE> 27
U.S. Alcohol Testing of America, Inc.
Proforma Statement of Operations
For the Fiscal Year ended 3/31/96
<TABLE>
<CAPTION>
MERGER AND
PROPOSED
SALE OR MERGER WITH
SALE LIQUIDATION ACQUISITION ACQUISITION
OF OF CORP. OF RSA
HISTORICAL USRR GOOD IDEAS USD 12/31/95 PROFORMA
---------- ---- ---------- --- -------- ------------
<S> <C> <C> <C> <C> <C> <C>
Continuing Operations:
Net Sales $ 1,165,661 1,101,599(10) 2,267,260
Costs and Expenses
Cost of Sales (Exclusive of
Depreciation Shown Below) 1,208,726 845,663(10) 2,054,389
Selling, General and Administrative
Expenses (Exclusive of Depreciation
Shown Below) 5,720,592 275,485(10) 5,996,077
Research and Development 1,005,832 1,005,832
Incomplete Research and Development 8,472,506(11) 8,472,506
Interest 81,450 81,450
Depreciation and Amortization 1,017,534 295,985 1,313,519
Loss on Settlement of Litigation 1,137,914 1,137,914
------------ -------- ----------- ---------- ---------- ------------
Total Costs and Expenses 10,172,048 8,472,506 1,417,133 20,061,687
------------ -------- ----------- ---------- ---------- ------------
Loss From Operations (9,006,387) (8,472,506) (315,534) (17,794,427)
------------ -------- ----------- ----------- ---------- ------------
Other Income (Expense)
Interest Income 116,075 116,075
Loss on Sale of Marketable Securities (1,889,216) (1,889,216)
Unrealized Gain on Marketable Securities 2,190,721 2,190,721
Other Losses (8,704) (8,704)
------------ -------- ----------- ----------- ---------- ------------
Total Other Income (Expense) 408,876 408,876
------------ -------- ----------- ----------- ---------- ------------
Loss Before Minority Interest in Net
Loss of Subsidiaries (8,597,511) (8,472,506) (315,534) (17,385,551)
Minority Interest in Net Loss of
Subsidiaries 541,466 (541,466)
------------ -------- ----------- ----------- ---------- ------------
Loss from Continuing Operations (8,056,045) (9,013,972) (315,534) (17,385,551)
Discontinued Operations:
Loss from Operations before Minority
Interest (1,545,457) (1,545,457)
Minority Interest in Net Loss 467,183 (467,183)
Loss on Disposal, Net of Minority
Interest $143,671 (1,326,267) (781,312) (2,107,579)
------------ -------- ----------- ----------- ---------- ------------
Loss from Discontinued Operations (2,404,541) (1,248,495) (3,653,036)
------------ -------- ----------- ----------- ---------- ------------
Net Loss $(10,460,586) $ $ 2,035,973 $(9,013,972) $ (315,534) (21,038,587)
============ ======== =========== =========== ========== ============
Weighted Average Common Shares Outstanding 29,834,502 688,302 4,017,767 1,445,946 35,986,517
============ ======== =========== =========== ========== ============
Loss Applicable to Common Stock:
Net Loss (10,460,586) $(1,248,495) $(9,013,972) (315,534) (21,038,587)
Preferred Stock Dividend - Class "A" (28,810) (28,810)
------------ -------- ----------- ----------- ---------- ------------
Loss Applicable to Common Stock $(10,489,396) $ $(1,248,495) $(9,013,972) $ (315,534) $(21,067,397)
============ ======== =========== =========== ========== ============
Loss Per Common Share:
Loss from Continuing Operations $ (0.27) $ (0.48)
Loss from Discontinued Operations $ (0.08) $ (0.10)
------------ ------------
Net Loss $ (0.35) $ (0.58)
============ ============
</TABLE>
22
<PAGE> 28
RISK FACTORS
In analyzing this offering, the Good Ideas Minority Stockholders
should consider all of the matters set forth below:
1. USAT Affiliations of Good Ideas Directors. Of the four
directors who approved the Merger Agreement on April 12, 1996, three were then
executive officers (two of whom were also then directors and the other a former
director) of USAT, all three were then employees of USAT, the fourth director
was an employee of Good Ideas and all four directors were stockholders of USAT.
Of the current four directors, two are executive officers, directors and
employees of USAT, one is a consultant to the USAT Board of Directors, the
fourth is still an employee of Good Ideas and all four are securityholders of
USAT.
Consequently, the Good Ideas Board of Directors has never been
independent of USAT and at least a majority of the directors have owed
fiduciary duties to both USAT and Good Ideas, creating a conflict of interest,
which has existed since USAT, through a subsidiary, acquired a majority
interest in Good Ideas in June 1992. However, specifically with respect to the
Merger, the Good Ideas Board approved certain safeguards in an effort to assure
fairness to the Good Ideas Minority Stockholders. First, the Merger Agreement
must be adopted by the holders of at least 50% of the outstanding shares of the
Minority Good Ideas Common Stock (excluding from such calculation the 210,000
shares in the aggregate held by two directors of Good Ideas), even though the
consent of USAT alone is sufficient to adopt the Merger Agreement in accordance
with the GCL. Second, a major firm was engaged as independent counsel for Good
Ideas. Lastly, the Board of Directors of Good Ideas has received an opinion
from Whale Securities as to the fairness of the Merger to the Good Ideas
Minority Stockholders from a financial point of view as of the date of the
opinion. The Merger Agreement provides that the first and second protections
cannot be waived by any party.
The USAT Board considered adding independent directors to Good Ideas,
but rejected the idea because of what it considered the virtual impossibility,
especially in light of potential director liability concerns, of finding a
person or persons to accept a directorship in a public company knowing that it
is in the process of going private and that USAT has majority control of the
Good Ideas Common Stock (63.6% of the outstanding shares as of June 30, 1996 if
the directors' shares are included). Although USAT could have attempted to
cause Good Ideas to make it financially attractive for a potential director to
accept a directorship, USAT believed that this would not be a prudent use of
Good Ideas' money and that any such payment or payments could be perceived as
an improper inducement to such person to favor the Merger.
23
<PAGE> 29
2. Operating Losses. The Company has sustained losses of $41,469,501
from inception through March 31, 1996. Management initiated cost reduction
actions to reduce selling, general and administrative expenses in fiscal 1996,
which prospective savings were offset by the $903,000 in combined legal and
other expenses incurred by both parties in the consent solicitation contest
(see "Summary-Recent Developments"), $250,000 in settlement of a claim by two
then Alconet officers relating to their then employment and $397,000 of
expenses incurred by Alconet, a subsidiary not included in the fiscal year
ended March 31, 1995 ("fiscal 1995"). Without the expenses of the consent
solicitation, management believes that the selling, general and administrative
expenses can be reduced in the fiscal year ending March 31, 1997 ("fiscal
1997"); however, there can be no assurance that management's expectations will
be realized in fiscal 1997 or thereafter. In addition, management has
initiated an effort through ProActive, a subsidiary, to tap the human resource
provider market which it believes can result in substantial revenues; acquired
RSA on May 21, 1996, which company has been designing drug-free workplace
policies and programs for ProActive clients since January 1996; will continue
to attempt to sell its toy operations; and has sold on April 30, 1996 the
assets of its rubber recycling operations, so that the Company can concentrate
on alcohol and drug testing and the related RSA/ ProActive operations as its
core businesses. However, there can be no assurance that management will
receive what it considers to be an acceptable offer for Good Ideas. In
addition, the Board will liquidate Good Ideas if no acceptable offer is
received by December 31, 1996. In addition, the decision to develop a saliva
based drug testing product, rather than complete first the urine based drug
testing product for marketing, will, in the opinion of management, enhance the
Company's future growth, but has delayed the receipt of any revenues from U.S.
Drug in fiscal 1996 and fiscal 1997, if not longer, unless revenues are to be
received from a marketing and/or development partner if and when such an
agreement for such a partner is executed, as to which there can be no
assurance, especially because management is not conducting any negotiations for
such a partner. Accordingly, it is management's belief, especially in view of
the significant losses the fiscal year ended March 31, 1994 ("fiscal 1994"),
and fiscal 1995 and fiscal 1996, that, despite these management programs, the
Company will not turn profitable in fiscal 1997 and that, pending development
of the ProActive operations in conjunction with RSA, the timing of the U.S.
Drug development work and the other management programs, it is currently too
speculative to project as to when, if ever, the Company will become profitable.
See "Business of the Company," "The Company's Financial Statements" and "The
Company's Management's Discussion and Analysis of Financial Condition and
Results of Operations."
Good Ideas reported net losses of $1,566,292 for fiscal 1996,
$798,307 for
24
<PAGE> 30
fiscal 1995 and $582,331 for fiscal 1994. Because USAT's Board of Directors
believes that the USAT stockholders will derive the most benefit if the
Company's core businesses were solely the alcohol and drug testing operations
and the human resource provider business and because of Good Ideas' history of
losses, questions as to the future marketability of its current toy products
and the problems in the toy industry generally, USAT has been seeking a
purchaser for Good Ideas; however, there can be no assurance that an acceptable
offer will be received and, accordingly, that any such sale will be effected.
If an acceptable offer is not received, the Board would seek instead to
liquidate Good Ideas by no later than December 31, 1996. See "Risk
Factors-Need for Financing" below and "The Merger and Related Matters-Sale of
Good Ideas."
3. Need for Financing. Because of the then projected continuing
losses from the Company's operations in fiscal 1996, USAT's management believed
that it was necessary to secure additional equity, through the private
placement of its securities, through the exercise of outstanding Common Stock
purchase warrants or stock options or through a combination of both, in order
to offset the anticipated cash shortfall from operations. In November 1995,
USAT authorized a private placement pursuant to Regulation D under the
Securities Act offering 2,000,000 shares of the USAT Common Stock which
resulted in $3,750,000 in gross proceeds upon the consummation of the offering
on February 14, 1996. Management believes that, as a result of this financing,
the proceeds from the sale of the assets of USRR, the recent and possible
future exercises of outstanding USAT Common Stock purchase warrants and stock
options and the cash to be generated from its operations, the Company will be
able to meet its cash requirements during the next 12 months. However, there
can be no assurance that this objective will be achieved and the Company in
such event would have to seek new financing, which financing may not be
available or, if available, may not be on acceptable terms. In addition,
depending on market and other conditions relating to the individual holder,
there can be no assurance that the outstanding USAT Common Stock purchase
warrants and stock options of USAT will be exercised and, if exercised, when.
Since January 31, 1996 and through June 30, 1996, Common Stock purchase
warrants and stock options to purchase an aggregate of 2,482,824 shares of the
USAT Common Stock were exercised for an aggregate exercise price of $4,421,588.
In the event that the Company is unable to generate sufficient cash
flow from operations or from sources other than operations as described in the
preceding paragraph (which event, in USAT's management's opinion, is not likely
to occur based upon the Company's past experience; however, there can be no
assurance that management will be successful in its financing efforts), then
the Company may have to reduce operations in order to
25
<PAGE> 31
survive, 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 USAT's warrants and 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.
Good Ideas' management believes that, pending receipt of an acceptable
purchase offer as to which there is 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 at least the next 12
months, if such time is required to sell or liquidate. In addition, Good
Ideas' cash resources could be supplemented by repayment on or before December
31, 1996 of USAT's indebtedness to Good Ideas ($2,052,000 as of June 30, 1996).
However, there can be no assurance that additional funds may not be required.
Because the USAT Board believes that such an investment would not be warranted
unless an acceptable sales offer was about to be closed, the Board would seek
instead to liquidate Good Ideas by no later than December 31, 1996. See "The
Merger and Related Matters-Reasons for the Merger and Approval," "The Company's
Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Good Ideas' Management's Discussion and Analysis of Financial
Condition and Results of Operations."
4. Competition. The Company has a variety of competitors
depending on the particular aspect of its business, many of which have far
greater financial resources and marketing staffs than the Company. There can
be no assurance that USAT will be able to compete successfully with these
companies. See "Business of the Company- Competition."
Alcohol Testing
The alcohol detection equipment industry is highly competitive.
Although management believes that USAT's Alco- Analyzer 2100 is the only
Department of Transportation approved evidential alcohol breath testing
instrument utilizing gas chromatography, it still competes with other alcohol
detection techniques developed by other companies. USAT competes with other
small companies such as CMI Inc., Intoximeters, Inc. and Lifeloc, Inc., which
also offer alcohol testing equipment. 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-LaRoche, Inc. ("Roche") and
STC, Inc., offer an on-site screening saliva based alcohol test. Roche has,
and several of these other
26
<PAGE> 32
companies may have, greater revenues and financial resources than the Company.
Drug Testing
The Company has not received any revenues from U.S. Drug because its
products are still in the developmental stage. Currently U.S. Drug is
developing two products which will screen for the presence of drugs of abuse,
one which will utilize flow immunosensor technology with urine samples as a
medium of testing and another which will utilize flow immunosensor technology
with saliva samples as a medium of testing. If the products are developed,
U.S. Drug will compete with many companies which currently utilize urine
samples as a medium of testing, such as Syva (a division of Syntex Corporation
("Syva"), Roche, Marion Laboratories, Inc. ("Marion"), Abbott Laboratories,
Inc. ("Abbot"), Editek, Inc. ("Editek"), Hycor Biomedical, Inc. ("Hycor"),
Princeton Bio Meditech, Inc. ("Princeton") and Biosite, Inc. ("Biosite"),
major pharmaceutical companies which also provide substance abuse screening
methods. Currently, to management's knowledge, no competitor is offering a
saliva based testing product on an "on site" basis for drugs of abuse.
However, management has been advised that one or more companies may have such
product under development and, accordingly, there can be no assurance that a
competitor will not offer such a product in the future. Even if no such
product is offered, U.S. Drug anticipates competition from other substance
abuse detection methods provided by the major companies mentioned in this
paragraph. If U.S. Drug successfully completes development of first its saliva
sample testing method and second its urine sample testing method, 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 without the assistance of a major
pharmaceutical or other company possessing such resources. There can be no
assurance that the assistance of such a company can be obtained, especially
because none is currently being sought. In addition, U.S. Drug's delay in
bringing a drug testing product to market may adversely affect its future
marketing efforts because of the name recognition gained by competitors
actively marketing a product during this interim period.
Human Resource Provider Operations
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 acquisition in May 1996 of RSA, can also
provide customized loss prevention services specifically designed to reduce the
negative effect of workplace substance abuse. The competition
27
<PAGE> 33
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 other providers of customized programs and
policies like RSA. 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 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.
5. No Common Stock Dividends. USAT has not paid any cash dividends
on the USAT Common Stock and, based on the Company's cash requirements and
continuing losses, does not anticipate paying cash dividends on the USAT Common
Stock in the foreseeable future. See "The Merger and Related Matters-Summary
of the Terms of the USAT Common Stock-Dividends."
6. Depressive Effect on Market of Warrant or Option Exercises,
Potential 144 Sales and Untimely Sales by Selling Securityholders. Any
exercise of the outstanding Common Stock purchase warrants or stock options of
USAT will increase the shares available for public trading, which may depress
the public market price for the USAT Common Stock. USAT is required to
maintain a current prospectus in order to permit the sale of shares underlying
certain of USAT's warrants and USAT's options for any holder thereof who
exercises. As of the date hereof, there was, in the opinion of counsel to
USAT, no such prospectus complying with Section 10(a)(3) of the Securities Act
and USAT was in the process of effecting filings under the Securities Act to
secure such a prospectus. Accordingly, because the last of these USAT warrants
and USAT options do not expire until August 1, 2004, the potential exercises
and the subsequent sales thereof may act as an overhang on the market for the
USAT Common Stock for a long period.
As of July 12, 1996, 35,337,337 shares of the USAT Common Stock were
issued and outstanding, 2,173,474 of which were held
28
<PAGE> 34
by current or former directors and executive officers of USAT and could only be
sold pursuant to Rule 144 or another exemption under the Securities Act.
Essentially, Rule 144 permits the sale of (a) restricted securities (as such
term is defined in Rule 144(a)(3)) held by any person after a two-year holding
period and (b) non-restricted securities held by affiliates of the issuer
without any holding period, in brokerage transactions and in an amount equal to
the greater of the average weekly reported trading volume during the prior
four-week period or one percent of the issuer's outstanding common shares
during any three-month period. If the stockholder has held the restricted
securities for more than three years and has not been an affiliate for more
than three months prior to the contemplated sale (the term "affiliate" being
generally defined as a director, executive officer or a beneficial owner of
such number of the outstanding shares of the USAT Common Stock as to be deemed
in control of USAT), such stockholder may sell pursuant to Rule 144(k) under
the Securities Act without regard to such a limitation on the number of shares.
As of July 12, 1996, there were also reserved for issuance: (a)
250,000 shares of the USAT Common Stock issuable upon the exercise at $1.33 per
share of a Common Stock purchase warrant expiring September 1, 1996; (b)
1,353,224 shares issuable upon the exercise at exercise prices ranging between
$1.33 and $4.00 per share of Common Stock purchase warrants expiring between
September 1, 1996 and December 17, 1997; (c) 61,250 shares issuable upon the
exercise at exercise prices ranging between $1.0625 and $4.00 per share of
Common Stock purchase warrants expiring between May 17, 1997 and September 1,
1998; (d) 82,750 shares issuable upon the exercise at exercise prices ranging
between $2.00 and $2.50 per share of Common Stock purchase warrants expiring
between September 1, 1998 and July 19, 1999; (e) 2,000,000 shares issuable upon
the exercise at $2.00 per share of Common Stock purchase warrants expiring
December 17, 1999; (f) 185,207 shares issuable upon the conversion of the
shares of the Class A Preferred Stock, $.01 par value (the "Class A Preferred
Stock"); (g) 437,500 shares issuable upon the exercise at $2.375 per share of
the outstanding stock options originally expiring August 1, 2004, but now
expiring the later of (i) 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 (ii) 90 days after (1) the
optionee's employment terminated or terminates or (2), if the optionee is not
an employee, the directorship terminated, granted under USAT's 1990 Restricted
Stock, Non-Qualified and Incentive Stock Option Plan (the "1990 Option Plan");
(h) 60,000 shares issuable upon the exercise at $1.9375 per share of Common
Stock purchase warrants expiring November 15, 1998 issued to new directors of
USAT and a consultant; (i) 700,000 shares issuable upon the exercise of three
Common Stock purchase warrants expiring November 15, 1998
29
<PAGE> 35
(as to 400,000 shares at $1.9375 per share), November 15, 2000 (as to
150,000 shares at $3.00 per share) and November 15, 2000 (as to 150,000 shares
at $4.00 per share) issued to a director in connection with his services in a
capacity other than as a director, including those related to the then pending
private placement pursuant to Regulation D under the Securities Act; (j)
300,000 shares issuable upon the exercise at $3.125 per share of a Common Stock
purchase warrant expiring April 17, 1999 issued to the same director for other
services not in his capacity as a director; (k) 41,000 shares issuable upon the
exercise at exercise prices ranging between $1.875 and $2.8175 per share of
Common Stock purchase warrants expiring between July 17, 1998 and July 19, 1999
issued to employees of the Company; (l) 200,000 shares issuable upon the
exercise at $2.00 per share of a Common Stock purchase warrant expiring
December 27, 1998 issued to a then consultant to USAT for his acting as
spokesperson for the Company's alcohol and drug testing operations (on April
18, 1996 he was named Chairman of the Board, Chief Executive Officer and a
director of USAT); (m) 200,000 shares issuable upon the exercise at $2.00 per
share of a Common Stock purchase warrant expiring March 31, 1999 issued to RSA
as a consultant to ProActive in consideration of its services rendered to
ProActive operations (the warrant being divided among the RSA shareholders
after the acquisition of RSA by USAT); (n) 900,000 shares issuable upon the
exercise at $3.125 per share of Common Stock purchase warrants expiring May 20,
1999 issued to the RSA shareholders as part of the RSA purchase price; (o)
600,000 shares issuable upon the exercise at $3.125 per share of a Common Stock
purchase warrant expiring May 12, 1999 issued to the new President and Chief
Operating Officer of USAT; (p) 700,000 shares issuable upon the exercise at
$2.4375 per share of a Common Stock purchase warrant expiring February 26, 1999
issued to a consultant to USAT for financial public relations services; (q)
100,000 shares issuable upon the exercise at $2.17 per share of Common Stock
purchase warrants expiring October 19, 2000 issued to the placement agents for
a private placement pursuant to Regulation S under the Securities Act; and (r)
150,000 shares issuable upon the exercise at $2.25 per share of a Common Stock
purchase warrant expiring January 29, 2000 issued to an individual in
connection with settlement of a litigation against USAT. All of the foregoing
Common Stock purchase warrants and options were granted at or above the fair
market value of the USAT Common Stock on the respective date of grant. Were
all of these 8,135,754 shares issuable upon the exercises of the foregoing USAT
Common Stock purchase warrants and stock options, assuming that the shares were
made subject to a prospectus complying with Section 10(a)(3) of the Securities
Act permitting their resale, the 185,207 shares issuable upon the conversion of
the Class A Preferred Stock, and the shares described in the preceding
paragraph which could be sold pursuant to Rule 144, or a substantial number of
the foregoing shares, publicly sold over a short time period, the market price
of the Common Stock could decline significantly
30
<PAGE> 36
because the market might lack the capacity to absorb a large number of shares
during a brief period. Such a decline in market price may make the terms of
any future financing more difficult for USAT to consummate on a favorable
basis. The shares of the USAT Common Stock issuable upon the exercise of the
warrants and options described in subparagraphs (a), (b), (c), (d) and (g) have
all been registered under the Securities Act for resale by the holders thereof;
however, there is not currently in effect a prospectus complying with Section
10(a)(3) of the Securities Act that would permit resale of such 2,184,724
shares of the USAT Common Stock. The 5,951,000 underlying shares for the other
warrants have to be registered under the Securities Act for either issuance by
USAT or resale by the holders.
In addition to its intention to register under the Securities Act the
5,951,000 underlying shares of the USAT Common Stock issuable upon the exercise
of the Common Stock purchase warrants and stock options described in the
preceding paragraph, either for issuance by USAT or for resale by the holders,
as to many of whom USAT has given a registration commitment, USAT has also
given a registration commitment to the purchasers of 2,000,000 shares of the
USAT Common Stock issued in the private placement as to which the final closing
was held on February 14, 1996 and to the former RSA shareholders for the
500,000 shares of the USAT Common Stock they received upon the acquisition of
RSA by USAT. The 500,000 shares issued to the RSA shareholders were 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"), but will require a post-effective amendment to the January 1992
Registration Statement being declared effective under the Securities Act for
such shareholders to resell. See "The Merger and Related Matters-Summary of
the Terms of the USAT Common Stock-Acquisition Shares." Were these 2,500,000
shares of the USAT Common Stock registered under the Securities Act for resale
by the holders and, if a substantial number of these shares were offered for
sale at the same time, such offerings could have the same adverse impact as
described in the preceding paragraph.
To the extent that the Merger is consummated, an aggregate of _____
shares of the USAT Common Stock will be issued to the Good Ideas Minority
Stockholders. To the extent that the U.S. Drug Merger is consummated, an
aggregate of _____ shares of the USAT Common Stock will be issued to the
minority stockholders of U.S. Drug. The aggregate of _________ shares of the
USAT Common Stock issued on such transactions will, with limited exceptions, be
freely tradeable and, if a substantial number of these shares were offered for
sale at the same time, such offerings could have the same adverse impact as
described in the second preceding paragraph.
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7. Technological Changes. The substance abuse testing industry is a
technological sensitive industry in that companies are constantly developing
new methods and making changes to current methods for substance abuse detection
in order to remain competitive. USAT competes, and, when its development stage
for a saliva based test and a urine based test are completed, U.S. Drug will
compete, with larger companies such as those named under "Business of the
Company- Competition," many of which have substantially greater financial
resources available to them to invest in the research and development of their
products than USAT and U.S. Drug. These competitors may develop products in
the future which may render USAT's and U.S. Drug's products obsolete or
non-competitive from a pricing point of view. To remain competitive, USAT and
U.S. Drug may require substantial financial resources for personnel and other
costs to conduct research and update current products to reflect the
technological advances; however, such financial resources may not be available.
In the alternative, 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 pharmaceutical or other 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. See the section "Need for Financing"
under this caption "Risk Factors" and "Business of the Company-Competition."
8. Market Limitation for Alcohol Testing Products. The potential
markets for USAT's alcohol testing products may be substantially limited to the
ones in which it currently sells - law enforcement, correctional facilities,
medical and clinical facilities, alcohol treatment centers and emergency rooms.
This market insofar as alcohol testing is concerned may be saturated and the
opportunity for growth limited; however, management of USAT believes that the
demand for alcohol testing could grow in the industrial market, in which USAT
does some current selling, on a broader basis as did the demand for drug
testing at an earlier date. There can be no assurance that such growth will
occur or that, if the growth occurs, USAT will successfully penetrate the
industrial market. See the sections "Marketing" and "Competition" under the
caption "Business of the Company."
9. Other Conflicts of Interest. As of June 30, 1996, 60.8% of the
outstanding shares of Good Ideas Common Stock were held by USAT. Since July
1992, USAT has provided certain management and
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administrative services to Good Ideas. As of June 30, 1996, there was a note
receivable from USAT to Good Ideas in the amount of $2,052,000, which is due on
December 31, 1996. For additional information relating to the relationships
between USAT and Good Ideas, see the section "USAT Affiliations of Good Ideas
Directors" under this caption "Risk Factors;" "Material Contacts of USAT with
Good Ideas;" "USAT Principal Stockholders;" "Good Ideas Principal Stockholders;
and "USAT Management".
10. Loss of Direct Ownership of Good Ideas. If the Merger is
consummated, the Good Ideas Minority Stockholders will lose their direct,
although minority, ownership interest in Good Ideas. As a result, if Good
Ideas is sold for an amount greater than the amount offered by USAT, which
event the USAT Board of Directors and the Good Ideas Board of Directors believe
is highly unlikely to occur, such holders will share in such sale only to the
extent of their diluted interest in USAT. In addition, to the extent any Good
Ideas Minority Stockholder wanted to be an investor solely in a toy company,
such stockholder would lose such opportunity as the result of the Merger.
TERMS OF THE TRANSACTION
CONSENT SOLICITATION STATEMENT/PROSPECTUS
This Consent Solicitation Statement/Prospectus is being furnished to
the Good Ideas Minority Stockholders for the purpose set forth in the next
paragraph and to offer the shares of the USAT Common Stock necessary to
consummate the Merger (see the subsection "The Merger" under this caption
"Terms of the Transaction"). On the Record Date, there were ___ holders of
record of the Good Ideas Minority Common Stock.
Pursuant to this Consent Solicitation Statement/Prospectus, the Good
Ideas Minority Stockholders are being requested to consent to a proposal to
adopt the Merger Agreement, a copy of which is attached hereto as Appendix A
and is incorporated into this Consent Solicitation Statement/Prospectus by this
reference, providing for the merger of Acquisition Corp. with and into Good
Ideas (i.e., the Merger), the conversion of shares of the Minority Good Ideas
Common Stock into shares of the USAT Common Stock on the basis set forth in the
Merger Agreement and the conversion of the Good Ideas Warrants to acquire Good
Ideas Common Stock into equivalent USAT Merger Warrants adjusted for the
exchange rate set forth in the Merger Agreement. Because the holders of the
Good Ideas Options have consented to cancellation of such securities, no USAT
security will be issued in lieu thereof. See the subsections "Terms of the
Merger Agreement-Conversion of Shares" and "Good Ideas Options and Warrants"
under the caption "The Merger and Related Matters" for more detailed
information.
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THE MERGER
Pursuant to the Merger Agreement, at the Effective Date, each
outstanding share of the Good Ideas Common Stock, other than the shares owned
by USAT, will be converted into ______ of a share of the USAT Common Stock.
Each share of the Good Ideas Common Stock owned by USAT, except for ten shares,
will be canceled upon the Merger. The portion of a share of the USAT Common
Stock to be received for each share of the Minority Good Ideas Common Stock was
determined by dividing $1.00 by the average of the closing sales prices per
share of the USAT Common Stock as reported on the American Stock Exchange
during the 30 days prior to the Record Date, which average sales price per
share was $_________. An aggregate of ______ shares of the USAT Common Stock
will be issued to the Good Ideas Minority Stockholders, subject to adjustment
for fractional shares. Prior to the Merger, USAT owned 60.8% of Good Ideas;
after the Merger, USAT will own 100% of Good Ideas. Assuming that there are no
exercises of outstanding Common Stock purchase warrants or stock options or any
conversions of USAT preferred stock between the date of this Consent
Solicitation Statement/Prospectus and the Effective Date, the USAT stockholders
will own _____% of the outstanding shares of the USAT Common Stock and the Good
Ideas Minority Stockholders will own _____%. See "The Merger and Related
Matters" for more detailed information concerning the terms of the Merger.
If the Merger is not consummated, Good Ideas and USAT will continue to
be publicly-owned companies and Good Ideas will continue to be a majority-owned
subsidiary of USAT. However, USAT intends to seek a purchaser for Good Ideas,
and, if no acceptable offer is received, to liquidate Good Ideas on or before
December 31, 1996.
VOTING RIGHTS
The Record Date for the determination of the stockholders of Good
Ideas entitled to notice of the consent solicitation and to consent hereunder
is August __, 1996 as fixed by the Board of Directors of Good Ideas on August
__, 1996 pursuant to Section 213(b) of the GCL.
On the Record Date, there were 3,948,680 shares of the Good Ideas
Common Stock issued and outstanding, of which 2,400,000 shares (60.8%) were
owned by USAT and 1,548,680 shares (39.2%) by stockholders other than USAT
(i.e., the Good Ideas Minority Stockholders). See "Good Ideas Principal
Stockholders" for information, as of the Record Date, regarding persons known
by Good Ideas to own beneficially 5% or more of the Good Ideas Common Stock as
of the Record Date and as to stock ownership of directors and executive
officers of Good Ideas. Each share of the Minority Good Ideas Common Stock is
entitled to one vote.
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Although, under Section 251 of the GCL, USAT, as the majority stockholder of
Good Ideas, could adopt the Merger Agreement without the consent of any other
Good Ideas stockholder, the Boards of Directors of USAT and Good Ideas have
agreed that, as a condition to the adoption of the Merger Agreement, the
affirmative consent of the holders of at least 50% of the outstanding shares of
the Good Ideas Common Stock owned by stockholders other than USAT is required
for the adoption of the Merger Agreement. Holders of the Minority Good Ideas
Common Stock are not entitled to dissenters rights under the GCL as to the vote
with respect to the adoption of the Merger Agreement. See the section "The
Consent Procedure-Rights of Dissenting Good Ideas Shareholders" under this
caption "Terms of the Trans-action."
THE CONSENT PROCEDURE
(1) STATUTORY BASIS
Unless a corporation's certificate of incorporation otherwise
provides, Section 228 of the Delaware General Corporation Law (the "GCL")
permits stockholders' actions without a meeting of stockholders and without
prior notice if a consent or consents in writing, setting forth the action so
taken, is signed by the holders of the outstanding shares of the voting stock
having not less than the minimum number of votes that would be necessary to
take such action at a meeting at which all shares entitled to vote thereon were
present. Good Ideas' certificate of incorporation does not otherwise provide,
so that a consent procedure pursuant to Section 228 of the GCL may be utilized
by USAT. Under the applicable provision of the GCL, such action is effective
when written consents from holders of record of the minimum number of
outstanding shares of the voting stock necessary to authorize the action are
executed and delivered to the corporation within 60 days of the earliest dated
consent delivered in accordance with the GCL to the corporation. Under Section
251 of the GCL, a domestic corporation may be merged with and into another
domestic corporation by the affirmative vote of the record holders of more than
50% of the outstanding shares of the voting stock acting without a meeting and
without prior notice. Accordingly, USAT as the owner of 60.8% of the Good
Ideas Common Stock, which is the sole voting stock of Good Ideas, could adopt
the Merger Agreement without any other stockholder voting in favor of the
adoption of the Merger Agreement. Notwithstanding the foregoing, the Merger
Agreement provides that it is a condition to the consummation of the Merger
that the record holders of a more than 50% of the outstanding shares of the
Good Ideas Common Stock owned by Good Ideas stockholders other than USAT (i.e.,
the Good Ideas Minority Stockholders) consent to the adoption of the Merger
Agreement. USAT will execute and deliver a consent to the adoption of the
Merger Agreement as a stockholder of Good Ideas only after the holders
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of more than 50% of the outstanding shares of the Minority Good Ideas Common
Stock have consented in order to permit the filing of a Certificate of Merger
in Delaware pursuant to the GCL and the terms of the Merger Agreement. USAT
and Good Ideas have agreed not to waive the requirement as to the approval by
the Good Ideas Minority Stockholders of the Merger Agreement and USAT has
agreed not to execute and deliver its consent to the adoption of the Merger
Agreement if such approval is not obtained.
(2) PROCEDURE TO CONSENT
UNDER THE GCL, ONLY HOLDERS OF RECORD ON THE RECORD DATE ARE ELIGIBLE
TO GIVE THEIR CONSENT TO THE ADOPTION OF THE MERGER AGREEMENT. ANYONE OWNING
SHARES BENEFICIALLY (BUT NOT OF RECORD), SUCH AS A PERSON WHOSE OWNERSHIP OF
SHARES IS THROUGH A BROKER, BANK OR OTHER FINANCIAL INSTITUTION, WHO WISHES TO
GIVE THEIR CONSENT SHOULD CONTACT THAT BROKER, BANK OR FINANCIAL INSTITUTION
WITH INSTRUCTIONS TO EXECUTE THE WHITE FORM OF CONSENT ON HIS OR HER BEHALF OR
TO HAVE THE BROKER, BANK OR FINANCIAL INSTITUTION'S NOMINEE EXECUTE THE
CONSENT.
USAT is soliciting the written consents referred to herein and, if
stockholders wish to give their consent, the white consent card should be
returned to Georgeson & Company Inc., Wall Street Plaza, New York, New York
10005, in the enclosed envelope, or to Good Ideas Enterprises, Inc., 10410
Trademark Street, Rancho Cucamonga, California 91730, Attention: Secretary.
(3) REVOCATION
An executed consent card may be revoked at any time before expiration
by marking, dating, signing and delivering a written revocation before the time
that sufficient unrevoked consents have been received to authorize the action
for which consents are solicited. Consents must be received within 60 days
after the first consent is delivered to Good Ideas. A revocation may be in any
written form validly signed by the record holder as long as it clearly states
that the consent previously given is no longer effective. The delivery of a
subsequently dated consent card which is properly completed will constitute a
revocation of any earlier consent. The revocation may be delivered to
Georgeson & Company Inc., Wall Street Plaza, New York, New York 10005 or to
Good Ideas Enterprises, Inc., 10410 Trademark Street, Rancho Cucamonga,
California 91730, Attention: Secretary.
(4) MISCELLANEOUS
ABSTAINING FROM GIVING A CONSENT OR NOT RETURNING A SIGNED CONSENT
WILL HAVE THE SAME EFFECT AS WITHHOLDING CONSENT TO THE PROPOSED ACTION. IF
YOU ARE THE STOCKHOLDER OF RECORD AND YOU WISH TO GIVE YOUR CONSENT, PLEASE
SIGN, DATE AND RETURN THE ENCLOSED WHITE CONSENT CARD PROMPTLY IN THE ENVELOPE
PROVIDED.
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IF YOUR SHARES OF THE GOOD IDEAS COMMON STOCK ARE HELD IN THE NAME OF
A BROKERAGE FIRM, BANK OR NOMINEE, ONLY THEY CAN CONSENT TO THE PROPOSED ACTION
AND ONLY UPON RECEIPT OF YOUR SPECIFIC INSTRUCTIONS. ACCORDINGLY, IF YOU WISH
TO GIVE YOUR CONSENT, PLEASE CONTACT THE PERSON RESPONSIBLE FOR YOUR ACCOUNT
AND GIVE INSTRUCTIONS FOR SUCH SHARES IMMEDIATELY.
USAT will pay all of the costs and expenses in connection with the
preparation, printing and distribution of this Consent Solicitation
Statement/Prospectus, including, without limitation, attorneys' fees,
accounting fees and printing expenses, and all other expenses with respect to
the Merger and the related transactions except for the fees and expenses of
Whale Securities in delivering a fairness opinion for the benefit of the Good
Ideas Minority Stockholders and the fees and disbursements of Good Ideas'
special counsel. For an itemized list of USAT's and Good Ideas' estimated
costs and expenses, see "The Merger and Related Matters-Fees and Expenses."
Good Ideas will pay a fee of $35,000 to Whale Securities for such services,
together with out-of-pocket expenses. USAT has retained Georgeson & Company
Inc. to assist with the solicitation of consents from the Good Ideas Minority
Stockholders, for which services Georgeson & Company Inc. will receive a fee of
$3,750, together with out-of-pocket expenses. In addition, the directors,
officers and employees of USAT, who will receive no additional compensation,
will participate in the solicitations. Consents may be solicited by personal
interviews, telephone calls and telegrams to supplement the solicitation by
mail. Arrangements will also be made with banks, brokerage houses and other
custodians, nominees and fiduciaries for the forwarding of consent solicitation
materials to the beneficial owners of stock held of record by such persons, and
USAT will reimburse such custodians, nominees and fiduciaries for reasonable
out-of-pocket expenses incurred by them in connection therewith.
Good Ideas has been advised that each of William D. Robbins, currently
the Chief Executive Officer and a director of Good Ideas, who owns 200,000
shares of the Minority Good Ideas Common Stock, and Michael S. McCord, a
director of Good Ideas since May 31, 1996, who owns 10,000 shares of the
Minority Good Ideas Common Stock, intends to consent with respect to his
200,000 and 10,000 shares, respectively, of the Minority Good Ideas Common
Stock or in the aggregate 13.6% thereof in favor of adoption of the Merger
Agreement. Each of the other directors of Good Ideas has advised Good Ideas
that he or she does not own any shares of the Minority Good Ideas Common Stock.
Each of the USAT directors and executive officers has advised USAT
that he or she does not own any shares of the Minority Good Ideas Common Stock.
James C. Witham and Karen B. Laustsen, who were directors and executive
officers of USAT until April 18, 1996, and Gary S. Wolff, who was an executive
officer
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of USAT until July 3, 1996, have advised USAT that they are former Good Ideas
directors and hold Good Ideas Options to purchase an aggregate of 22,500 shares
of the Good Ideas Common Stock which they will surrender if the Merger is
consummated. They have also advised USAT that they do not own any shares of
the Good Ideas Common Stock.
Even assuming that Messrs. Robbins and McCord submit consents as
indicated, USAT has determined that USAT will not proceed with the Merger
unless USAT has received consents from the holders of at least 50% of the
outstanding shares of the Minority Good Ideas Common Stock without including
the aggregate of 210,000 shares held by these persons. Accordingly, the
consent of the holders of 774,341 shares of the remaining 1,338,680 shares of
the Minority Good Ideas Common Stock or 57.8% thereof will be necessary to
consummate the Merger. If the Merger is consummated, Messrs. Robbins and
McCord will receive shares of the USAT Common Stock for their shares of the
Minority Good Ideas Common Stock on the same basis as the other Good Ideas
Minority Stockholders.
(5) RIGHTS OF DISSENTING GOOD IDEAS STOCKHOLDERS
Under Section 262(b) of the GCL, appraisal rights are not available to
holders of the Minority Good Ideas Common Stock in connection with the
consummation of the Merger because both the USAT Common Stock which will be
received by the Good Ideas Minority Stockholders and the Good Ideas Common
Stock were listed on national securities exchanges as of the Record Date.
Additionally, Delaware counsel for USAT and Good Ideas has advised them that
Good Ideas may not voluntarily offer, under Delaware law, its stockholders
appraisal rights. Section 262 of the GCL specifies the circumstances in which
stockholders are entitled to appraisal rights. Delaware courts have
consistently held that appraisal rights may only be granted by statute or by
corporate charter. Because Section 262(b) bars appraisal rights to the Good
Ideas Minority Stockholders as indicated above because of the listed status and
the Good Ideas Certificate of Incorporation does not permit voluntary rights of
appraisal as allowed by Section 262(c) of the GCL, the Good Ideas Minority
Stockholders may not be granted voluntary appraisal rights if the Merger is
approved.
THE MERGER AND RELATED MATTERS
REASONS FOR THE MERGER AND APPROVAL
(1) AUTHORIZATION
On November 16, 1995, the Board of Directors of USAT approved in
principle the acquisition of the minority stockholder
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interest in Good Ideas, i.e., taking Good Ideas private, without setting the
consideration to be given to the Good Ideas Minority Stockholders. On February
6, 1996, the USAT Board authorized execution of the Merger Agreement, which
included an offer of a fraction of a share of the USAT Common Stock having a
value of $1.00 per share for each share of the Good Ideas minority stock, the
determination to be based on the average of the closing sales prices of the
USAT Common Stock during the 30 calendar days prior to the Record Date. In
determining this exchange ratio, the USAT Board considered, based on an
application of the formula, a range as to the number of shares of the USAT
Common Stock to be issued to the Good Ideas Minority Stockholders - a maximum
above which the USAT Board would not want to proceed with the Merger because it
would, in the USAT Board's opinion, be unfair to the USAT stockholders and a
minimum below which the offer would, in the opinion of the USAT Board, probably
be unacceptable to the Good Ideas Minority Stockholders.
On April 12, 1996, the Board of Directors of Good Ideas authorized
execution of, and submission to the Good Ideas Minority Stockholders for
approval of, the Merger Agreement. Also in making its determination as to the
exchange rate, the Good Ideas Board considered a range as to the number of
shares of the USAT Common Stock to be issued to the Good Ideas Minority
Stockholders based on an application of the formula - a minimum below which the
offer would be unacceptable to the Good Ideas Board for offering to the Good
Ideas Minority Stockholders and a maximum above which the USAT Board would, in
the opinion of the Good Ideas Board, reject as being unfair to the USAT
stock-holders. As of such date, there were four directors of Good Ideas: James
C. Witham and Karen B. Laustsen, each of whom was, until April 18, 1996, a
director and an executive officer of USAT, Gary S. Wolff, who was, until July
3, 1996, an executive officer of USAT and was, until September 26, 1995, a
director thereof, and William D. Robbins, the Chief Executive Officer of Good
Ideas. Each of Messrs. Witham and Wolff and Ms. Laustsen was an employee of
USAT and Mr. Robbins is an employee of USAT. Each of the foregoing is a
stockholder of USAT. Ms. Laustsen resigned as a director of Good Ideas
effective May 28, 1996; Mr. Witham resigned effective May 31, 1996; and Mr.
Wolff resigned effective July 3, 1996. Since May 31, 1996, the Good Ideas
Board has, in addition to Mr. Robbins, consisted of Robert Stutman, the
Chairman of the Board, the Chief Executive Officer and a director of USAT,
Linda H. Masterson, the President, the Chief Operating Officer and a director
of USAT, and Michael S. McCord, a consultant to the USAT Board of Directors and
a former member of the Committee. Mr. Stutman and Ms. Masterson are also
employees of USAT and all four directors are securityholders of USAT.
All actions taken by the Boards of Directors concerning the
authorization of the Merger Agreement and the transactions related thereto were
unanimously approved except that Ms. Laustsen abstained at the February 6, 1996
USAT Board meeting
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because of her concern of being on both sides of the transaction. However,
when Ms. Laustsen voted as a Good Ideas director on April 12, 1996 in favor,
she said that she also supported the Merger as a USAT director. Despite the
resignations of Messrs. Witham and Wolff and Ms. Laustsen, each has advised
USAT that he and she continue to support the Merger. All of the new members of
the Good Ideas Board also support the Merger and the USAT Board continues its
unanimous support.
On August __, 1996, after the number of shares to be offered to the
Good Ideas Minority Stockholders was calculated pursuant to the exchange ratio,
both the USAT Board and the Good Ideas Board concluded that the number of
shares was within the ranges each had previously considered and deemed
acceptable.
On February 6, 1996, USAT's Board, acting on behalf of USAT as the
sole stockholder of Acquisition Corp., adopted the Merger Agreement and, on
April 12, 1996, Acquisition Corp.'s Board of Directors, consisting of Alan I.
Goldman, John C. Lawn and Linda H. Masterson, who also serve as USAT directors
and, in Ms. Masterson's case, since May 13, 1996, also as the President and
Chief Operating Officer of USAT, unanimously authorized execution of the Merger
Agreement and approved the related transactions.
(2) ATTEMPTS TO RESOLVE CONFLICT OF INTERESTS
As a result of the interlocking historical relationships among the
directors of Good Ideas with USAT as described above, the Good Ideas Board of
Directors has never been independent of USAT and at least a majority of the
directors have owed fiduciary duties to both USAT and Good Ideas, creating a
conflict of interest, which has existed since USAT, through a subsidiary,
acquired a majority interest in Good Ideas in June 1992. However, specifically
with respect to the Merger, the Good Ideas Board approved certain safeguards in
an effort to assure fairness to the Good Ideas Minority Stockholders. First,
the Merger Agreement must be adopted by the holders of at least 50% of the
outstanding shares of the Minority Good Ideas Common Stock (excluding from such
calculation the 210,000 shares in the aggregate held by two directors of Good
Ideas), even though the consent of USAT alone is sufficient to adopt the Merger
Agreement in accordance with the GCL. Second, a major firm was engaged as
independent counsel for Good Ideas. Lastly, the Board of Directors of Good
Ideas has received an opinion from Whale Securities as to the fairness of the
Merger to the Good Ideas Minority Stockholders from a financial point of view
as of the date of the opinion. The Merger Agreement provides that the first
and second protection for the Good Ideas Minority Stockholders cannot be waived
by any party.
The USAT Board and the Good Ideas Board each considered adding
independent directors to Good Ideas, but rejected the idea
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because of what each considered the virtual impossibility, especially in light
of potential director liability concerns, of finding a person or persons to
accept a directorship in a public company knowing that it is in the process of
going private and that USAT has majority control of the Good Ideas Common Stock
(63.6% of the outstanding shares as of June 30, 1996 if the directors' shares
are included). Although USAT could have attempted to cause Good Ideas to make
it financially attractive for a potential director to accept a directorship,
both the USAT and Good Ideas Boards believed that this would not be a prudent
use of Good Ideas' money and that any such payment or payments could be
perceived as an improper inducement to such person to favor the Merger.
The USAT Board and the Good Ideas Board also considered engaging an
independent representative for Good Ideas to negotiate the terms of the
transaction, but concluded that, in view of the above safeguards to be used,
the expenditure to engage such a person did not appear justified. Because of
Good Ideas' declining revenues and increasing losses, the questions raised as
to the necessity of adding an entire new toy product line or lines for Good
Ideas to be competitive and the problems in the toy industry generally as
described elsewhere in this Consent Solicitation Statement/Prospectus (see
"Business of Good Ideas-Overview"), the Boards concluded that Good Ideas'
operations did not warrant devoting a substantial amount of time and money to
effecting a "taking private" proposal by engaging an independent negotiator as
opposed to using the limited funds to meeting operational requirements and
adopting the safeguards described in the second preceding paragraph.
(3) DETERMINATION OF TERMS
Commencing in October 1995, there were a series of meetings, including
those enumerated under the subsection "Authorization," at which either the USAT
directors or the Good Ideas directors discussed the concept of taking Good
Ideas private and ultimately set the terms therefor, including the exchange
ratio and using the mechanism of a merger rather than a tender offer. James C.
Witham and Karen B. Laustsen, who sat on both Boards and were in contact with
certain of the Good Ideas Minority Stockholders, and Michael S. McCord, who was
a consultant to the USAT Board and a stockholder in both USAT and Good Ideas,
advised the other directors as to the concerns expressed by certain minority
stockholders to them.
Representatives of Rosenman & Colin, LLP, special counsel to Good
Ideas, met with the Good Ideas directors on several occasions, advising them
about their fiduciary duties, complicated by the fact, as indicated above in
the subsection "Authorization" under this caption, that nearly all had dual
responsibilities to Good Ideas and USAT. Similarly Gold &
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Wachtel, LLP, general counsel to USAT, advised the USAT directors at several
meetings about their fiduciary duties. Both counsel responded to questions
about the applicability of the business judgment rule to the proposed
transaction.
Commencing in November a representative of Whale Securities met with
members of the Good Ideas Board on several occasions first to review the
factors to be considered in determining whether a USAT offer would be fair and,
once the exchange ratio was determined, the reasons why Whale Securities
considered the USAT exchange ratio to be fair to the Good Ideas Minority
Stockholders. On May 20, 1996, the USAT directors met with such representative
to review the preliminary fairness opinion.
(4) USAT BOARD REASONS
In approving the Merger Agreement on February 6, 1996 and its
subsequent review, the Board of Directors of USAT took into consideration the
following factors as reasons for taking Good Ideas private:
(A) THE COMPANY'S BEST OPPORTUNITY AT OBTAINING PROFITABILITY
REQUIRES ONLY SYNERGISTIC OPERATIONS.
In the opinion of the USAT Board, for the Company to have its best
opportunity at increasing revenues and securing profitability, it should focus
solely on its alcohol and drug testing and human resource provider operations
as its core businesses, thereby necessitating the divestitures of USAT's toy
and rubber recycling products subsidiaries, the latter of which divestitures
was effected on April 30, 1996. The USAT Board believes that the three "core
businesses" have a synergy with each other, which its toy and rubber recycling
operations do not have, and thereby make a more attractive investment for
stockholders and a better combination on which to build for the future. The
USAT Board believed that taking this action of divestiture is consistent with
the trend against conglomerates, especially when the non-related businesses
have declining revenues and operational losses. Accordingly, and in
combination with the reasons set forth below, the USAT Board believes that the
shares of the USAT Common Stock will over time have greater value to the Good
Ideas Minority Stockholders than their Good Ideas Common Stock.
(B) GOOD IDEAS' OPERATIONS ARE DECLINING AND WOULD REQUIRE
ENTIRELY NEW TOY PRODUCTS TO EFFECT A TURNAROUND AT A SUBSTANTIAL INVESTMENT OF
TIME AND MONEY.
The USAT Board reviewed the declining revenues and increasing losses
at Good Ideas. The Board noted the action by Toys R Us, Good Ideas' principal
customer (constituting over 50% of Good Ideas' sales in each of the past three
fiscal years), in
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reducing its orders commencing in fiscal 1995, attributing the cause to its
large inventories and declining sales and customer traffic. The Board also
noted what Good Ideas management believed to be the trend in the toy industry
for distributors or retailers to minimize their number of vendors and to reduce
the number of items carried in their inventory, which causes the toy
manufacturer to maintain an inventory to meet customer demands and thereby
increases the manufacturer's costs. These actions also have the effect, in the
opinion of the Good Ideas management, of squeezing out the small companies like
Good Ideas with their limited product lines. In addition, Good Ideas'
management advised that an additional new product line or lines, at a
substantial expenditure of time and money, would be necessary for Good Ideas to
compete effectively and that there can be no assurance of success even if such
effort were made because of the foregoing conditions in the toy industry.
Specifically, the USAT Board considered the following negative trends:
(i) the net loss of Good Ideas increased from $582,000 for fiscal 1994 to
$798,000 for fiscal 1995 and was $1,566,292 for fiscal 1996, (ii) net sales of
Good Ideas for fiscal 1995 were $4,606,039, a decrease of $938,182 or 16.9%
from net sales of $5,544,221 in fiscal 1994, and net sales for fiscal 1996 were
$1,508,819, a decrease of $3,097,220 or 67.2% from the sales for the prior
fiscal year, (iii) net sales from the wooden construction toy category, Good
Ideas' primary product line, for fiscal 1995 were $2,841,000, a decrease of
$733,000 or 20.5% from such net sales in fiscal 1994, and net sales from wooden
construction toys for fiscal 1996 were $967,000, a decrease of $1,874,000 or
66.0% from such net sales in the prior fiscal year, and (iv) selling, general
and administrative expenses for fiscal 1995 increased to $1,924,078, or 41.8%
of net sales, from $1,487,811, or 26.8% of net sales, for fiscal 1994 and
selling, general and administrative expenses for fiscal 1996 decreased to
$1,278,633, or 84.7% of net sales.
The USAT Board reached this conclusion as to Good Ideas' operational
problems even though Good Ideas' sales, although declining, were larger than
those of either of the two other segments in each of the last three fiscal
years. For this reason, the USAT Board initially deferred any consideration of
divestiture of Good Ideas. However, as indicated above, absent an infusion of
new products, the USAT Board expected Good Ideas' revenues to continue to
decline. On the other hand, the USAT Board anticipates growth from the
RSA/ProActive combined operations and the alcoholic testing operations,
ultimately in an amount sufficient to offset the loss of the Good Ideas'
revenues.
In view of the foregoing, the USAT Board concluded that there can be
no assurance when Good Ideas, if at all will operate on a profitable basis and
that the likelihood of the Company's success was far greater and that,
therefore, the Good Ideas
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Minority Stockholders' ownership of shares of the USAT Common Stock holds a
significantly higher opportunity for a greater return on their initial
investment.
(C) USAT'S OFFER HAS GREATER VALUE TO THE GOOD IDEAS MINORITY
STOCKHOLDERS THAN LIQUIDATION VALUE, BOOK VALUE OR MARKET VALUE.
The USAT Board also considered as a factor that the receipt by the
Good Ideas Minority Stockholders of __ of a share of the USAT Common Stock for
each share of the Minority Good Ideas Common Stock is, in the Board's opinion,
a better alternative for the Good Ideas Minority Stockholder than (a) receiving
$.55 per share if Good Ideas was liquidated based on its assets and liabilities
as of March 31, 1996 (i.e., total assets ($2,422,732) less total liabilities
($248,207) divided by outstanding shares (3,948,680) - see "Statement of Net
Assets in Liquidation" in the Good Ideas Financial Statements) or (b) receiving
$.71 per share if Good Ideas were sold for its net book value as of December
31, 1995, or (c) retaining their shares in Good Ideas, which shares are highly
illiquid (the average daily trading volume in Good Ideas in the last 12 months
was approximately 1,500 shares per day) and which shares are currently valued
at __% of the value of the USAT Common Stock being offered hereunder. The USAT
Board noted that the market price for the Good Ideas Common Stock has
consistently gone down since March 1994. See "Good Ideas Market
Information-Market Data." While there can be no assurance that the value of
the USAT Common Stock will rise, the USAT Board believes that over a period of
time this security may bring greater value to the Good Ideas Minority
Stockholders than cash or holding the Minority Good Ideas Common Stock for the
reasons discussed in this section.
(D) THE GOOD IDEAS COMMON STOCK MAY BE DELISTED.
On November 18, 1995, the Pacific Stock Exchange Incorporated (the
"Pacific Stock Exchange") advised Good Ideas that the share bid price of the
Good Ideas Common Stock was below $1.00 per share, which does not meet the
minimum Tier II listing maintenance requirement of the Pacific Stock Exchange,
which requirement had become effective January 23, 1995. Good Ideas has been
granted an extended compliance period, not to exceed six months from May 9,
1996, to demonstrate that the Good Ideas Common Stock is in compliance.
Although the USAT Board considered the possibility of effecting a reverse stock
split in an amount sufficient to increase the market value of the Good Ideas
Common Stock, it recognized that, unless Good Ideas reversed its adverse
operational trends of declining revenues and increasing losses, as to which
there can be no assurance, it was likely that, after the split, the market
price would begin to decline and again reach a level not complying with the
Exchange's maintenance requirement. The Board also recognized that, if
delisting occurred, the Good Ideas Common Stock would not meet the market price
requirement for listing on the American Stock Exchange or reporting on the
National Association of Securities
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Dealers Automated Quotation ("NASDAQ") System and that, if the Good Ideas
Common Stock was reported in the "pink sheets," it was unlikely that the Good
Ideas Common Stock would rise in market value in such over-the-counter market
in view of its operational problems. In addition, the USAT Board felt that it
was highly likely that delisting would reduce even further the Good Ideas
Minority Stockholders' current minimal liquidity in the Minority Good Ideas
Common Stock and, accordingly, their receipt of the USAT Common Stock will be
of much greater value to them. In view of the cut-back in operations of Good
Ideas, if the Merger is rejected, there may be no alternative to avoid
delisting.
(E) GOING CONCERN VALUE OF GOOD IDEAS NOT CONSIDERED SIGNIFICANT.
The USAT Board also looked at whether it could assign a "going concern
value" to Good Ideas. In this connection, the USAT Board concluded that Good
Ideas' current toy products could no longer generate sufficient revenues to
effect a turnaround, especially in view of the actions by Toys R Us, Good
Ideas' principal customer, in reducing its orders, and that an infusion of a
new product line or lines, requiring a substantial investment in time and
money, was necessary to effectuate this objective. Accordingly, the USAT Board
concluded that Good Ideas' operations were not currently "viable" so as to
allocate a "going concern value" for valuation purposes. However, the USAT
Board concluded that another toy company with its own products would consider
the existing toy products of Good Ideas as attractive additional assets to
purchase, especially if such potential acquiror could also utilize Good Ideas'
tax loss carryforwards (see the section "Results of Operations, Fiscal 1996 vs.
Fiscal 1995" under the caption "The Company's Management's Discussion and
Analysis of Financial Condition and Results of Operations"). The USAT Board,
based on the advice of the Good Ideas' management, believed that such a toy
company acquiror would not be interested in Good Ideas' facilities and sales
personnel, so that these could be discontinued, thereby reducing Good Ideas'
costs during the period in which such a purchaser could be sought.
Nevertheless, the USAT Board deemed that arrangements to continue the
production and sale of products through an operating entity were necessary to
achieve USAT's desire to sell Good Ideas to a toy company on this basis. The
arrangements were also necessary if operations were to be restarted as
indicated in the subsection "Good Ideas Board's Reasons" in this section
"Reasons for the Merger and Approval" under this caption "The Merger and
Related Matters." On the other hand, Good Ideas had to be treated as a
discontinued operation in the Consolidated Financial Statements based on the
February 26, 1996 decision to sell or liquidate Good Ideas. The USAT Board,
however, concluded that, in view of no third party offers to acquire Good Ideas
being made competitive with that offered by USAT and Good Ideas' questionable
viability, the Good Ideas Minority Stockholders' receipt of the shares of the
USAT Common Stock and, therefore, ownership in a potentially viable
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and growing public company would be of greater value to them than their shares
of the Good Ideas Minority Stock.
(F) WAITING FOR AN UPTURN IN THE TOY INDUSTRY DOES NOT SEEM
ECONOMICALLY JUSTIFIED.
The USAT Board considered as an alternative to the Merger and the sale
waiting for an upturn in the toy industry generally and attempting to make Good
Ideas operate on a profitable basis. However, the USAT Board considered that
the costs to achieve such objective, which would, in the directors' opinion,
require the acquisition through purchase or licensing of additional toy
products, as to which acquisition there can be no assurance, and the
uncertainty as to when conditions in the toy industry generally will improve
outweigh any possible benefit to be derived from such an effort. In addition,
there can be no assurance that, if, at a later date, USAT sought to sell Good
Ideas, it would realize an acceptable sales price. For the reasons set forth
in this subsection, combined with Good Ideas' past negative cash flow from
operations, its decline in sales and its increasing losses, the USAT Board
concluded that waiting for an upturn in the toy industry was far too great a
risk to take and that the Good Ideas Minority Stockholders would realize a
greater return on the offer of the USAT Common Stock at the current time.
(G) USAT COULD CANCEL LOAN INDEBTEDNESS ON THE MERGER.
If the Merger is consummated, then USAT's indebtedness to Good Ideas
($2,052,000, inclusive of the loan assumed by USAT which was due to Good Ideas
from USRR - see the section "Material Contacts of USAT with Good Ideas - Loans
from Good Ideas to USAT") will be canceled. USAT could in such event use any
cash flow generated from operations or financing for operational purposes and
not for repayment of this indebtedness. As a result of the use of the funds
for this purpose, the USAT Board believes that the Company's revenues will grow
and that it will achieve profitability earlier than Good Ideas and,
accordingly, for this reason, and in conjunction with the other reasons set
forth in this section, the USAT Board believes that the shares of the USAT
Common Stock will over time have greater value to the Good Ideas Minority
Stockholders than their shares of the Minority Good Ideas Common Stock. If the
Merger is not consummated, although USAT made net loan repayments of $171,000
during fiscal 1996, USAT is not required to repay the balance of such
indebtedness to Good Ideas until its current maturity date of December 31,
1996.
(H) ELIMINATING PUBLIC SUBSIDIARIES COULD LEAD TO ADDITIONAL COST
SAVINGS.
The USAT Board believes that it must continue to institute cost
reduction efforts wherever feasible. Based on a review of costs, the Board
believes that at least $50,000 to $75,000 can be saved each year with respect
to each of Good Ideas and U.S. Drug if this subsidiary did not have public
stockholders and its
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common stock was not registered pursuant to Section 12(b) of the Exchange Act.
(5) REASON FOR SHARE OFFERING
Once the decision to sell or liquidate was made, the USAT Board
reconsidered the question of whether the Good Ideas Minority Stockholders would
realize a better return on the offer of shares of the USAT Common Stock. The
Board had previously considered that, even if Good Ideas continued as a
operational subsidiary of USAT, the illiquidity of the Good Ideas' shares, the
declining market price and the strong probability of delisting made an offer of
shares of the USAT Common Stock more attractive to the Good Ideas Minority
Stockholders than retention of their shares of the Minority Good Ideas Common
Stock. Such review concluded that the offer of a fraction of a share of the
USAT Common Stock for each share of the Minority Good Ideas Common Stock would
also appear to result in the Good Ideas Minority Stockholder receiving more
than on sale or liquidation, as indicated above in USAT Board reason numbered
4(c) above. Accordingly, the sole reason for USAT making a share offering was
the USAT Board's belief that the Good Ideas Minority Stockholders would have a
better chance of realizing a return on their investment whether or not the
Merger was consummated or whether or not Good Ideas was sold or liquidated.
The Good Ideas Board concurred in the USAT Board's belief.
(6) REASON FOR USING MERGER FORM
Once the decision to take Good Ideas private was made, the USAT Board
structured the transaction as a merger, rather than as a tender offer to the
Good Ideas Minority Stockholders followed by a merger, because it believed that
the merger was a faster and less expensive method than was a tender offer to
achieve one of its primary objectives of having no minority stockholders in
Good Ideas. Moreover, USAT selected a consent solicitation over a proxy
solicitation in order to save the time and expenses of holding a meeting. The
USAT Board believed that the transaction should be effected at this time before
USAT initiated any further efforts to improve the business operations of the
Company, including those of Good Ideas, and had all of its corporate structural
questions resolved. If, in addition to the consummation of the Good Ideas
sale, the Merger and the U.S. Drug Merger are consummated, the USAT Board will
operate USAT through divisions and not subsidiaries for cost savings and other
reasons. If such transactions are effected, the USAT Board will also consider
changing USAT's name (an action which would require USAT stockholder approval)
to one more indicative of its combined operations.
(7) GOOD IDEAS BOARD'S REASONS
Certain of the factors which the Board of Directors of USAT considered
as reasons for approving the Merger were also considered by the Good Ideas
Board of Directors in granting their
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approval. As indicated under "Terms of the Transaction-The Consent
Procedure-Miscellaneous," William D. Robbins and Michael S. McCord, the sole
directors of Good Ideas who own shares of the Minority Good Ideas Common Stock,
intend to submit consents in favor of the Merger. As indicated in the section
"Good Ideas Options and Warrants" under this caption "The Merger and Related
Matters," the three former directors of Good Ideas who hold the Good Ideas
Options intend to surrender such securities if the Merger is consummated. The
factors considered by the Good Ideas Board in approving the Merger were as
follows:
(a) Good Ideas' operations are declining and would require
entirely new toy products to effect a turnaround at a substantial investment of
time and money.
(b) USAT's offer has greater value to the Good Ideas Minority
Stockholders than liquidation value, book value or market value.
(c) The Good Ideas Common Stock may be delisted.
(d) Going concern value of Good ideas not considered significant.
(e) Waiting for an upturn in the toy industry does not seem
economically justified.
For a more detailed statement of these reasons, see the subsection "USAT
Board's Reasons" under this section "Reasons for the Merger and Approval" under
this caption "The Merger and Related Matters."
One of the matters considered by the Good Ideas Board was the
recoverability of the Good Ideas recorded assets. Tradi-tionally Good Ideas
did not evaluate its toy inventory for obsolescence until after the ordering
for the Christmas season was completed when it had its best opportunity to
evaluate its then customer demand. Once the decision was made that there was
no demand, Good Ideas would then dispose of the toys in its inventory deemed
not to be further marketable. On such basis, the adjustments would be made by
Good Ideas at the end of the December quarter or at fiscal- year end, virtually
simultaneously with the disposal of this inventory.
In connection with its review of inventory as of December 31, 1995,
the Good Ideas Board concluded that, even with the contemplated more limited
operations for Good Ideas, the recorded value of the assets would be recovered
in a continuing operation and, accordingly, no adjustment was required.
Management did not deem this recoverability adversely affected by the cost
reduction measure of closing Good Ideas' plant and offices, which measure was
dictated by expiration of the lease on December 31, 1995 and with the landlord
seeking a long-term lease, its upcoming fourth quarter (January 1 to March 31)
in which new orders were traditionally few and the ability to have plant and
office
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services performed in the interim economically elsewhere. In this connection,
the Good Ideas Board noted that Good Ideas was always dependent on outside
sources most manufacturing was performed in the Far East or in Mexico by
vendors and most of the finishing and packaging operations were subcontracted
to a local Texas vendor. Accordingly, if the decision was made to resume full
scale operations of Good Ideas as they were previously conducted prior to
institution of the cash saving termination of leases and employees, management
fully believed that these operations could be restarted very quickly.
The decision by the USAT Board on February 6, 1996 to take Good Ideas
"private" was not, in either Board's opinion, inconsistent with keeping a
limited operation until the decision to expand or sell was made and, as
indicated in the prior paragraph, not inconsistent with their belief as to the
recovery of the recorded value of the inventory. Although Whale Securities
refers (see the section "Fairness Opinion" under this caption "The Merger and
Related Matters") to its estimate that an orderly liquidation of assets of Good
Ideas would likely result in the Good Ideas Minority Stockholders receiving
less than the book value share, both Boards believe that there is a difference
between evaluating an ongoing business, which Good Ideas was when the inventory
evaluation was being made with respect to the December 31, 1995 results of
operations, and one that is being liquidated.
The impairment of the Good Ideas inventory and fixed asset values was
a direct result of the decision made on February 26, 1996 to sell or liquidate
Good Ideas. From an accounting point of view Good Ideas had to be treated as a
discontinued operation as reflected in the Good Ideas Statement of Net Assets
in Liquidation, Note 14 to Financial Statements of Good Ideas and Note 14 to
Consolidated Financial Statements. However, this may be contrasted with the
Boards' decision to keep an operating company, albeit on a more limited basis,
to facilitate a sale as discussed under USAT Board reason numbered 4(e) in the
section "Reasons for the Merger and Approval-USAT Board Reasons" under this
caption "The Merger and Related Matters." Had the decision on February 26,
1996 been to restart the operation as described in the second preceding
paragraph, management believes that the value of the inventory and fixed assets
would not have been significantly impaired.
(8) EFFECT OF MERGER ON USAT
The Merger will provide USAT with its best opportunity to increase its
revenues and profits by enabling USAT to capitalize on the synergy of its core
businesses, and, over time, increase the value of the USAT Common Stock. The
indebtedness to Good Ideas will also be cancelled allowing USAT to use its cash
flow for operations and financing and not for repayment of this debt. See
subsections 4(a) and 4(8) in this section "Reasons for the Merger" under this
caption "The Merger and Related Matters."
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Moreover, there will be no federal tax consequences to USAT or its stockholders
as a result of the Merger.
However, the shares of USAT Common Stock to be issued to the Good
Ideas Minority Stockholders will dilute the stock ownership and voting rights
of the current USAT stockholders. Thus, the current USAT stockholders who hold
100% of the outstanding shares of the USAT Common Stock will hold __% of the
outstanding shares if the Merger is consummated and __% if the U.S. Drug Merger
is also consummated.
(9) CONCLUSION
The Boards of USAT and Good Ideas have concluded that, for the
foregoing reasons, the consummation of the Merger is in the best interests of
USAT and Good Ideas and is fair to the Good Ideas Minority Stockholders from a
financial point of view. In making its determination, the USAT Board
considered factors (4)(b) and (c) in this section "Reasons for the Merger and
Approval" more important than factors (4)(a), (d), (e), (f), (g) and (h). In
making its determination, the Good Ideas Board considered factors (7)(a), (b)
and (e) in this section "Reasons for the Merger and Approval" more important
than factors 7(c) and (d).
Both Boards recommend that the Good Ideas Minority Stockholders
consent to the adoption of the Merger Agreement. The directors of Good Ideas
direct attention to their affiliation with USAT and the attendant conflicts of
interests as described in the subsection "Authorization" in this section
"Reasons for the Merger" under this caption "The Merger and Related Matters."
The Boards of Directors of USAT and Good Ideas had considered as
alternatives to taking Good Ideas private a sale of the assets or stock of Good
Ideas, its liquidation and an expansion of the business by seeking new
products, including the seeking of financing therefor. In connection with the
latter, neither Board believed that the Good Ideas Minority Stockholders would
be receptive to a rights offering because of the low market price and the basis
price for most of the holders. The Boards, therefore, concluded that, if
financing were necessary, it would have to be external and Good Ideas' business
prospects and operational results would not be conducive to a lender or an
investor. In any event, for the reasons discussed in the subsection "USAT
Board Reasons" in this section "Reasons for the Merger and Approval" under this
caption "The Merger and Related Matters," the Boards rejected expansion of Good
Ideas business as an alternative or waiting to follow developments in the toy
industry generally as alternatives. As indicated in the same subsection, the
Boards concluded that the Good Ideas Minority Stockholders would realize more
from USAT's offer of shares of the USAT Common Stock than in the proceeds of a
sale or liquidation. Once the decision to take Good Ideas private was made,
the USAT Board chose a merger over a tender offer, followed by a merger,
because it believed such procedure would involve
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less expenditures of time and money than a two-step process when the intention
was to have all public stockholders in one corporation.
In evaluating the Merger, the Boards of Directors of USAT and Good
Ideas also considered the oral presentations of Whale Securities that the
Merger exchange ratio is fair to the Good Ideas Minority Stockholders from a
financial point of view. In addition, before mailing this Consent Solicitation
Statement/ Prospectus, they considered the written opinion of Whale Securities,
which confirmed the conclusion of such oral presentations and which supports
the opinions of the USAT and Good Ideas Boards of Directors that the Merger is
fair to the Good Ideas Minority Stockholders. A copy of the opinion of Whale
Securities is attached as Appendix B to this Consent Solicitation
Statement/Prospectus. See the section "Fairness Opinion" below.
In consideration of the foregoing reasons in this section "The Reasons
for the Merger and Approval," the Boards of Directors of USAT and Good Ideas
both believe that this consent solicitation offer is substantively, as well as
procedurally, fair to the Good Ideas Minority Stockholders.
There can be, of course, no assurance that any or all of the
objectives will be achieved.
FAIRNESS OPINION
Whale Securities is an investment banking firm primarily specializing
in the small cap market and is regularly engaged in the evaluation of small cap
companies and their securities in connection with equity and debt financings,
merger and acquisitions and valuations for corporate and other purposes. Whale
Securities has not acted in the past on behalf of Good Ideas, USAT or
Acquisition Corp. in any capacity. In addition, there is no agreement or
understanding as to the future or current employment of Whale Securities except
in connection with the pending possible acquisition of the minority interest in
U.S. Drug by USAT. Various investment banking firms as to which counsel or
others in management had personal contacts were solicited as to their
availability to perform the analysis and, of the three firms which replied in
the affirmative, Whale Securities was selected based on its prior experience
and its reasonable fee for its services.
Good Ideas agreed to pay Whale Securities a fee of $35,000, of which
$17,500 was paid on Whale Securities' acceptance of the assignment. $8,750
will be paid when Whale Securities concludes its findings and $8,750 will be
paid upon Whale Securities
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delivering its fairness opinion in definitive form. Accordingly, the fee for
the analysis and the report will be $26,250.
Whale Securities has delivered a written opinion dated as of the date
hereof (the "Fairness Opinion") to the Good Ideas Board stating its opinion
that, considered as a whole, the Merger exchange ratio is fair to the Good
Ideas Minority Stockholders from a financial point of view as of the date of
the opinion. The full text of the Fairness Opinion, which contains a
description of the assumptions and qualifications made, procedures followed and
matters considered by Whale Securities in rendering its opinion, is set forth
as Appendix B to this Consent Solicitation Statement/Prospectus, is
incorporated herein by reference and should be read in its entirety.
In connection with the Fairness Opinion, Whale Securities reviewed and
considered, among other things: (1) the Merger Agreement; (2) Good Ideas' and
USAT's Annual Reports on Form 10-K for the three fiscal years ended March 31,
1996, 1995 and 1994 and their Quarterly Reports on Form 10-Q for the quarterly
periods ended June 30, 1995, September 30, 1995 and December 31, 1995; (3)
certain information, including financial forecasts, relating to the businesses,
earnings and prospects of Good Ideas and USAT, furnished to Whale Securities by
senior management; (4) the historical market prices and trading activity for
Good Ideas and USAT shares; and (5) publicly available information concerning
certain other companies and transactions which Whale Securities considered
relevant to its analysis. In addition, Whale Securities held discussions with
the managements of Good Ideas and USAT for the purpose of reviewing the
historical and current operations of such companies and the business prospects
for each.
In conducting its analysis and in arriving at its opinion, Whale
Securities relied upon and assumed the accuracy and completeness of the
financial and other information that was publicly available or provided to
Whale Securities and Whale Securities did not undertake to independently verify
the same. Whale Securities did not prepare or obtain any independent
evaluation or appraisal of Good Ideas' or USAT's assets or liabilities. Whale
Securities assumed and relied upon the senior management of Good Ideas and USAT
as to the reasonableness and achievability of the financial and operating
forecasts furnished by management (and the assumptions and bases therefor).
Whale Securities' opinion was necessarily based on economic, market and other
conditions as in effect on, and the information made available to it as of, the
date of its opinion. Whale Securities was retained by the Board of Directors
of Good Ideas to act as financial advisor to Good Ideas only with respect to
its fairness opinion. In addition, in the ordinary course of its securities
business, Whale Securities may actively trade equity securities of Good Ideas
and/or USAT and/or U.S. Drug for its own account and the accounts of customers,
and Whale Securities, therefore, may from time to time hold a long or short
position in such securities. The Fairness Opinion was directed to the Board of
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Directors of Good Ideas and does not constitute a recommendation to any Good
Ideas Minority Stockholder as to how such a stockholder should consent on any
matter submitted for Good Ideas stockholder consent in connection with the
Merger.
In connection with the rendering of its opinion to the Board of
Directors of Good Ideas, Whale Securities performed a variety of financial
analyses, including those summarized below. Whale Securities believes that its
analyses must be considered as a whole and that selecting portions of such
analyses and the factors considered therein, without considering all factors
and analyses, could create an incomplete view of the analyses and the processes
underlying Whale Securities' opinion. The preparation of a fairness opinion is
a complex process involving subjective judgments and is not necessarily
susceptible to partial analysis or summary description. The projections
prepared by the management of each of Good Ideas and USAT underlying Whale
Securities' analyses are not necessarily indicative of future results or
values, which may be significantly more or less favorable than such
projections. Estimates of values of companies do not purport to be appraisals
or necessarily reflect the prices at which companies or their securities
actually may be sold. Except as described below, none of the analyses
performed by Whale Securities was assigned a greater significance by Whale
Securities than any other.
The projections furnished to Whale Securities were prepared by the
management of Good Ideas and USAT. Good Ideas and USAT do not publicly
disclose internal management projections of the type provided to Whale
Securities in connection with the review of the proposed Merger. Such
projections were not prepared with a view towards public disclosure. The
projections were based on numerous variables and assumptions which are
inherently uncertain, including, without limitation, factors relating to
general economic and competitive conditions. Accordingly, actual results could
vary significantly from those set forth in such projections.
Whale Securities did not determine the amount of the consideration to
be paid by USAT to the Good Ideas Minority Stockholders nor did it make a
recommendation as to the exchange ratio determined by the USAT Board, which
exchange ratio was then communicated to Whale Securities for review in
preparation of the Fairness Opinion.
The following is a brief summary of certain factors which Whale
Securities discussed with the Board of Directors of Good Ideas which figured
prominently in Whale Securities' valuation of Good Ideas and certain analyses
performed by Whale Securities in connection with the Fairness Opinion.
1. Certain factors considered in the evaluation of Good Ideas:
Whale Securities noted that the business of Good Ideas has been in a
severe decline over the past year with sales for the
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nine months ended December 31, 1995 of only $1,473,416 and estimated sales for
the quarter ended March 31, 1996 of under $100,000 as compared to sales for the
comparable periods of the prior year of $4,286,705 and $319,334, respectively.
For the nine months ended December 31, 1995, Good Ideas had a gross profit of
$331,118, equivalent to a 22% gross margin, and experienced an operating loss
of $1,033,000.
Good Ideas' plant and offices were closed in January 1996 and the
business of Good Ideas has since been operated out of the residences of its
remaining two full-time employees with certain administrative assistance being
provided by USAT. Inventories are currently being reduced as sales are
fulfilled through independent third parties warehousing Good Ideas inventories.
Manufacturing operations are performed by contract manufacturers and sales are
generated by independent sales representatives. Except for working capital,
Good Ideas owns no material tangible or strategic assets. It competes in its
operations with larger companies offering more heavily branded products. Given
the competitive nature of the toy business, the lack of critical mass to Good
Ideas' sales and gross profits to cover normal operating expenses, and Good
Ideas' significant operating losses, Whale Securities noted that the viability
of the business as a stand alone enterprise was questionable. Whale Securities
also noted that, despite the public announcements in November 1995, USAT might
consider the sale of Good Ideas, the Good Ideas Board had not been presented
with third party offers or overtures for its purchase at prices competitive
with the price being offered by USAT. Whale Securities has been advised by
USAT that Gary S. Wolff, the Treasurer of USAT and Good Ideas until July 3,
1996, has been speaking with the various vendors and customers of Good Ideas as
to their interest in acquiring all or part of Good Ideas; that no formal bid
process has been initiated; and that, to date while certain of the vendors have
expressed some interest, none has presented an offer that he could present to
the Board. His services in this connection are continuing despite his
resignation, for which services he is not receiving any additional
compensation. See, however, "USAT Management-Employment Agreements."
In analyzing the businesses of USAT, Whale Securities noted the lack
of synergy between Good Ideas and the other businesses of USAT. The proposed
Merger would, however, allow USAT to cancel an outstanding note owed to Good
Ideas in the amount of $1,927,009 at December 31, 1995. While USAT's control
position did not directly impact Whale Securities' opinion as to fair value, it
did, in Whale Securities' opinion, diminish the likelihood of alternative
offers arising that would be competitive to that of USAT with respect to the
Good Ideas Minority Stockholders. Whale Securities further discussed the fact
that the Good Ideas Minority Stockholders had little liquidity in their shares
and, if the Good Ideas Common Stock were delisted from the Pacific Stock
Exchange, such liquidity might be further diminished. The USAT Common Stock
proposed to be issued in connection with the Merger will be registered
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shares, freely tradable by the Good Ideas Minority Stockholders. Whale
Securities noted that, with an average weekly trading volume for the USAT
Common Stock during the nine weeks ended March 29, 1996 of approximately
1,500,000 shares, the Good Ideas Minority Stockholders under the proposed
Merger would hold far more liquid securities in USAT shares than by holding
Good Ideas shares.
2. Whale Securities' analysis encompassed a number of valuation
approaches, including:
(a) Market value of Good Ideas shares and premiums to market for
acquisitions - The USAT offer to merge its subsidiary with Good Ideas was
announced on February 6, 1996. The market prices for the Good Ideas Common
Stock on February 5, 1996 and on January 30, 1996, one day and one week,
respectively, prior to the announcement, were $0.375 per share. The exchange
offer computed based on $1.00 payable in a partial share of the USAT Common
Stock for each share of the Good Ideas Common Stock represents a premium of
167% over the $0.375 preannouncement price and a premium of 78% over the
highest closing price of the Good Ideas Common Stock in the 90-day period prior
to the announcement of the offer. Whale Securities noted that average public
market acquisition premiums over market prices one week prior to the
announcement for the market as a whole were 45% in 1995 and 42% in 1994.
Hence, the premium over market value offered by USAT in the exchange offer is
significantly higher than the average premium paid in acquisitions in the
public markets as a whole and, as such, tends, in the opinion of Whale
Securities, to support the fairness of the USAT exchange offer.
(b) Asset based methods - The toys being marketed by Good Ideas
are neither proprietary nor highly branded. The supplier of the equestrian
toys sells the identical products to other toy companies in the United States
and the log building toys similarly are widely available. Few barriers to
entry exist to prevent the establishment of near identical toy lines by new
entrants. Good Ideas' book value per share at December 31, 1995 was $.71 per
share, equivalent to 71% of the USAT offer using a valuation basis of $1.00 per
Good Ideas share payable in the USAT Common Stock. Due to the facts that Good
Ideas has been unprofitable, its sales declining, its toy lines non-proprietary
and few barriers exist to new entrants purchasing the products directly from
manufacturers, Whale Securities estimated that a sale of the business would
likely not result in a substantial premium to the underlying value of the
assets. Similarly Whale Securities estimated that the orderly liquidation of
the Good Ideas assets would likely result in the Good Ideas Minority
Stockholders receiving less than the Good Ideas book value per share due
principally to estimated losses that would be incurred in liquidating inventory
and fixed assets and the cost of business discontinuance. Whale Securities
made a liquidation analysis based on the Good Ideas balance sheet as of
December 31, 1995 which follows this paragraph. Whale Securities noted that
Good Ideas had net operating tax loss carryforwards of
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approximately $3,000,000 at December 31, 1995, which might, under certain
circumstances, have some value to an acquiror. Though companies in the toy
industry frequently trade in the market at a multiple of book value, Whale
Securities felt that, because Good Ideas' principal assets were monetary in
nature (cash, receivables and inventory), book value and liquidation value
should be weighted heavily in its assessment of the fairness of USAT's Merger
offer. Whale Securities also advised that stocks of companies in the toy
industry trade on the average of 4.6 times book value, but the average company
also trades at a 26 Price/Earnings Ratio and has a three-year revenue growth
rate of 19.5%. Accordingly, in the opinion of Whale Securities, the statistics
of these other companies are not applicable to Good Ideas because it has losses
which have increased by $984,000 or 169.1% during the past three fiscal years
and revenues which decreased by $4,036,000 or 72.8% during the same three-year
period.
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LIQUIDATION ANALYSIS OF GOOD IDEAS
AS OF DECEMBER 31, 1995 BALANCE SHEET
(ALL AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Est Liquidation
Book value Est Liquidation Value
at 12/31/95 Adjustment at 12/31/95
----------- ------------ -----------
<S> <C> <C> <C>
Assets:
- ------
Cash & equivalents $205 $205
Accounts receivable $192 -$19(a) $173
Inventories $595 -$178(b) $416
Prepaid expenses $13 -$4(c) $9
Note receivable - Parent $1,927 $1,927
------ ------- ------
Total current $2,932 -$202 $2,730
PP&E, net $84 -$42(d) $42
Other assets $7 $7
Contracts/manufacturing
relationships/misc. 0
NOL carryforward $0 $150(e) $150
------ ------- ------
Total assets $3,023 -$94 $2,929
Liabilities & O.E.:
- ------------------
Accounts payable $173 $173
Accrued expenses $16 $16
Current portion of long
term debt $9 $9
------ ------- ------
Total current liabilities $198 $198
Long term debt-net of current $16 $16
------ ------- ------
Total liabilities $214 $214
Costs of liquidation/
dissolution $150(f) $150
Owners' equity $2,809 -$244 $2,565
------ ------- ------
Total liabilities & O.E. $3,023 -$94 $2,929
Number of
shares outstanding 3.949 3.949
- -------------------------------------------------------------------------------------------
<CAPTION>
Book Value Liquidation Value
<S> <C> <C>
$0.71 $.065 + or - $0.10 per share
Offer by USAT per share $1.00
</TABLE>
Conclusion: USAT offer appears to be above most likely range of liquidation
scenarios.
__________________________
Assumptions/Estimates:
(a) 10% loss of accounts receivable due to discontinuance of line, less
imperative to pay.
(b) 30% loss in liquidating line, selling costs, work in progress,
unsalable items in face of going out of business.
(c) 30% loss of prepaid expenses.
(d) 50% of book value loss on liquidation.
(e) valued at 50% of NOL carryforward, NOL may not be usable to many
acquirors.
(f) estimated cost of winding up business, employment severance, legal,
accounting, misc.
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(c) Income, cash flow, and discounted cash flow based methods - Whale
Securities considered the use of income, cash flow and discounted cash flow
based methods in valuing the shares of Good Ideas. Due to the facts that Good
Ideas has experienced losses and negative cash flow for several years, and
projections for 1996 reflect declining sales, continued losses and negative
cash flow, Whale Securities determined the business does not lend itself to the
price-earnings and cash flow multiple approaches to valuation. The management
of Good Ideas has not prepared projections for the business of Good Ideas for
any period after September 30, 1996.
(d) Comparison to similar public companies and similar sale
transactions - Whale Securities identified over 30 publicly traded companies
operating in Good Ideas' business segment. Most of these companies were
significantly larger than Good Ideas. As a composite, companies in the segment
on March 28, 1996 traded on the average at a multiple of 26 times prior
12-month reported earnings and 4.5 times book value. Though Whale Securities
considered each company, no group of companies was believed to be defining in
terms of the valuation of Good Ideas due to differing factors in the public
companies such as size, business mix, growth rate, earnings, or lack of trading
in their shares. Whale Securities also conducted a review of merger and
acquisition activity in the toy industry, both in the manufacturing and the
distribution sectors. There were few transactions for which public information
was reported and none were offered as being sufficiently comparable to the
Merger so as to assist in establishing a clear range of value.
(e) Analysis of the USAT Common Stock to be given as consideration -
In its review of the consideration to be received by the Good Ideas Minority
Stockholders, Whale Securities noted that the shares of the USAT Common Stock
to be issued in connection with the Merger will be registered shares and freely
tradable by the Good Ideas Minority Stockholders on the American Stock
Exchange. Based on USAT's average weekly trading volume during February and
March 1996 of approximately 1,500,000 shares, unless conditions changed, the
Good Ideas Minority Stockholders in the event of the Merger would hold
relatively liquid securities in the USAT shares. Whale Securities noted that
the share price of the USAT Common Stock traded up sharply during February and
March 1996 from the $2.375 per share USAT price on February 5, 1996, the day
prior to the announcement of the Merger offer. Whale Securities cautioned
management and the Good Ideas Board that a decline in the USAT share prices
between the Record Date and the closing of the Merger might result in the
holders of the Minority Good Ideas Common Stock receiving less valuable
consideration than the amount contemplated under the Fairness Opinion.
In connection with the Fairness Opinion, Whale Securities performed
procedures to update, as necessary, certain of the analyses described above and
reviewed the assumptions on which
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such analyses were based and the factors considered in connection therewith.
TERMS OF THE MERGER AGREEMENT
The following description of the Merger Agreement describes the
material terms thereof. Good Ideas Minority Stockholders are also directed to
Appendix A to this Consent Solicitation Statement/Prospectus where the full
text of the Merger Agreement is set forth.
(1) CONVERSION OF SHARES
After adoption of the Merger Agreement by the requisite consents of
the Good Ideas Minority Stockholders and USAT, Acquisition Corp. will be merged
with and into Good Ideas; each share of the Minority Good Ideas Common Stock
issued and outstanding on the Effective Date will be converted into ________ of
a share of the USAT Common Stock; and each share of the Good Ideas Common Stock
owned by USAT, except for ten shares, will be canceled. The shares of
Acquisition Corp. owned by USAT will be canceled upon the Merger becoming
effective. An aggregate of __________ shares of the USAT Common Stock will be
issued to the Good Ideas Minority Stockholders, subject to adjustment for
fractional shares. Assuming that there are no exercises of outstanding Common
Stock purchase warrants or stock options or any conversions of USAT preferred
stock between the date of this Consent Solicitation Statement/Prospectus and
the effective date of the Merger, the USAT stockholders will own ___% of the
outstanding shares of the USAT Common Stock and the Good Ideas Minority
Stockholders will own ___%. The portion of a share of the USAT Common Stock to
be exchanged for each share of the Minority Good Ideas Common Stock was
determined by dividing $1.00 by the average of the closing sales prices per
share of the USAT Common Stock as reported on the American Stock Exchange
during the 30 days prior to the Record Date, which average sales price per
share was $_________.
The Good Ideas Options to purchase an aggregate of 22,500 shares of
the Good Ideas Common Stock, all of which are owned by three former members of
Good Ideas' Board of Directors, will be waived.
The Good Ideas Warrants to purchase an aggregate of 120,000 shares of
the Good Ideas Common Stock will be converted into the Merger Warrants of USAT
to acquire __________ shares of the USAT Common Stock at $____ per share. See
the section "Good Ideas Options and Warrants" under this caption "The Merger
and Related Matters."
No fractional shares of the USAT Common Stock will be issued. Holders
of the Good Ideas Common Stock entitled to receive on the Effective Date
fractional shares of the USAT Common Stock upon the consummation of the Merger
will receive in lieu thereof a cash payment calculated on the basis of the
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closing sales price for a share of the USAT Common Stock on the Effective Date
(or on the first day thereafter as such price is available).
(2) EFFECTIVE DATE
The Merger will become effective on the date and at the time of the
filing of a copy of the Certificate of Merger with the Secretary of State of
Delaware (i.e., the Effective Date). This filing will occur as soon as
practicable following the receipt of consents from the holders of more than 50%
of the outstanding shares of the Minority Good Ideas Common Stock and a consent
from USAT and the satisfaction of other conditions and it is currently expected
to take place on or about __________, 1996. The Merger Agreement requires the
parties to close within five business days after the last condition to the
Merger has been satisfied or waived. Either USAT or Good Ideas is entitled,
however, to abandon the Merger prior to the consummation for the reasons
referred to below in the subsections "Conditions to the Merger" and "Amendment
and Termination Rights" in this section "Terms of the Merger Agreement" under
this caption "The Merger and Related Matters."
(3) CONDITIONS TO THE MERGER
The obligations of USAT (and Acquisition Corp.) and Good Ideas under
the Merger Agreement are subject to the satisfaction of certain conditions
(unless such conditions are waived by the party intended to receive the benefit
of those conditions), including (1) the condition that the representations and
warranties of the parties set forth in the Merger Agreement shall be true in
all material respects on the date of the Merger, (2) the performance by each
corporation in all material respects of all obligations to be performed by it
under the Merger Agreement, (3) the receipt of closing certificates and (4) the
receipt of all requisite consents from all governmental agencies and third
parties which are required to effect the Merger, including, without limitation,
(a) that this Registration Statement has been declared effective by the
Commission, (b) that no stop order shall have been issued or proceedings for
such purpose shall have been instituted and (c) that the issuance of the USAT
Common Stock shall have all requisite authorizations under state securities or
"blue sky" laws for issuance.
The obligations of USAT under the Merger Agreement are subject to the
satisfaction of certain conditions (unless such conditions are waived by USAT
except as indicated in the second succeeding paragraph), including (1) the
consent to the adoption of the Merger Agreement by the holders of more than 50%
of the shares of Good Ideas Minority Common Stock, (2) the obtaining of a
fairness opinion to the Good Ideas Minority Stockholders reasonably
satisfactory to USAT and (3) the lack of any material adverse change in the
business or financial condition of Good Ideas.
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The obligations of Good Ideas under the Merger Agreement are subject
to the satisfaction of certain conditions (unless such conditions are waived by
Good Ideas except as indicated in the succeeding paragraph), including (1) the
consent to the adoption of the Merger Agreement by the holders of more than 50%
of the outstanding shares of the Minority Good Ideas Common Stock, (2) the
obtaining of a fairness opinion to the Good Ideas Minority Stockholders
reasonably satisfactory to Good Ideas and (3) the lack of any material adverse
change in the business or financial condition of the Company (excluding Good
Ideas).
The conditions that (1) the holders of more than 50% of the
outstanding shares of the Minority Good Ideas Common Stock consent to the
adoption of the Merger Agreement, (2) a fairness opinion be obtained and (3)
the Registration Statement has been declared effective and there is no "stop
order" in effect are not waivable by either USAT or Good Ideas.
If either party terminates its obligations under the Merger Agreement
to consummate the Merger because a condition precedent thereto has not been
satisfied, its sole obligation to the other party shall be to pay its own costs
which it agreed to pay on consummation of the Merger and which were incurred in
connection with the proposed transactions. See the section "Fees and Expenses"
under this caption "The Merger and Related Matters."
(4) AMENDMENT AND TERMINATION RIGHTS
The Merger Agreement provides that the respective Boards of Directors
of USAT and Good Ideas may, by written agreement, amend the Merger Agreement at
any time before or after its adoption by the Good Ideas Minority Stockholders,
provided that after such approval no amendment may be made which changes either
the amount or the form of the consideration to be received by the holders of
the Minority Good Ideas Common Stock pursuant to the Merger Agreement without
further approval by the Good Ideas Minority Stockholders.
The Merger Agreement, as amended, may be terminated and the Merger
abandoned, whether before or after approval by the Good Ideas Minority
Stockholders, at any time prior to the Effective Date (1) by mutual written
consent of the Boards of Directors of USAT and Good Ideas, (2) by either USAT
or Good Ideas if the respective Board of Directors, based on the opinion of its
outside counsel, determines that making a recommendation to the Good Ideas
Minority Stockholders to adopt the Merger Agreement could reasonably be deemed
to cause the members of such Board of Directors to breach their fiduciary
duties under applicable law to their respective stockholders or (3) by either
USAT or Good Ideas if there is any statute, rule or regulation which makes
consummation of the Merger illegal or otherwise prohibited or any order,
decree, injunction or judgment enjoining Acquisition Corp., USAT or Good Ideas
from consummating the Merger, and such order, decree, injunction or judgment
has become final and non-
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appealable. The obligations automatically terminate if the Merger has not been
consummated by December 31, 1996.
SUMMARY OF THE TERMS OF THE USAT COMMON STOCK
(1) GENERAL
USAT is authorized to issue 50,000,000 shares of the USAT Common
Stock, $.01 par value. Holders of the USAT Common Stock (i) have one vote per
share; (ii) have equal rights to any dividends declared by the Board of
Directors of USAT after payment of all accrued and unpaid dividends on USAT's
Class A Preferred Stock and any other preferred stock hereafter issued which
has a preference as to dividend payments; (iii) are entitled to share in all
assets available for distribution to stockholders upon liquidation, dissolution
or winding up of USAT's affairs after payment of all preferences on the Class A
Preferred Stock and any other preferred stock hereafter issued which has a
preference upon liquidation, dissolution or winding up of USAT; (iv) have no
preemptive, subscription or conversion rights; and (v) no sinking fund
provisions. There are no provisions in the Bylaws or the Certificate of
Incorporation of USAT which discriminate against any existing or prospective
holder of the USAT Common Stock as a result of such holder's ownership of a
substantial amount of the USAT Common Stock. All outstanding shares of the
USAT Common Stock are, and all shares to be issued upon the consummation of the
Merger will be, fully paid and nonassessable.
Reference is made to "USAT Management-Directors and Officers" for a
description of how the USAT directors are elected by the holders of the USAT
Common Stock on a classified basis. With a classified Board of Directors, at
least two annual meetings of stockholders, instead of one, will generally be
required to effect a change in the majority of USAT's Board. As a result, a
classified Board may discourage proxy contests for the election of directors or
a purchase of a substantial block of the USAT Common Stock because its
provisions could operate to prevent obtaining control of the USAT Board of
Directors in a relatively short period of time. The classification provisions
could also have the effect of discouraging a third party from making a tender
offer or otherwise attempting to obtain control of USAT. There are no other
provisions in USAT's Certificate of Incorporation or By-Laws that may have the
effect of delaying, deferring or preventing a change in control of USAT and
that would operate with respect to an extraordinary corporate transaction
involving USAT or any of its subsidiaries, such as a merger, reorganization,
tender offer, sale or transfer of substantially all of its assets, or
liquidation. However, the Board would have the power, without seeking further
stockholder approval, to include such provisions in the Class B Preferred Stock
described in the succeeding paragraph, but has no current intention of
reissuing such security or including any such provision.
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There are 500,000 shares of the Class A Preferred Stock, $.01 par
value, authorized, of which 41,157 shares were outstanding as of June 30, 1996.
These shares have a liquidation preference of $205,785 and are convertible into
185,207 shares of the USAT Common Stock. As of June 30, 1996, there was no
other series of the USAT preferred stock outstanding, although there are
1,500,000 shares of the Class B Preferred Stock, $.01 par value, authorized.
(2) ELECTION OF DIRECTORS
Holders of the USAT Common Stock have no cumulative voting rights,
which means that stockholders owning more than 50% of the outstanding shares of
the USAT Common Stock can vote to elect all directors. Accordingly, the
remaining stockholders would not be able to elect any. In addition, as
indicated in the preceding subsection, USAT's directors are elected on a
classified basis.
(3) DIVIDENDS
Dividend payments on the USAT Common Stock are discretionary with the
USAT Board of Directors and depend on various factors, including earnings,
capital requirements and financial condition. USAT has no current plan to pay
cash dividends on the USAT Common Stock in the foreseeable future because of
the cash requirements of the Company and its history of losses. See "USAT
Market Information-Dividend Policy."
(4) TRANSFER AGENT
The Transfer Agent for the USAT Common Stock is U.S. Stock Transfer
Corporation, 1745 Gardena Avenue, Suite 200, Glendale, CA 91204.
(5) ACQUISITION SHARES
The January 1992 Registration Statement, which became effective on
January 17, 1992 under the Securities Act, registered 3,000,000 shares of the
USAT Common Stock (the "Acquisition Shares") solely for offer and issuance to
the owners of businesses or properties which USAT may acquire. USAT intends to
sign agreements restricting the recipients of the Acquisition Shares from their
resale or transfer for specific periods unless USAT gives its prior written
consent. USAT has no agreements, arrangements, proposals or understandings
regarding any acquisitions at this time. As of June 30, 1996, USAT had
1,532,679 registered Acquisition Shares at its disposal for future
acquisitions. See "Business of the Company-Subsidiaries" for information as to
the prior issuance of an aggregate of 1,467,321 shares of the Acquisition
Shares relating to the acquisitions of USRR's assets, Alconet and RSA.
Notwithstanding the registered status of the Acquisition Shares,
recipients of these shares offering them for public resale may potentially be
deemed statutory underwriters because
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they would be engaged in a public distribution of securities. An additional
registration under the Securities Act might, therefore, be required disclosing
the nature of the acquisition, the shares received as consideration and the
manner of their distribution and sale before the recipient could resell the
Acquisition Shares.
GOOD IDEAS' DIRECTORS AND EXECUTIVE OFFICERS
If the Merger is consummated, Acquisition Corp. will be merged with
and into Good Ideas and Good Ideas will be the surviving corporation and, under
the Merger Agreement, its directors and officers will continue to serve. For
certain information as to such persons, including their executive compensation
where applicable, see "Good Ideas Management."
DIFFERENCES IN STOCKHOLDERS' RIGHTS
The Good Ideas Minority Stockholders will become holders of the USAT
Common Stock if the Merger is consummated. Because both Good Ideas and USAT
are incorporated under the laws of Delaware, there will be no change in the
statutory rights as stockholders of the Good Ideas Minority Stockholders when
they become stockholders of USAT. See the section "Summary of the Terms of the
USAT Common Stock" under this caption "The Merger and Related Matters."
DIFFERENCES IN BY-LAWS
The By-Laws of Good Ideas and USAT are substantially similar except
that the former provides for cumulative voting for the Board of Directors.
Under cumulative voting, a stockholder may cast all of his, her or its votes in
an election in favor of a single candidate for a single vacancy. This method
of voting is intended to allow substantial minority stockholders to obtain a
representative on the Board. In USAT the directors are elected by
non-cumulative voting and, because only a plurality of the votes cast at the
meeting is necessary to elect a director, a majority of the USAT stockholders
can elect all of the USAT directors up for election at the meeting. Both Good
Ideas and USAT have classified Boards, so that generally only one-third of the
directors should be up for election at any meeting.
EXCHANGE OF CERTIFICATES
At the Effective Date, each share of the Minority Good Ideas Common
Stock outstanding immediately prior to the Effective Date will be converted
into the right to receive ________ of a share of the USAT Common Stock. The
shares of the Good Ideas Common Stock owned by USAT on the Effective Date,
except for ten shares, will be canceled. Promptly after the Effective Date, a
transmittal form will be furnished by U.S. Stock Transfer Corporation, as
Exchange Agent, to the Good Ideas Minority Stockholders. The transmittal form
will contain instructions with respect to the surrender of the certificates
for the
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Minority Good Ideas Common Stock in exchange for the certificates for the USAT
Common Stock. MINORITY GOOD IDEAS COMMON STOCK CERTIFICATES SHOULD NOT BE
FORWARDED TO THE EXCHANGE AGENT UNTIL AFTER RECEIPT OF THE TRANSMITTAL FORM AND
SHOULD NOT BE RETURNED TO GOOD IDEAS WITH THE ENCLOSED CONSENT FORM. Upon
surrender of stock certificates for exchange to the Exchange Agent, together
with the letter of transmittal duly executed, the holder of such certificates
will be entitled to receive in exchange therefor certificates representing the
number of shares of the USAT Common Stock equal to the shares of the Minority
Good Ideas Common Stock held by him, her or it in accordance with the Merger
Agreement.
After the Effective Date, a record holder of the Minority Good Ideas
Common Stock will have no rights with respect to such stock except to surrender
the certificates in exchange for certificates representing the USAT Common
Stock. No dividends or other distributions declared after the Effective Date
with respect to shares of the USAT Common Stock issuable upon conversion of
shares of the Minority Good Ideas Common Stock and payable to the holders of
record of the USAT Common Stock after the Effective Date will be paid to the
holder of any unsurrendered certificate representing the Minority Good Ideas
Common Stock until the holder thereof surrenders such certificate in exchange
for certificates representing the appropriate number of shares of the USAT
Common Stock. Subject to the effect, if any, of applicable law, after
subsequent surrender and exchange of a certificate, the record holder will be
entitled to receive any dividends or other distributions, without any interest
thereon, which theretofore had become payable with respect to the shares of the
USAT Common Stock for which such certificate was exchangeable. Because of the
current intention of the USAT Board of Directors not to pay dividends on the
USAT Common Stock (see the section "Summary of the Terms of the USAT Common
Stock-Dividends" under this caption "The Merger and Related Matters" and "USAT
Market Information-Dividends"), the foregoing discussion may be moot.
For all other purposes, however, including all right, if any, to vote
with respect to all matters, each certificate which represented outstanding
shares of the Minority Good Ideas Common Stock before the Merger will be deemed
to represent ownership of shares of the USAT Common Stock into which those
shares are converted by the Merger.
GOOD IDEAS OPTIONS AND WARRANTS
All of the Good Ideas Options to purchase an aggregate of 22,500
shares of the Good Ideas Common Stock outstanding on the Record Date are held
by three former members of the Good Ideas Board of Directors and will be
canceled with the consent of such persons effective upon the consummation of
the Merger. Pursuant to the terms thereof, as a result of their resignations,
the Options held by each of Karen B. Laustsen, James C. Witham and Gary S.
Wolff will expire on August 26, 1996, August 29, 1996 and October 1, 1996,
respectively. Good Ideas Options to purchase an
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aggregate of 15,000 shares held by Glenn A. Bergenfield and William DiTuro,
former directors of Good Ideas, expired on February 14, 1996. There were no
other stock options to purchase shares of the Good Ideas Common Stock
outstanding on the Record Date and the only warrants to purchase shares of the
Good Ideas Common Stock which were outstanding on the Record Date were the Good
Ideas Warrants owned by Baraban or its designees. Baraban was the underwriter
of Good Ideas' initial public offering. The Good Ideas Warrants evidence the
right to purchase an aggregate of 120,000 shares of the Good Ideas Common Stock
at $7.50 per share. The exercise price was negotiated by Good Ideas and
Baraban and represented 150% of the offering price to the public in the initial
public offering of Good Ideas. If the Merger is consummated, as a result of
the anti-dilution provisions of the Good Ideas Warrants, the Good Ideas
Warrants will be converted into USAT Common Stock purchase warrants expiring
February 16, 1999 (i.e., the Merger Warrants) to purchase an aggregate of
________ shares of the USAT Common Stock, which is the same number of shares
which the holders of the Good Ideas Warrants would have been entitled to
receive after the consummation of the Merger had the Good Ideas Warrants been
exercised immediately prior to the consummation of the Merger. The exercise
price will be proportionately reduced to $_____ per share pursuant to the
anti-dilution provisions of the Good Ideas Warrants.
Except for the number of shares of the USAT Common Stock issuable upon
the exercise of the Merger Warrants and the exercise price, both as indicated
in the preceding paragraph, the Merger Warrants will be identical to the Good
Ideas Warrants in terms and conditions. The number of shares issuable upon
exercise and the exercise price are subject to adjustment in the event of
(1)(a) a stock dividend, (b) a subdivision of the USAT Common Stock, (c) a
combination of the outstanding shares of the USAT Common Stock into a smaller
number of shares and (d) a reclassification of the shares of the USAT Common
Stock into other securities of USAT (including a reclassification effected by a
merger or consolidation in which USAT is the continuing corporation); (2) the
issuance by USAT of rights, options or warrants to all holders of the USAT
Common Stock to purchase shares of the USAT Common Stock at a price which is
below the then market price per share of the USAT Common Stock; or (3) a
consolidation or merger of USAT or a sale by USAT of all or substantially all
of its property. The adjustments are intended to place the holder of the
Merger Warrant in the same position the holder would have been had the Merger
Warrant been exercised prior to the event. No fractional share will be issued
upon exercise and a cash payment based on the then market price of the USAT
Common Stock shall be paid in lieu thereof.
Because the shares of the USAT Common Stock issuable upon the exercise
of the Merger Warrants have been registered under the Securities Act in this
Registration Statement, they are freely tradeable unless issued to an
"underwriter" as such term is defined in Rule 145(c) under the Securities Act.
See the
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section "Resale of USAT Securities" under this caption "The Merger and Related
Matters."
SALE OF GOOD IDEAS
On February 26, 1996, the USAT Board of Directors concluded that the
value of the USAT Common Stock could best be maximized if the Company
concentrated its operations on alcohol and drug testing and the related human
resource provider business of ProActive and disposed of the rubber recycling
product business of USRR and the toy business of Good Ideas. In December 1995,
the USAT Board and the Good Ideas Board had concluded that the only way to
reverse the Good Ideas history of declining revenues and increasing losses was
to develop a whole new product line, whether through acquisition or licensing.
However, both Boards were then reluctant to authorize expenditure of funds
because (1) Toys R Us, Inc. ("Toys R Us"), Good Ideas' principal customer, had,
commencing in fiscal 1995, been reducing its orders to Good Ideas, attributing
its reduction to its large inventories and declining sales and customer
traffic; (2) many toy retailers were also minimizing the number of vendors and
reducing the number of items carried in inventory which has the result of
squeezing out the smaller companies like Good Ideas with their limited product
lines; and (3) other small toy manufacturers were complaining to Good Ideas
that they were experiencing the same problems as described in (1) and (2) so
that the problems were not confined to Good Ideas. Accordingly, both boards
concluded that it would be difficult to make Good Ideas' operations profitable
during the next 12 months. After additional consideration, finally on
February 26, 1996, for all of these reasons, the USAT Board concluded that it
would be in the best interest of the USAT stockholders and that of the Good
Ideas Minority Stockholders if the assets of Good Ideas were, or the Good Ideas
Common Stock was, sold to a third party. Accordingly, the Board has authorized
management to seek offers from prospective purchasers. To date, no acceptable
offer has been received and there can be no assurance that any such offer will
be received. If no acceptable offer is received, the business of Good Ideas
will be liquidated on or before December 31, 1996. See the section "Reasons
for the Merger and Approval" under this caption "The Merger and Related
Matters."
REGULATORY APPROVALS
As of the date hereof, the Merger requires no approval by any federal
or state governmental agency, except for compliance with the Securities Act,
the Exchange Act and state "blue sky" or securities laws. Without limiting the
foregoing, no compliance is necessary under the Hart-Scott-Rodino Antitrust
Improvement Act of 1976, as amended, and the rules and regulations thereunder.
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ACCOUNTING TREATMENT
The Merger will be accounted for as a "purchase" as such term is used
under generally accepted accounting principles.
FEES AND EXPENSES
Whether or not the Merger is consummated, all fees and expenses
incurred in connection with the Merger and the transactions contemplated
thereby will be paid by USAT, except that Good Ideas will pay Whale Securities
for the fairness opinion (up to $35,000 as a fee plus out-of-pocket expenses)
and the fees and disbursements of Rosenman & Colin, LLP, its special counsel.
Such fees and expenses to be paid by USAT include any expenses incurred in
connection with the preparation, printing and distribution of this Consent
Solicitation Statement/ Prospectus, including, without limitation, attorneys'
fees, accounting fees and printing expenses and consent solicitation expenses.
The fees and expenses incurred by USAT in connection with the Merger
and the related transactions described in this Consent Solicitation
Statement/Prospectus are expected to be approximately $_______________,
consisting of $___________ in legal fees and disbursements, $____________ in
expenses related to the Registration Statement, $____________ in printing
expenses, $____________ in Exchange Agent costs, $___________ in consent
solicitation fee and costs (including mailing costs) and $____________ in
miscellaneous costs. The fees and expenses of Good Ideas are expected to be
approximately $___________, consisting of $_____________ in fee and
disbursements to Whale Securities, $___________________ in legal fees and
disbursements and $__________________ in miscellaneous costs.
CERTAIN TAX CONSEQUENCES
Rosenman & Colin, LLP, special counsel to Good Ideas, has delivered an
opinion to Good Ideas as to the tax consequences of the Merger to the Good
Ideas Minority Stockholders and Good Ideas, a copy of which opinion is filed as
an exhibit to the Registration Statement. Gold & Wachtel, LLP, general counsel
to USAT, has reviewed the opinion, has advised the USAT Board orally that it
concurs therein and has advised the USAT Board orally as to the tax
consequences of the Merger to USAT and the USAT stockholders.
Such firms concur that the transaction, although accomplished in the
form of a reverse triangular merger, will not meet the statutory requirements
of a tax free reorganization within the meaning of Sections 368(a)(1)(A) and
368(a)(2)(E) of the Internal Revenue Code of 1986, as amended (the "Code"),
because, immediately prior to the Merger, USAT already owns more than 20% of
the Good Ideas Common Stock and, consequently, cannot acquire 80% or more of
the Good Ideas Common Stock through the Merger as is required by Section
368(a)(2)(E) of the Code.
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Furthermore, in order for a reorganization to qualify under any subdivision of
Section 368(a)(1) of the Code, Treasury Regulations require that there must be
a continuity of the business enterprise under the modified corporate form. In
order for there to be continuity of the business enterprise, the transferee in
a corporate reorganization must either (1) continue the transferor's historic
business or (2) use a significant portion of the transferor's historic business
assets in a business. In the instant transaction, the Board of Directors of
USAT has determined, and this Consent Solicitation Statement/Prospectus so
indicates, that USAT will either sell or liquidate the business of Good Ideas
not later than December 31, 1996. Therefore, because USAT will not continue
Good Ideas' historic assets in a business conducted as a subsidiary of USAT
after the transaction, there will not be a continuity of the business
enterprise after the transaction is consummated. For this reason as well, in
the opinion of the respective counsel, the Merger cannot qualify as a tax-free
reorganization.
Such firms also concur that the Merger will not qualify as a
transaction under Section 351 of the Code so as to render the exchange by the
Good Ideas Minority Stockholders of their shares of the Minority Good Ideas
Common Stock for shares of the USAT Common Stock tax free. Section 351 of the
Code provides that no gain or loss is recognized if property is transferred to
a corporation by one or more persons solely in exchange for stock in such
corporation and immediately after the exchange such person or persons are in
control of the corporation. Such counsel have advised that "control" for this
purpose means the ownership of stock possessing at least 80% of the total
combined voting power of all classes of stock entitled to vote and at least 80%
of the total number of shares of all other classes of stock of the corporation.
Although the Good Ideas Minority Stockholders can be deemed to be transferring
their shares of the Minority Good Ideas Common Stock (which is "property") to
USAT solely in exchange for shares of the USAT Common Stock, it is clear that
the transferor Good Ideas Minority Stockholders will not be in "control" of
USAT immediately after the transfer, thus rendering Section 351 of the Code
inapplicable to the Merger.
Consequently, the transaction will not be a tax free reorganization
and will be treated as a taxable transaction, with the following consequences:
(a) gain or loss will be recognized by the Good Ideas Minority Stockholders
upon the receipt of the USAT Common Stock in exchange for the Minority Good
Ideas Common Stock to the extent of the difference between the stockholder's
tax basis for the Good Ideas Common Stock and the fair market value of the USAT
Common Stock received in the exchange; (b) the tax basis of the USAT Common
Stock will be the fair market value of such stock upon the date received; and
(c) the holding period for federal income tax purposes of the USAT Common Stock
received by the Good Ideas Minority Stockholders will commence on the date of
receipt. If, as would be expected, the shares of the Minority Good Ideas
Common Stock are held as capital assets, any gain or loss recognized will be a
capital gain or loss. There should be
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no federal income tax consequences to the holders of the USAT Common Stock,
USAT or Good Ideas.
No rulings have been, or will be, requested from the Internal Revenue
Service (the "IRS") with respect to any of the matters described above.
The foregoing is not intended as an alternative to individual tax
planning. Accordingly, each Good Ideas Minority Stockholder should consult
his, her or its own tax advisor concerning the foreign, federal, state, local
and other tax consequences of the Merger as they relate to the stockholder's
particular circumstances. There can be no assurance that some or all of the
positions taken by the parties to the reorganization will not be challenged by
the IRS and that the IRS will not prevail in such challenge.
THE FOREGOING CONSTITUTES ONLY A GENERAL DESCRIPTION OF CERTAIN OF THE
FEDERAL INCOME TAX CONSEQUENCES OF THE TRANSACTION TO THE GOOD IDEAS MINORITY
STOCKHOLDERS, WITHOUT CONSIDERATION OF THE PARTICULAR FACTS AND CIRCUMSTANCES
OF EACH STOCKHOLDER'S SITUATION.
TRADING IN THE GOOD IDEAS COMMON STOCK
If the Merger is consummated, trading in the Good Ideas Common Stock
will cease on the Effective Date; the registration of the Good Ideas Common
Stock under Section 12(b) of the Exchange Act will be terminated; and the Good
Ideas Common Stock will be delisted from the Pacific Stock Exchange.
RESALE OF USAT SECURITIES
The shares of the USAT Common Stock to be issued to the Good Ideas
Minority Stockholders pursuant to the Merger Agreement will be freely
transferable under the Securities Act, except for shares issued to any person
who may be deemed to be an "underwriter" within the meaning of Rule 145(c)
under the Securities Act (an "underwriter", for purposes of the Rule, is
generally an affiliate of Good Ideas, i.e., a person who as a result of an
officership, a directorship or his, her or its beneficial ownership of shares
of the Good Ideas Common Stock was deemed to be a controlling person with
respect to Good Ideas). Such an underwriter may only transfer shares of the
USAT Common Stock issued in the Merger pursuant to an effective registration
statement or when the proposed transfer is otherwise in compliance with Rule
145(d) under the Securities Act or another exemption from the registration
requirements of the Securities Act. Because the other directors and executive
officers of Good Ideas hold no shares of the Good Ideas Common Stock, no Good
Ideas Warrants and no Good Ideas Options, and because the only 10% stockholder
of Good Ideas is USAT which will surrender all but ten of its shares of the
Good Ideas Common Stock if the Merger is consummated, only William D. Robbins,
the Chief Executive Officer and a director of Good Ideas, and Michael S.
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McCord, a director of Good Ideas, who will receive ___ and ____ shares,
respectively, of the USAT Common Stock in exchange for 200,000 and 10,000
shares, respectively, of the Good Ideas Minority Common Stock if the Merger is
consummated, may be an affiliate of Good Ideas. As indicated under "USAT
Principal Stockholders," no director or executive officer of USAT will receive
shares of the USAT Common Stock as a result of the Merger. USAT will instruct
its transfer agent to implement all applicable restrictions on transfer with
respect to Mr. Robbins' and Mr. McCord's shares or any person who may later be
deemed to have been an affiliate of Good Ideas, of which person USAT currently
has no knowledge.
Under Rule 145(d), an affiliate of Good Ideas who receives shares of
the USAT Common Stock will be permitted to sell a limited number of shares
provided such sale is made in compliance with paragraphs (c), (e), (f) and (g)
of Rule 144 under the Securities Act, i.e., (1) USAT's securities must continue
to be registered under Section 12 of the Exchange Act; (2) USAT has to have
filed all reports required to be filed under Section 13 of the Exchange Act
during the 12 months preceding the date of such proposed sale; (3) the total
number of shares sold by the affiliate during the three-month period
immediately preceding the date the affiliate places his, her or its order to
sell may not exceed the greater of 1% of the shares which are shown as
outstanding in the most recent report or statement published by USAT or the
average weekly reported trading volume of the USAT Common Stock during the four
calendar weeks preceding the sale; (4) the sale is conducted in a "brokers'
transaction" or is made directly to a "market maker" (as those terms are
defined in Section 4(4) of the Securities Act and Section 3(a)(38) of the
Exchange Act, respectively); and (5) the affiliate selling the securities does
not solicit or arrange for the solicitation of orders to buy the securities in
anticipation of, or in connection with, such transaction, or make any payment
in connection with the offer or sale of the securities to any person other than
the broker who executes the order to sell the securities. In addition, if the
person is not an affiliate of USAT at the time of the proposed sale and has
been the beneficial owner of the USAT Common Stock for at least two years and
USAT is then current in filing its periodic reports under Section 13 of the
Exchange Act, or if the person is not an affiliate of USAT at the time of the
proposed sale and has not been for a period of three months prior thereto and
has been the beneficial owner of the USAT Common Stock for at least three
years, such person can sell pursuant to the exemption of Rule 145(d).
MATERIAL CONTACTS OF USAT WITH GOOD IDEAS
GOOD IDEAS RELATIONSHIP WITH USAT
As of June 30, 1996, 60.8% of the outstanding shares of the Good Ideas
Common Stock was held by USAT. James C. Witham, Chairman of the Board and a
director of Good Ideas until May 31,
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1996, served as the Chairman of the Board, the President, the Chief Executive
Officer and a director of USAT until April 18, 1996. Karen B. Laustsen, a
director of Good Ideas until May 28, 1996, was an Executive Vice President and
a director of USAT until April 18, 1996. Until July 3, 1996, Gary S. Wolff was
the Treasurer, the Chief Financial Officer, the Chief Accounting Officer and a
director of Good Ideas, was the Treasurer, the Chief Financial Officer and the
Chief Accounting Officer of USAT and, prior to September 26, 1995, was a
director of USAT. Glenn A. Bergenfield and William DiTuro, also directors of
Good Ideas until November 16, 1995, were directors of USAT prior to September
26, 1995. Michael J. Witham was a director of Good Ideas and a Vice President
of Good Ideas until September 26, 1996. On May 31, 1996, Robert Stutman, the
Chairman of the Board, the Chief Executive Officer and a director of USAT since
April 18, 1996, Linda H. Masterson, the President and Chief Operating Officer
of USAT since May 13, 1996 and a director of USAT since September 26, 1995, and
Michael S. McCord, a consultant to the USAT Board of Directors and a former
member of the Committee, were elected directors of Good Ideas, with Mr. Stutman
also being elected as the Chairman of the Board of Good Ideas. All of the
foregoing persons except Messrs. Bergenfield, DiTuro and McCord were or are
employees of USAT. William D. Robbins, the other current director of Good
Ideas, is an employee of Good Ideas. All of the persons named in this
paragraph are securityholders of USAT. See "Summary-Recent Developments,"
"USAT Management," "Principal Stockholders," and "Good Ideas Principal
Stockholders.
NO LOANS TO GOOD IDEAS FROM USAT OUTSTANDING
From time to time commencing in July 1992, USAT made loans to Good
Ideas for working capital bearing interest at a rate of 12% per annum.
Effective October 1, 1993, the interest rate on such loans was reduced to eight
percent per annum. As of March 31, 1993, the outstanding balance of all
borrowings from USAT was $1,960,000 and interest expense for the 12 months then
ended was $143,000. As of March 31, 1994, the outstanding balance of all
borrowings from USAT was $437,000 and interest expense for fiscal 1994 was
$164,000. The balance was paid in fiscal 1995 and no further loans have been
made by USAT to Good Ideas.
LOANS FROM GOOD IDEAS TO USAT AND AFFILIATES
During fiscal 1995, Good Ideas made short-term loans to USAT and USRR,
a wholly owned subsidiary of USAT, in the amounts of $1,196,000 and $1,027,000,
respectively. During fiscal 1996, USAT made net loan repayments of $171,000
and USAT assumed the loan due to Good Ideas from USRR, resulting in a note
receivable from USAT of $2,052,000 at March 31, 1996. The loans are evidenced
by notes which bear interest at the rate of 8% per annum. This indebtedness
was originally due on December 31, 1995, but has been extended initially until
June 30, 1996 and then to December 31, 1996. Good Ideas extended the repayment
date on its loan to USAT because Good Ideas wanted to continue to
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receive interest payments under the loan while it considered in December 1995
whether or not to invest in a new product line and in June 1996 whether the
Merger would be consummated. The loans were made with funds in excess of
amounts required for operating capital and carry interest rates in excess of
those available to Good Ideas on short-term money market investments.
MANAGEMENT SERVICES AGREEMENT
For the period July 1992 through March 1993, USAT provided management
and administrative services to Good Ideas in exchange for 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 from April to
September 1993 was ten percent of annual net sales. Given the related industry
experience of USAT management, the immediate availability of USAT personnel and
the belief of the management of Good Ideas that the terms offered by USAT were
fair and reasonable, Good Ideas did not investigate alternative management
services providers.
Pursuant to the Management Services Agreement effective as of October
1, 1993, such fees were computed on the basis of a fixed monthly fee of
$25,000, plus five percent of Good Ideas' annual gross sales in excess of
$5,000,000. 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 to
Good Ideas, both in terms of employee time and allocated overhead costs. The
services provided to Good Ideas by USAT pursuant to the Management Services
Agreement include management, administrative, accounting and other financial
services and advice, including, without limitation, the following: services
currently performed by the Treasurer of Good Ideas (who is also the Treasurer
of USAT), for which he is not directly compensated by Good Ideas; services
relating to Good Ideas' financial and banking relationships; services relating
to the preparation of financial statements, budgets, forecasts and cash flow
projections; cash management advice; and other miscellaneous services and
advice. As of February 26, 1996, the services previously provided to Good
Ideas by USAT relating to the negotiation of licensing arrangements and the
acquisition of complementary product lines and businesses, although material in
value, had been preliminary in nature and not resulted in any agreement with
respect to terms for any such transaction.
The initial term of this Agreement expired on September 30, 1994, was
automatically renewed for successive one- year terms which will expire on
September 30, 1996 and is automatically renewable from year to year thereafter,
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.
Since July 1992, four former members of USAT's senior management,
James C. Witham, Gary S. Wolff, Karen B. Laustsen and
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Michael J. Witham (until September 26, 1995), were the primary persons involved
in the provision of services to Good Ideas under the Management Services
Agreement. Because of the resignations of Mr. Witham and Ms. Laustsen on April
18, 1996, the resignation of Mr. Wolff on July 3, 1996 and the elections of
Robert Stutman and Linda H. Masterson (effective May 13, 1996) as described
under "Summary-Recent Developments", Mr. Stutman and Ms. Masterson have
substituted for Mr. Witham, Ms. Laustsen and Mr. Wolff in performing these
services on behalf of USAT, although the first two provided assistance until
May 31, 1996 and Mr. Wolff continued to assist USAT in providing services to
Good Ideas until July 3, 1996. Effective that date, Joseph Bradley was elected
Treasurer of both Good Ideas and USAT so he is now performing Mr. Wolff's
services as the Treasurer described in the second preceding paragraph. The
management of Good Ideas believes that the Management Services Agreement with
USAT is fair and reasonable and that Good Ideas' costs would be greater if it
had to obtain such services from an unaffiliated party with commensurate
industry experience, if available, or maintain the internal staff required to
provide such services itself.
In view of the USAT Board's decision on February 26, 1996 to sell or
liquidate Good Ideas, as well as the cost reduction actions previously
implemented, the USAT Board suspended USAT's management fees to Good Ideas
retroactive to January 1, 1996.
BUSINESS OF THE COMPANY
GENERAL
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. In June 1988, Good Ideas Texas began the manufacture and shipment
of toys. In June 1992, a subsidiary of USAT acquired a 55% interest in Good
Ideas Texas. In December 1993, Good Ideas was incorporated in Delaware and
Good Ideas Texas was merged with and into Good Ideas. USAT thereafter
continued to own 85.7% until Good Ideas had a public offering of the Good Ideas
Common Stock in March and April 1994. As of June 30, 1996, USAT owned 60.8% of
the Good Ideas Common Stock.
2. 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.
Effective January 1993, USAT granted a sole and exclusive sublicense to 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. Pursuant to the sublicense, U.S. Drug is developing proprietary
systems that will test for drug use. In
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October and November 1993, U.S. Drug had a public offering of the U.S. Drug
Common Stock. As of June 30, 1996, USAT owned 67.0% of the outstanding U.S.
Drug Common Stock.
3. In September 1995, ProActive, a wholly-owned subsidiary
incorporated in June 1995, entered the human resource provider business.
4. In March 1995, USAT acquired 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.
5. On May 21, 1996, USAT completed its acquisition of RSA, a provider
of corporate drug-free work place programs. Since January 1996, RSA has been
designing policies and programs for the ProActive subsidiary.
In November 1992, USRR, then a newly-incorporated wholly-owned
subsidiary of USAT, acquired the assets of a 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-U.S. Rubber
Recycling, Inc." under this caption "Business of the Company."
USAT intends to merge ProActive with and into RSA. If the Merger is
consummated and the U.S. Drug Merger is consummated, then USAT intends to merge
U.S. Drug's successor by merger, RSA and all other subsidiaries which are not
sold or liquidated into USAT and operate thereafter through three divisions,
one conducting alcohol testing operations, one conducting drug testing
operations (if and when the products are developed) and the third conducting
human resource provider/developer of substance abuse programs. USAT also
intends to seek USAT stockholder approval for a new name that will reflect the
combined operations.
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 admissability in court proceedings.
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<TABLE>
<CAPTION>
Percentage of Revenues
USAT's Products and Services Derived During Each of
----------------------------
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"), 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:
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Model 2100 - Enhanced electronics and software create an easy to use
instrument which can be networked to a central location for downloading 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 an ideal, convenient and reliable method for
determining and identifying chemical substances within a compound.
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 USAT 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.
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(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
The Alco Analyzer, the Mobile Alcohol Collection System and the Alco
Breath Tubes represent 90% of USAT's current sales volume of its alcohol
testing products in domestic and international markets. 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
Drug and Alcohol Testing Services
(1) LAW ENFORCEMENT/CORRECTIONAL
USAT markets and sells the Alco-Analyzer and the Mobile Alcohol
Collection System ("MACS") to law enforcement agencies for evidential testing
purposes.
Screening devices and Alco-Breath Tubes ("ABT") are generally used for
roadside screening to determine probable cause for further breath testing by
evidentiary quality testing equipment.
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 is marketing and selling 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
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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 in the
transportation industry, 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, Inc. ("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, 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 MACS and the ABTs 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 that preferably DOT approval must 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
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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.
(4) DRUG AND ALCOHOL 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. It is engaged in drug and alcohol 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 currently believed 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 Roche and STC, Inc., offer an on-site screening saliva
based alcohol testing. Roche has, and several of these companies may have,
greater revenues and financial resources than the Company. Although USAT
believes
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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. Currently U.S. Drug is
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
hydrochloride (PCP), amphetamines (including methamphetamines) and
tetrahydrocannabinol (THC, marijuana). If the products are developed, 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
pharmaceutical companies providing substance abuse screening methods: (1)
enzyme-multiplied immunoassay technique (EMIT) manufactured and distributed by
Syva; (2) radioimmunoassay (RIA) manufactured and distributed by Roche and
others; (3) thin layer chromatography (TLC) manufactured and distributed by
Marion; (4) a fluorescence polarization immunoassay (FPIA) manufactured by
Abbott, and other immunoassay tests provided by (5) Editek; (6) Hycor; (7)
Princeton, and (8) 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 U.S. Drug 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 substance 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
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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. 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 first its saliva sample testing method
and second its urine sample testing method, 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 pharmaceutical or other
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 acquisition in May 1996 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
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become and there are no other providers of customized programs and policies
like RSA. 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 can be 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 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.
Toy Products
The toy industry is highly fragmented and extremely competitive.
Currently, Good Ideas markets a full line of wooden interlocking log and wooden
block construction playsets which competes primarily with Lincoln Log, a
product manufactured and distributed by Playskool, a division of Hasbro, Inc.
("Hasbro"), one of the five largest toy companies in the United States. Good
Ideas also markets a line of equestrian toys consisting of plastic horses
ranging in height from five to eleven inches which competes primarily with
products offered by Breyer, Inc., the dominant manufacturer of injection-molded
collectible horses, and Marchon, Inc., a United States importer of
injection-molded toy horses. Management believes that it offers a high quality
line of wooden log playsets and equestrian toys. However, there can be no
assurance that Playskool/Hasbro, which has greater financial resources
available to it than Good Ideas, will not attempt to expand its presence in the
wooden log playsets category, nor is there any assurance that other toy
companies will not attempt to enter into this category. Due to relatively low
barriers to entry in the toy industry, Good Ideas could face competition from a
number of smaller toy companies as well if it were not to be sold or liquidated
by December 31, 1996.
RESEARCH AND DEVELOPMENT
During 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 fiscal 1995, the Company spent
approximately $1,249,000 on research and development, including $886,000
expended on
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development of the technology of U.S. Drug. In 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 this 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) GOOD IDEAS ENTERPRISES, INC.
In February and April 1994, Good Ideas completed an initial public
offering of the Good Ideas Common Stock, which security trades on the Pacific
Stock Exchange. As of June 30, 1996, USAT owned 2,400,000 of the 3,948,680
outstanding shares of the Good Ideas Common Stock or 60.8% thereof.
For information relating to the business of Good Ideas, see "Business
of Good Ideas." For information relating to the Management Agreement between
USAT and Good Ideas, see "Material Contacts of USAT with Good Ideas-Management
Services Agreement."
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(2) 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 common stock $.01 par value,
of U.S. Drug (the "U.S. Drug Common Stock"), which trades on the Pacific Stock
Exchange. As of June 30, 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 will 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 is required before
the urine based testing product can be marketed. U.S. Drug, based on its
review of current market conditions, has decided to defer, but not cancel,
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 June 30, 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
favorable 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:
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(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 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 DSN was renegotiated and amended
to provide for minimum annual 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. 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.
(b) On April 16, 1992, USAT entered into a 12-month cooperative 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 annually $300,000 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 the Treasurer of U.S.
Drug, for which he is not directly compensated by U.S. Drug; services relating
to U.S.
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Drug's financial and banking relationships; services relating to the
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.
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
to register shares of 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 (i.e., the U.S. Drug
Merger). 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
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resource provider business of ProActive and operated the three as if one
corporation. This action required the sale of the rubber recycling product
business of USRR (see the subsection (4) in this section "Subsidiaries" under
this caption "Business of the Company") and would require the sale of the toy
business of Good Ideas. In addition, the USAT directors have concluded that,
because of the history of losses in Good Ideas, the necessity of developing or
acquiring new products if there is to be a turn around and the problems
generally in the toy industry, 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. For both of these reasons, the USAT Board authorized on February
26, 1996 management to seek offers from prospective purchasers. 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.
(3) 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. 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
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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.
As indicated under "Summary-Recent Developments," 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. 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
shareholders for their 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 S. 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 shareholders 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 S. Stutman) registered under the Securities Act as
Acquisition Shares in 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 S. Stutman) at $3.125 per share, which was the fair market
value on the date of grant. USAT also issued two promissory notes aggregating
$400,000 in principal amount (the "RSA Notes") to two RSA shareholders (one of
whom is Mr. Stutman who received a RSA Note for $239,760 and Brian S. 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. As a result of
the acquisition of RSA, the Consulting Agreement
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described in the preceding paragraph terminated; however, the Common Stock
purchase warrants described therein remain outstanding, except that the RSA
warrant was distributed among the RSA shareholders, including Mr. Stutman who
received a warrant to purchase 105,500 shares and Brian S. Stutman who received
a warrant to purchase 70,500 shares.
During its last three fiscal years ended December 31, 1996, RSA's
revenues, income and income per share were as follows:
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Revenue................... $1,101,599 $646,428 $ 536,292
Net Income (Loss)......... $ (19,549) $ 16,694 $ (98,448)
Income (Loss) per share... $ (244.36) $ 208.68 $(1,278.55)
</TABLE>
Effective December 28, 1995, ProActive also engaged the services of
Patricia Starling, who had been serving as a consultant, as its Vice President
Operations for a two year term. Ms. Starling was granted a Common Stock
purchase warrant expiring December 27, 1998 to purchase 20,000 shares of the
USAT Common Stock at $2.00 per share, which was the market price on the date of
grant. The warrant is currently exercisable as to 10,000 shares and becomes
exercisable as to 5,000 shares on each anniversary date.
See the section "Property" under this caption "Business of the
Company" for information as to the ProActive and RSA leases.
(4) 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 (see "The Merger and Related Matters-Summary of the Terms of the USAT
Common Stock-Acquisition Shares") and valued at $1,564,642. The acquisitions
have been accounted for as a purchase in the financial statements of the
Company. 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.
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(5) U.S. RUBBER RECYCLING, INC.
In November 1992, USAT purchased the total 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 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 USSR's then 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.
USAT acquired the total assets of Adflo International, Inc. for a
total consideration of 185,000 shares of the USAT Common Stock valued at
$196,563. The transaction was accounted for as a purchase in the financial
statements of the Company. These shares were part of the Acquisition Shares
registered under the Securities Act in the January 1992 Registration Statement
solely for acquisition purposes (see "The Merger and Related Matters-Summary of
the Terms of the USAT Common Stock-Acquisition Shares").
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 (see, however, the section
"Description of Property" under this caption "Business of the Company"). 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.
EMPLOYEES
As of July 29, 1996, the Company had 70 full time employees including
its officers, of which 27 engaged in manufacturing and operations, 10 in sales
and marketing, 12 in research and development and technical support, and 6
scientists and 15 in general and administrative jobs. The Company has no
collective bargaining agreement with its employees.
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<PAGE> 97
DESCRIPTION OF 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 its subsidiaries U.S. Drug and Good Ideas.
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. 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." under this caption "Business of the Company"), 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 13 to Notes to the Company's Financial Statements
elsewhere in this Prospectus.
Management is of the opinion that the leased facilities are currently
adequate and suitable for the Company.
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.
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<PAGE> 98
BUSINESS OF GOOD IDEAS
OVERVIEW
Good Ideas Texas was incorporated under the laws of the State of Texas
on December 18, 1987. Pursuant to the Good Ideas Acquisition Agreement, USAT
through a subsidiary acquired a 55% interest in Good Ideas Texas for which
USAT's subsidiary issued shares of its stock valued at $5,844 and received
1,533,125 shares of the Good Ideas Common Stock effective June 29, 1992. On
June 5, 1992, Good Ideas was incorporated under the laws of the State of
Delaware. On December 17, 1992, Good Ideas Texas was merged with and into Good
Ideas and a 27,871-for-1 stock split was effected for the previously issued
shares of Good Ideas Texas (all references herein to the number of shares of
the Good Ideas Common Stock being adjusted to reflect this stock split on a
retroactive basis). In August 1993, USAT acquired its subsidiary's interest in
Good Ideas, which acquisition included the issuance of 400,000 shares of the
USAT Common Stock valued at $2.4375 per share to two officer-stockholders,
which transaction gave effect to the $5,844 previously paid. During fiscal
1993, USAT settled litigation against USAT by a person who was also an investor
in Good Ideas and, as part of the settlement, received 696,875 shares of the
Good Ideas Common Stock from such investor. As a result of these transactions,
USAT owned 2,230,000 shares of the Good Ideas Common Stock for which it had
paid for in shares of the USAT Common Stock or of its subsidiary having an
aggregate value of $975,000. On December 15, 1993, USAT received 170,000
shares of the Good Ideas Common Stock as payment for $748,682 in indebtedness
owned by Good Ideas to USAT. In addition, also on December 15, 1993, the two
officer-stockholders surrendered 157,500 shares of the Good Ideas Common Stock
to Good Ideas in consideration of receiving new employment agreements. As a
result of this reduction in the outstanding shares of the Good Ideas Common
Stock, USAT's ownership was increased to 2,400,000 or 85.7% of the 2,800,000
shares of the Good Ideas Common Stock then outstanding. In February and March
1994, Good Ideas had a public offering of Good Ideas Common Stock in which an
aggregate of 1,320,000 shares were sold. As of June 30, 1996, USAT owned
2,400,000 of the 3,948,680 shares of the Good Ideas Common Stock outstanding or
60.8%.
As a result of certain of the transactions described in the preceding
paragraph, USAT acquired 2,400,000 shares of the Good Ideas Common Stock for an
aggregate cost, without attempting to value the shares surrendered in the
settlement, of $1,723,682 or $.72 per share of the Good Ideas Common Stock as
compared with a fraction of a share of the USAT Common Stock having a value of
$1.00 per share being offered to the Good Ideas Minority Stockholders for each
share of the Good Ideas Common Stock pursuant to this Consent Solicitation
Statement/Prospectus.
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<PAGE> 99
Good Ideas designed and markets and distributes a variety of
traditional toy products for children of various ages. Good Ideas' sales
historically have been derived from a line of traditional wooden construction
toys. Good Ideas' historic strategy had been to design and develop enduring
traditional lines of toys and to create enhancements to, and extensions of,
these toy lines which maximized product line sales while minimizing development
and advertising expenses for new and enhanced products. Good Ideas enhanced
and extended its existing toy lines through the addition of accessories and
through the incorporation of plastic figures and components into themed
playsets which provide the consumer with a creative play environment.
Commencing in fiscal 1995, Toys R Us, the major customer of Good Ideas, has
been significantly reducing its 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 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 have the result of
squeezing out the smaller companies like Good Ideas with their limited products
lines. See "The Company's Management's Discussion and Analysis of Financial
Condition and Results of Operations-Good Ideas Enterprises" and "Good Ideas'
Management's Discussion and Analysis of Financial Condition and Results of
Operations-Results of Operations." If Good Ideas is not sold, management
intends to liquidate the business of Good Ideas (see "The Merger and Related
Matters-Sale of Good Ideas").
In addition to the products described in the ensuing sections, Good
Ideas has also manufactured and sold a construction toy consisting of a set of
corrugated cardboard bricks marketed under the trademark Bill's Bric
Builders(TM). Due to increasing paper costs, the line of corrugated cardboard
bricks was discontinued after fiscal 1995.
SALES BY PRODUCTS
The following table sets forth Good Ideas' net sales by product in
dollar volume (in thousands) and as a percentage of net sales:
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<PAGE> 100
<TABLE>
<CAPTION>
Year Ended March 31,
---------------------------------------------------------------------------
1996 1995 1994
--------------------- --------------------- ---------------------
Category Amount Percentage Amount Percentage Amount Percentage
- -------- ------ ---------- ------ ---------- ------ ----------
<S> <C> <C> <C> <C> <C> <C>
Wood Construction Toys $ 967 64.1% $2,841 61.7% $3,574 64.5%
Equestrian Toys 531 35.2% 1,213 26.3% 1,015 18.3%
Corrugated Cardboard
Construction Toys* 8 0.6% 344 7.5% 413 7.4%
Other Products 2 0.1% 208 4.5% 542 9.8%
------ ----- ------ ------ ------ ------
Total $1,508 100.0% $4,606 100.0% $5,544 100.0%
====== ====== ====== ====== ====== ======
- ------------------
</TABLE>
* Due to increasing paper costs, the line of corrugated cardboard bricks was
discontinued after fiscal 1995.
WOODEN CONSTRUCTION TOYS
Good Ideas markets a full line of wooden interlocking log and wooden
block construction toys sets. Good Ideas ships classic stained log sets
marketed under the trademark Paul Bunyan Log Builders(TM) and brightly-painted,
multi- colored combination log and building block sets under the trademark Paul
Bunyan Wood Builders(TM). Good Ideas believes that it is a major supplier of
wooden interlocking-log construction toys in the United States. Good Ideas
also ships a themed playset, marketed as General Custer's Fort Apache(TM),
combining standard wood logs with plastic figures and accessories. In 1993,
Good Ideas commenced shipping additional themed playsets, such as Log Town(TM)
and Log Village(TM), which include plastic roofs, windows, doors and other
accessories. Good Ideas' wooden construction toys typically range in retail
price from $4.99 to $39.99, depending upon the number of pieces in the set and
the addition of plastic components in themed sets.
EQUESTRIAN TOYS
Good Ideas' line of equestrian toys consists of flocked plastic horses
ranging in height from five to eleven inches, which are marketed under the
trademark Black Beauty and Friends(TM). This line includes a variety of
different styles of horses to encourage collection of the entire line. These
styles include the Appaloosa, Chestnut, Carrousel, Palomino, Dappled Gray,
Paint, Leopard and Black Beauty horses. Individual horses typically range in
retail price from $3.99 for a five-inch horse to $7.99 for an eight-inch horse
and $14.99 for an eleven-inch horse. Combination sets of one five-inch pony
and one eight-inch mare typically retail for $9.99. In addition, Good Ideas
separately offers accessories and playsets scaled to the most popular
eight-inch horses, including an assortment of cotton blankets and leggings made
in a variety of colors and real leather saddles. Good Ideas also markets two
playsets under the
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trademark Black Beauty and Friends(TM): the Equestrian Center and the Stable
and Corralset. Both of these sets contain different styles of horses, which
are not available for purchase separately. The Equestrian Center typically
retails for $11.99 and the Stable and Corral typically retails for $29.99.
COLORFORMS FLIP-TOP ACTIVITY CENTER(TM)
In October 1994, Good Ideas acquired a license allowing Good Ideas to
manufacture certain products bearing the Colorforms brand name and logo,
including an activity table utilizing the products of both Good Ideas and
Colorforms under the trademark Colorforms Flip-Top Activity Center(TM). The
activity table was included in Good Ideas' 1995 product line and was introduced
at the New York Toy Fair in February of 1995. The activity table's suggested
retail price was $129.99. There were limited sales of these products during
the six months ended September 30, 1995. The license expired in October 1995
and was not renewed.
DESIGN AND DEVELOPMENT
Good Ideas' design and development strategy had been to produce
enduring, traditional lines of toys and to create enhancements to and
extensions of these toys lines in order to broaden their appeal to targeted
consumers. Good Ideas' line of wooden log construction sets exemplifies this
strategy. Traditional stained-wood interlocking log construction toys have
been marketed in the United States for many years. Good Ideas had enhanced and
extended its line of wooden log construction toys with the introduction of
multi-colored logs and themed playsets containing plastic figures and
accessories.
Good Ideas relied on its senior management personnel and on
independent designers and contractors to design and develop its products.
Typically, Good Ideas had presented designers with toy concepts developed or
acquired by it and the designers created renderings of the product. Good Ideas
retained product and packaging designers on an ongoing basis and generally paid
a flat fee for their services. To minimize some of the risk associated with
introducing new products, Good Ideas normally consulted with its principal
customers in the development of new products.
SALES AND MARKETING
Good Ideas has distributed its products primarily to national mass
merchandisers, such as Toys R Us, Wal-Mart Stores, Inc. ("Wal-Mart") and J.C.
Penney Company, Inc. ("Penney"), and to wholesale clubs, such as Price Costco
Wholesale Corporation ("Costco") and BJ's Wholesale Club, Inc. ("BJ's"). Good
Ideas has sold its toy products to high- end specialty retailers, including
F.A.O. Schwarz and Imaginarium. As indicated in the table below, none of the
foregoing customers had sales to them of
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<PAGE> 102
10% or more of the Good Ideas sales during the past three fiscal years other
than Toys R Us (in excess of 50% in all three years) and Costco (not in fiscal
1996). Several of Good Ideas' products appeared in the 1995 Sears Wish Book
which markets toys manufactured and distributed by many different toy
manufacturers and distributors. Until sale or liquidation, Good Ideas will
continue to attempt to make sales to the above-named and other customers.
The traditional types of toys that Good Ideas developed and currently
markets are well known and do not require substantial advertising to create
consumer awareness. Consequently, Good Ideas believes that the most important
marketing tools for these products are their packaging and pricing. Good Ideas
utilizes attractive, innovative and unique packaging to differentiate its
products from those of its competitors. To date, Good Ideas has not incurred
significant expenses for advertising; however, if Good Ideas attempted to
develop toys in the future, which is not its current intention, these could
require advertising support. On a limited basis, Good Ideas makes advertising
allowances available to the retailers that promote its products.
The following table sets forth net sales to Good Ideas' largest
customers for each of the specified periods by dollar volume (in thousands) and
as a percentage of net sales:
<TABLE>
<CAPTION>
Years Ended March 31,
--------------------------------------------------------------------------
1996 1995 1994
-------------------- --------------------- ---------------------
Customer Amount Percentage Amount Percentage Amount Percentage
- -------- ------ ---------- ------ ---------- ------ ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Toys R Us $ 779 51.7% $2,726 59.2% $3,182 57.4%
Costco 50 3.3% 963 20.9% 554 10.0%
Other (1) 679 45.0% 917 19.9% 1,808 32.6%
------ ------ ------ ------ ------ ------
Total $1,508 100.0% $4,606 100.0% $5,544 100.0%
====== ====== ====== ====== ====== ======
</TABLE>
_____________________
(1) "Other" includes all customers with sales of less than 10% of total
sales.
Good Ideas maintained, until December 31, 1995, a small internal sales
and marketing staff and relied primarily upon 20 sales representatives in the
United States, one in Mexico and one in Canada, all of whom are independent
contractors. These sales representatives have made on-site visits to customers
to solicit orders for products and have marketed Good Ideas' products at the
major toy trade shows in New York City and Hong Kong and at
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<PAGE> 103
regional trade shows. Good Ideas has no long-term commitments from any of its
customers, but instead has relied upon its independent sales representatives
and personal relationships with its customers to sell its products.
MANUFACTURING
Good Ideas contracted with manufacturers in China, Mexico and the
United States to produce its current products. Decisions related to the choice
of manufacturer were based on price, quality of merchandise, reliability and
the ability of a manufacturer to meet Good Ideas' timing requirements for
delivery. Good Ideas does not have long-term contracts with any of its
manufacturers and competes with other companies for production facilities with
respect to certain of its products.
The principal raw materials used in the production of Good Ideas'
products are wood and plastic. Raw materials are generally purchased by Good
Ideas' contract manufacturers which deliver the completed products to Good
Ideas. Good Ideas also purchases packaging for certain of its products. Good
Ideas believes that an adequate supply of raw materials used in the manufacture
of its products are readily available from existing and alternative sources at
reasonable prices.
Good Ideas' wooden construction toys are rough-cut by manufacturers
located in China and Mexico. Contracting with foreign manufacturers is subject
to a number of additional risks not associated with contracting with domestic
manufacturers, including transportation delays and interruptions, political and
economic disruptions, the impositions of tariffs and import and export controls
and changes in governmental policies. If Good Ideas was for any reason unable
to obtain rough-cut materials from any of its current suppliers, Good Ideas
believed that it could shift its manufacturing requirements to its other
suppliers without incurring substantial delay. Following rough-cut foreign
manufacturing, all of Good Ideas' wooden construction toys are finished by a
domestic manufacturer. Although Good Ideas currently relies exclusively upon
this manufacturer for such finishing services, Good Ideas believes that it
could locate another source or shift these manufacturing processes to its other
suppliers. However, in such event, Good Ideas' ability to meet customer orders
would be severely restrained for the period of time necessary to develop an
alternate source for these services, which period of time Good Ideas believes
could be significant and could adversely affect Good Ideas' customer relations
and results of operations.
The flocked horses sold by Good Ideas are purchased from a single
manufacturer in China. Good Ideas' current supplier owns the molds for the
plastic horses that make up the core of its equestrian line of toys, and Good
Ideas believes it would incur
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<PAGE> 104
substantial delay and additional expenses in obtaining sufficient supplies of
these types of products from other foreign manufacturers. Good Ideas' supplier
of plastic horses is under no obligation to refrain from selling such products
to other purchasers in the United States.
Plastics components used in Good Ideas' themed construction sets are
manufactured by a number of manufacturers. Tooling and molding for unique
plastic components are owned by Good Ideas and may be utilized by any number of
manufacturers if the need arises for alternate sources of production.
Necessary plastic components for which Good Ideas does not own the molds can be
purchased on the open market from several manufacturers.
BACKLOG
Total order backlog at March 31, 1994, 1995 and 1996 was approximately
$500,000, $322,000 and $-0-, respectively. Good Ideas' experience has been
that cancellations, rejections or returns of orders do not materially reduce
the amount of sales realized from its backlog.
Good Ideas participates in the electronic data interchange program
maintained by several of its largest customers, including Toys R Us, Wal-Mart
and Penney. This program allows Good Ideas to monitor store inventory and
schedule production to meet anticipated re-orders. Re-orders are generally
filled by Good Ideas within 30 days.
PROPRIETARY TRADEMARKS
Good Ideas' name Good Ideas(TM) and Big Bill's Bric Builders(TM) are
registered trademarks of Good Ideas and have been published by the U.S. Patent
and Trademark Office (the "PTO"). Additionally, the Company has filed
trademark applications with the PTO for the following trademarks: Paul Bunyan
Log Builders(TM) and Black Beauty and Friends(TM).
Good Ideas believes it has the right to use these trademarks for the
product categories on which they are currently used. Although Good Ideas
believes that its trademarks and trade names do not infringe on the proprietary
rights of third parties, there can be no assurance that infringement claims
will not be asserted against Good Ideas in the future.
COMPETITION
For information relating to competition, see "Business of the
Company-Competition-Toy Products."
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<PAGE> 105
GOVERNMENT REGULATION
Good Ideas is subject to the Federal Hazardous Substances Act and the
Federal Consumer Product Safety Act, among other laws. These laws empower the
Consumer Products Safety Commission (the "CPSC") to protect children from
hazardous toys and other articles. Pursuant to federal law, all toy products
must meet certain product safety standards established by the CPSC. Similar
laws exist in some states and cities in the United States and in many
jurisdictions throughout the world. Further, in order to gain widespread
acceptance by toy retailers, toy products must meet additional product safety
standards established by the Toy Manufactures Association (the "TMA"). While
Good Ideas has maintained a quality control program to ensure compliance with
applicable federal, state, local and foreign laws regarding product safety and
with the product safety standards promulgated by the TMA, such laws and
standards are continually evolving and are strictly construed. Although Good
Ideas believes that its products currently comply with all applicable laws and
standards, there can be no assurance that Good Ideas' products will continue to
comply with such laws and standards in the future. The CPSC has the authority
to exclude from the market articles which are found to be hazardous and can
require a manufacturer to repurchase such toys under certain circumstances.
Any such event could have an adverse effect upon Good Ideas' business, results
of operations, reputation and customer relationships.
EMPLOYEES
As of June 30, 1996, Good Ideas employed one person, excluding
independent contractors, sales representatives and the personnel employed by
USAT who provide management and administrative services to Good Ideas.
PROPERTIES
Good Ideas' principal executive offices were located in Fort Worth,
Texas, where Good Ideas leased approximately 22,000 square feet of
office/warehouse space under a lease that expired in December 1995. The base
rent for Good Ideas' former space was approximately $5,300 per month. Good
Ideas leased an additional 5,000 square feet of warehouse space in Fort Worth
for $1,500 per month on a month-to-month basis. Good Ideas currently shares
office space with USAT. See "Business of the Company-Properties."
LEGAL MATTERS
Good Ideas is not a party to any material litigation and is not aware
of any pending litigation that could have a material
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<PAGE> 106
adverse effect on Good Ideas' business, results of operations or financial
condition.
USAT PRINCIPAL STOCKHOLDERS
The following table sets forth certain information, as of July 12,
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; (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 July 12, 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.
<TABLE>
<CAPTION>
Number of Shares
Name and Address Beneficially Owned Percentage
- ---------------- ------------------ ----------
<S> <C> <C>
Robert Stutman (2) 971,500(3) 2.7%
c/o Robert Stutman & Associates,
Inc.
450 Washington Street
Dedham, MA 02026
Linda H. Masterson (4) 60,000(5) nil
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
</TABLE>
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<PAGE> 107
<TABLE>
<CAPTION>
Number of Shares
Name and Address Beneficially Owned Percentage
- ---------------- ------------------ ----------
<S> <C> <C>
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) 1,478,648(14) 4.1%
Donald & Co. Securities, Inc.
5200 Tower Center Circle
Boca Center, Suite 207
Boca Raton, FL 33486
All directors and 3,107,748(3)(5) 8.4%
executive officers (13)(14)(15)
as a group (seven
persons)
</TABLE>
- -------------------
(1) The percentages computed in this column of the table are based upon
35,337,335 shares of the USAT Common Stock outstanding on July 12, 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 July 12, 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 (a) 127,500 shares of the USAT
Common Stock issuable upon the exercise at $2.00 per share of a Common
Stock purchase warrant expiring December 27, 1998 issued to him for his
consulting services, (b) 105,500 shares of the USAT Common Stock issuable
upon the exercise at $2.00 per share of a Common Stock purchase warrant
expiring March 31, 1999 issued to him when the Common Stock purchase
warrant to purchase 200,000 shares issued to RSA was divided among the
RSA
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<PAGE> 108
shareholders and (c) 474,750 shares of the USAT Common Stock issuable
upon the exercise at $3.125 per share of a Common Stock purchase warrant
expiring May 20, 1999 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) 10,000 shares of the USAT
Common Stock issuable upon the exercise at $1.9375 per share of a Common
Stock purchase warrant expiring November 15, 1998 issued to her as a
director of USAT on the same basis as described in note (13) to the table
and (b) 50,000 shares of the USAT Common Stock expiring May 12, 1999
issuable upon the exercise at $3.125 per share of a Common Stock purchase
warrant issued pursuant to Ms. Masterson's terms of employment, which
50,000 shares are the only shares as to which the warrant to purchase an
aggregate of 600,000 shares is currently exercisable or exercisable
within 60 days of July 12, 1996.
(6) Mr. Wolff was the Treasurer, Chief Financial Officer and Chief Accounting
Officer of USAT until he resigned on July 3, 1996.
(7) The shares reported in the table include (a) 15,000 shares issuable upon
the exercise at $1.06 per share of a Common Stock purchase warrant
expiring September 30, 1996, (b) 10,000 shares issuable upon the exercise
at $4.00 per share of a Common Stock purchase warrant expiring May 17,
1997 and (c) 80,000 shares issuable upon the exercise at $2.375 per share
of a stock option expiring 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 or (b) October 1, 1996.
(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 at $2.375 per share of a stock option expiring the later of (a)
30 days after the effective date of a post-effective date of a
registration statement under the Securities Act relating to the
underlying shares of the Common Stock or (b) August 29, 1996.
(10) Ms. Laustsen was an Executive Vice President and a director of USAT until
April 18, 1996.
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<PAGE> 109
(11) The shares reported in the table include 100,000 shares issuable upon the
exercise at $2.375 per share of a stock option expiring the later of (a)
30 days after the effective date of a post-effective date of a
registration statement under the Securities Act relating to the
underlying shares of the Common Stock or (b) August 29, 1996.
(12) A director of USAT.
(13) The shares reported in this table include or reflect 10,000 shares of the
USAT Common Stock issuable upon the exercise at $1.9375 per share of a
Common Stock purchase warrant expiring November 15, 1998 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) 10,000 shares of the USAT
Common Stock issuable upon the exercise at $1.9375 per share of a Common
Stock purchase warrant expiring November 15, 1998 issued to Mr. Rosen on
the same basis as those described in note (13) to this table; (b) 400,000
shares of the USAT Common Stock issuable upon the exercise at $1.9375 per
share of a Common Stock purchase warrant expiring November 15, 1998; (c)
150,000 shares upon the exercise at $3.00 per share of a Common Stock
purchase warrant expiring November 15, 2000; (d) 150,000 shares upon the
exercise at $4.00 per share of a Common Stock purchase warrant expiring
November 15, 2000; and (e) 300,000 shares of the USAT Common Stock
issuable upon the exercise at $3.125 per share of a Common Stock purchase
warrant expiring April 17, 1999 issued to Mr. Rosen as consideration for
assisting in the exercise of Common Stock purchase warrants. The Common
Stock purchase warrants described in (b), (c) and (d) were issued to Mr.
Rosen as consideration for his services, including those related to the
private placement consummated in February 1996. 50,000 of the shares
subject to each of the warrants described in (c) and (d) may be forfeited
if none of the Common Stock purchase warrants issued to the purchasers in
such private placement are exercised and may be reduced in the number of
shares which may be exercised pro rata to the exercise of the private
placement warrants.
(15) The shares reported in the table include 10,000 shares issuable upon the
exercise at $1.875 per share of a Common Stock purchase warrant expiring
January 2, 1999 held by an executive officer of USAT.
As indicated elsewhere in this Consent Solicitation Statement/Prospectus
(see "Business of the Company-General"),
104
<PAGE> 110
Good Ideas and U.S. Drug are the only subsidiaries of USAT which are not
wholly-owned.
As of July 12, 1996, no director or executive officer of USAT owned
beneficially any shares of the Good Ideas Common Stock. USAT itself owns
2,400,000 of the 3,948,600 outstanding shares of the Good Ideas Common Stock or
60.8% thereof.
The following table reports, as of July 12, 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>
Peter M. Mark 15,500 nil
</TABLE>
- ------------------
(1) The percentage computed in this column of the table is based upon
5,221,900 shares of the U.S. Drug Common Stock outstanding on July 12,
1996. No effect is given, pursuant to Rule 13d-3(d)(1) under the Exchange
Act, to shares issuable upon the exercise of U.S. Drug stock options and
U.S. Drug Common Stock purchase warrants which are currently exercisable
or exercisable within 60 days of July 12, 1996 because no director or
executive officer of USAT owns such an option or warrant.
USAT owns 3,500,000 shares of the 5,221,900 shares outstanding as of
July 12, 1996 or 67.0% thereof.
GOOD IDEAS PRINCIPAL STOCKHOLDERS
The following table sets forth, as of July 12, 1996, certain
information with respect to (1) any person who beneficially owned more than 5%
of the Good Ideas Common Stock, (2) each director of Good Ideas, (3) the Chief
Executive Officer of Good Ideas who was the only executive officer of Good
Ideas whose total annual salary and bonus exceeded $100,000 in fiscal 1996; and
(4) all directors and executive officers as a group. Each beneficial owner who
is a natural person has advised Good Ideas that he or she has sole voting and
investment power as to the shares of the Good Ideas Common Stock reported in
the table. The table does not attribute beneficial ownership of USAT's shares
to any person who is or was a director and/or executive officer of USAT.
105
<PAGE> 111
<TABLE>
<CAPTION>
Number of Shares Percentage of
Name and Address of Common Stock Common Stock
Of Beneficial Owner Beneficially Owned Beneficially Owned(1)
- ------------------- ------------------ ------------------
<S> <C> <C>
U.S. Alcohol Testing
of America, Inc. 2,400,000 60.8%
10410 Trademark Street
Rancho Cucamonga, CA 91730
William D. Robbins(2) 200,000 5.1%
c/o Good Ideas
Enterprises, Inc.
10410 Trademark Street
Rancho Cucamonga, CA 91730
Robert Stutman(3) 0 -0-
450 Washington Street, Suite 302
Dedham, MA 02026
Linda H. Masterson(4) 0 -0-
10410 Trademark Street
Rancho Cucamonga, CA 91730
Michael S. McCord(5) 10,000 nil
2001 Kirby Drive
Suite 701
Houston, TX 77019
All directors and executive
officers as a group
(5 persons) 210,000 5.3%
- -------------------
</TABLE>
(1) The percentages computed in this column of the table are based upon
3,948,680 shares of the Good Ideas Common Stock outstanding on July
12, 1996. No effect is given, pursuant to Rule 13d-3(d)(3)(i) under
the Exchange Act, to shares issuable upon the exercise of Good Ideas
stock options or Good Ideas Common Stock purchase warrants because no
person owns either such an option or warrant.
(2) Chief Executive Officer and a director of Good Ideas.
(3) Chairman of the Board and a director of Good Ideas and Chairman of the
Board, Chief Executive Officer and a director of USAT.
(4) A director of Good Ideas and President, Chief Operating Officer and a
director of USAT.
(5) A director of Good Ideas and a consultant to the USAT Board of
Directors.
106
<PAGE> 112
USAT MARKET INFORMATION
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 Common Stock
during the periods indicated:
<TABLE>
<CAPTION>
FISCAL 1995
- -----------
Quarter Ended High Low
------------- ---- ---
<S> <C> <C>
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 July 31, 1996, the closing sales price of the USAT Common Stock was
$2.25 per share.
HOLDERS
The holders of record of the USAT Common Stock on July 22, 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 June 30, 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 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.
107
<PAGE> 113
RECENT QUOTATIONS
The following table sets forth the closing sales prices per share for
the USAT Common Stock and the Good Ideas Common Stock, as reported by the
American Stock Exchange and the Pacific Stock Exchange, respectfully, on
February 5, 1996, the last full day on which these stocks were traded prior to
the initial public announcement of the principal terms of the proposed Merger
and on August __, 1996, the latest available date. See the section "Market
Data" under this caption "USAT Market Information" and "Good Ideas Market
Information-Market Data" for a historical comparison of market prices of the
USAT Common Stock and the Good Ideas Common Stock, respectively.
<TABLE>
<CAPTION>
USAT Good Ideas
Common Stock Common Stock
------------ ------------
<S> <C> <C>
February 5, 1996 $2.375 $.375
August __, 1996
</TABLE>
GOOD IDEAS MARKET INFORMATION
MARKET DATA
The Good Ideas Common Stock is traded on the Pacific Stock Exchange
under the symbol "KID." The quarterly high and low sales prices since Good
Ideas' initial public offering on February 17, 1994 as reported by the Pacific
Stock Exchange are set forth below for the periods indicated.
<TABLE>
<CAPTION>
FISCAL 1995 HIGH LOW
- ----------- ---- ---
<S> <C> <C>
Quarter Ended
-------------
June 30, 1994 $4.875 $3.625
September 30, 1994 $4.50 $1.875
December 31, 1994 $3.125 $1.50
March 31, 1995 $1.9375 $ .75
<CAPTION>
FISCAL 1996 HIGH LOW
- ----------- ---- ---
<S> <C> <C>
Quarter Ended
-------------
June 30, 1995 $1.25 $.625
September 30, 1995 $.75 $.50
December 31, 1995 $.75 $.125
March 31, 1996 $.6875 $.25
</TABLE>
108
<PAGE> 114
On July 31, 1996, the closing sales price of the Good Ideas Common
Stock was $.375 per share.
EXCHANGE LISTING
On November 18, 1995, the Pacific Stock Exchange advised Good Ideas
that the share bid price of the Good Ideas Common Stock was below $1.00 per
share, which does not meet the minimum Tier II listing maintenance requirement
of the Pacific Stock Exchange, which requirement had become effective January
23, 1995. Good Ideas has been granted an extended compliance period, not to
exceed six months from May 9, 1996, to demonstrate that the Good Ideas Common
Stock is in compliance. Good Ideas management intends that, if the Merger is
consummated, Good Ideas will withdraw its listing application with the Pacific
Stock Exchange and deregister the Good Ideas Common Stock under Section 12(b)
of the Exchange Act. In such event, the Good Ideas Minority Stockholders will
thereafter be able to trade their shares of the USAT Common Stock on the
American Stock Exchange. As an alternative to the Merger, the Good Ideas Board
of Directors had reconsidered the possibility of effecting a reverse stock
split of the Good Ideas Common Stock in an amount sufficient to increase the
market value of the Good Ideas Common Stock to a level above the minimum
requirement of the Pacific Stock Exchange. This approach has been previously
rejected because the Board recognized that, unless Good Ideas reversed its
adverse operational trends of declining revenues and increasing losses, as to
which there can be no assurance, it was likely that, after the split, the
market price would begin to decline and again reach a level not complying with
the Pacific Stock Exchange's maintenance requirement. The Board also recognized
that, if delisting occurred, the Good Ideas Common Stock would not meet the
market price requirement for listing on the American Stock Exchange or
reporting on the NASDAQ System and that, if the Good Ideas Common Stock was
reported in the "pink sheets," it was unlikely that the Good Ideas Common Stock
would rise in market value in such over-the-counter market in view of its
operational problems. In view of the cut-back in operations of Good Ideas, if
the Merger is rejected, there may be no alternative to avoid delisting.
HOLDERS
As of June 30, 1996, there were 146 holders of record (including USAT)
and approximately 1,100 beneficial holders of the Good Ideas Common Stock.
DIVIDENDS
Good Ideas' Board of Directors has not declared any dividends on the
Good Ideas Common Stock through June 30, 1996
109
<PAGE> 115
and, in view of the continuing losses, the Board has no current intention to
pay any such dividends.
USAT MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table contains information concerning the current
directors and executive officers of USAT as of July 12, 1996:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Robert Stutman 53 Chairman, Chief Executive Officer
and a director
Linda H. Masterson 45 President, Chief Operating Officer
and a director
Joseph Bradley 52 Treasurer, Acting Chief Financial Officer
and Acting Chief Accounting Officer
Alan I. Goldman 59 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 on September 26,
1996 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 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. For information as to severance
arrangements relating to two executive officers named in the table, see the
section "Employment Agreements" under this caption "USAT Management".
110
<PAGE> 116
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 United States 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 "Business of the Company-Subsidiaries-ProActive Synergies,
Inc./Robert Stutman & Associates, Inc."
Linda H. Masterson has had substantial experience in marketing, sales
and business development in the medical diagnostics, healthcare and
biotechnology fields. On September 26, 1995, she was elected a director of
USAT. 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 was the
President and owner until she joined Cholestech, Inc. in ___________, ___,
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-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.
Joseph Bradley was elected as the Treasurer of USAT effective July 3,
1996 and simultaneously designated as its Acting Chief Financial Officer and
Chief Accounting Officer. He had previously been serving USAT as its
Controller, joining USAT in _____________, 1995. Prior thereto, Mr. Bradley
was Chief Financial Officer of Bocchi Laboratories, Inc., a contract
111
<PAGE> 117
manufacturer of personal care products, from __________ 1994 to ___________
1995. He was Controller and Chief Financial Officer of Pacific Clay Products,
Inc., a manufacturer of building products, from _________ 1991 to ___________
1994. From 1979 to 1991, Mr. Bradley held several positions with Kimstock,
Inc., a manufacturer of plumbing products, including Executive Vice President
and Chief Operating Officer, Vice President-General Manager and Vice President-
Finance. Previously, he held various financial positions at Cordon
International Corporation, Atlantic Richfield Company and Tridair Industries,
Inc. and was an auditor and consultant with the accounting firm of Arthur
Andersen & Co. Mr. Bradley is a certified public accountant and earned a B.A.
in Accounting and Business Economics from Claremont McKenna College and an
M.B.A. from The Claremont Graduate School in 1990.
The following persons were all elected as directors of USAT on
September 26, 1995:
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
Production Systems Acquisition 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
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<PAGE> 118
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 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, as follows: 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.
113
<PAGE> 119
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>
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 - - -
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 had three-year employment agreements with these officers which were
scheduled to terminate on December 31, 1996 and which provided 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. On July 3, 1996, Mr.
Wolff resigned his officership in USAT. 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, 2004 (the "USAT Options") under 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.
114
<PAGE> 120
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 Summary 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>
<CAPTION>
==================================================================================================
Number of
Shares Acquired Value Unexercised Value of Unexercised
On Exercise Realized Options In-The-Money Options
Name March 31, 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>
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
USAT had 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 agreed to continue to serve USAT as
employees until May 31, 1996. Mr. Wolff resigned as the Treasurer, the Chief
Financial Officer and the Chief Accounting Officer of USAT, Good Ideas and U.S.
Drug and as a director of Good Ideas and U.S. Drug on July 3, 1996. As a
result of these resignations, the Employment Agreements terminated on May 31,
1996 as to Mr. Witham and Ms. Laustsen and on July 3, 1996 as to Mr. Wolff,
except that USAT made a $25,000 severance payment to Mr. Wolff and is
continuing medical benefits for the three former executive
115
<PAGE> 121
officers until December 31, 1996, the original expiration date of the
Employment Agreements. Mr. Wolff is, however, continuing to assist USAT in its
efforts to sell the stock or assets of Good Ideas. See "The Merger and Related
Matters-Fairness Opinion."
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 at an annual base salary of $132,000. Pursuant to
his Employment Agreement, Mr. Wolff was employed as the Treasurer and Chief
Financial Officer at an annual base salary of $176,000 per year. Each of such
salaries reflected 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 was only required to devote a majority of his time.
The Employment Agreements contained 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 provided 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 or is profitable 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.
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<PAGE> 122
Stutman is terminated without cause (as 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 Common Stock purchase 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 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 (i.e., May 13, 1996), 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 prepared evidencing the
severance provisions and are filed as exhibits to the registration statement.
DIRECTORS' COMPENSATION
Prior to the change on September 26, 1995 in the composition of the
Board (see "Summary-Recent Developments"), directors of USAT who were not
employees were eligible to receive 10,000 shares of the USAT Common Stock in
the current fiscal year, in addition to being reimbursed for their travel and
other expenses. On September 26, 1995, 10,000 shares of the USAT Common Stock
were allocated to each of Glenn Bergenfield and William DiTuro, then directors,
on September 26, 1995.
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<PAGE> 123
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 Common Stock purchase warrant to purchase 10,000
shares of the USAT Common Stock at an exercise price for each share equal to
the closing sales price as reported on each anniversary date of November 16,
1995 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. Based on the fact that the results of operations for
fiscal 1996 were reported in a press release dated June 14, 1996, each of the
current directors will not receive a Common Stock purchase warrant in 1996
because the average sales price during the 90 calendar days prior to July 14,
1996 was $2.9308 per share or less than a $1.00 rise over $1.9375 per share.
CERTAIN 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 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 Common Stock purchase warrant to purchase
10,000 shares of the 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.
In February 1996, Lee S. Rosen, a director of USAT, received (1)
$100,000 and (2)(a) a Common Stock purchase warrant expiring November 15, 1998
to purchase 400,000 shares of the USAT Common Stock at $1.9375 per share, (b) a
Common Stock purchase warrant expiring November 15, 2000 to purchase 150,000
shares of the USAT
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Common Stock at $3.00 per share and (c) a Common Stock purchase warrant to
purchase 150,000 shares of the USAT Common Stock at $4.00 per share for
services performed in connection with USAT's offering of 2,000,000 shares of
the USAT Common Stock pursuant to Regulation D of the Securities Act. The
latter two warrants can only be exercised as to 50,000 shares of the USAT
Common Stock subject thereto in proportion to the shares issued upon the
exercise of Common Stock purchase warrants expiring December 17, 1999 to
purchase 2,000,000 shares of the USAT Common Stock at $2.00 per share issued to
the purchasers in such prior placement. During May and June 1996, Mr. Rosen
was paid an additional $400,000 for services rendered to USAT in connection
with the exercise of outstanding Common Stock purchase warrants to purchase
shares of the USAT Common Stock. The payments to Mr. Rosen have been charged
to Additional Paid-In Capital. Mr. Rosen also received a Common Stock purchase
warrant expiring April 17, 1999 to purchase 300,000 shares of the USAT Common
Stock at $3.125 per share.
GOOD IDEAS MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table contains certain information relating to the
directors and executive officers of Good Ideas as of July 12, 1996:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Robert Stutman 53 Chairman of the Board
William D. Robbins 46 Chief Executive Officer and
Director
Joseph Bradley 52 Treasurer and Acting Chief
Financial Officer and Acting
Chief Accounting Officer
Linda H. Masterson 45 Director
Michael S. McCord 53 Director
</TABLE>
The Certificate of Incorporation of Good Ideas provides for the
division of the Board of Directors into three classes, each class serving for a
period of three years. The foregoing notwithstanding, directors serve until
their successors have been duly elected and qualified or until they resign,
become disqualified or disabled, or are otherwise removed. If a vacancy is
created in any class, the Board may elect a director who will serve until the
next Annual Meeting of Stockholders at which time he or she, if the director is
to be reelected, must be designated
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<PAGE> 125
to a class. Of the directors named above, Mr. Robbins' term is scheduled to
expire with the Annual Meeting of Stockholders in 1997. Messrs. McCord and
Stutman and Ms. Masterson were elected by the Board on May 31, 1996 and,
accordingly, must be designated to a class if they stand for reelection at the
next Annual Meeting of Stockholders, which will not be held if the Merger is
consummated.
Glenn A. Bergenfield and William DiTuro, who were elected by
stockholders to serve until the Annual Meeting of Stockholders in 1995,
resigned as directors on November 16, 1995. Karen B. Laustsen, James C. Witham
and Gary S. Wolff, who were elected by stockholders to serve until the Annual
Meeting of Stockholders in 1996, resigned as directors on May 28, 1996, May 31,
1996 and July 3, 1996, respectively. Michael J. Witham, who was elected to
serve until the Annual Meeting of Stockholders in 1997, resigned on September
26, 1995.
Each officer of Good Ideas is elected by the Board and serves at the
discretion of the Board until his or her successor is elected and qualifies or
until he or she resigns, becomes disqualified or disabled, or is otherwise
removed.
BUSINESS HISTORY
For the business history of Messrs. Stutman and Bradley and Ms.
Masterson, see "USAT Management-Business History."
William D. Robbins, a co-founder of Good Ideas Texas, has served as
Chief Executive Officer and a director of Good Ideas or its predecessor Good
Ideas Texas since the latter's inception in December 1987. From September 1986
to December 1987, Mr. Robbins was employed by LJN Toy Company. Prior to
September 1986, Mr. Robbins was employed by Toys R Us for 18 years, most
recently as General Merchandising Manager of Imports and Director of Product
Development.
Michael S. McCord is the owner of McCord Investments, a sole
proprietorship formed in 1980 which primarily invests in various capital
markets. Mr. McCord is also a stockholder, director and officer of McCord
Brothers, Inc. and a partner of McCord Brothers Partnership, a privately-owned
company and partnership, respectively, each of which invests in oil, gas and
real estate properties. From 1974 to 1980, Mr. McCord served as Financial Vice
President of the Wedge Group, a privately held holding company which acquired
and held control of international multi-industry (including agricultural,
construction, energy, manufacturing and service) companies with aggregate
revenues in excess of $1 billion. Mr. McCord was elected as a director of Good
Ideas on May 31, 1996. He is also a stockholder of Good Ideas, a stockholder
and, since May 31, 1996, a director of U.S.
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<PAGE> 126
Drug, and a stockholder of USAT and a consultant to its Board of Directors.
FAMILY RELATIONSHIPS
There are no family relationships among the directors and executive
officers of the Company.
SUMMARY COMPENSATION TABLE
The following table sets forth certain information as to the sole
executive office of Good Ideas (who was the Chief Executive Officer) who cash
compensation exceeded $100,000 in fiscal 1996.
<TABLE>
<CAPTION>
Annual Compensation Long Term Compensation
---------------------------------------- ---------------------------
Other Securities
Name and Principal Annual Underlying All Other
Position Year Salary Bonus Compensation Options Compensation
- ------------------ ---- ------ ----- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
William D. Robbins 1996 $160,000 - - - -
Chief Executive Officer 1995 $160,615 - - - -
1994 $158,077 $20,000 - - -
</TABLE>
STOCK OPTIONS
In December 1993, the Board of Directors approved a stock option/stock
issuance plan which covered 500,000 shares of the Good Ideas Common Stock. The
options (i.e., the Good Ideas Options) were to be granted at an exercise price
of not less than 85% of the fair market value of a share of the Good Ideas
Common Stock on the date of grant and were to have terms not to exceed ten
years. On December 1993, Options expiring December 17, 2003 to purchase an
aggregate of 37,500 shares of the Good Ideas Common Stock at $4.40 per share
were granted to the then five directors. Options to purchase 7,500 shares each
granted to Glenn A. Bergenfield and William DiTuro, who resigned as directors
on November 16, 1995, terminated on February 16, 1996. Options to purchase
7,500 shares each granted to Karen B. Laustsen, James C. Witham and Gary S.
Wolff, who resigned as directors on May 28, 1996, May 31, 1996 and July 3,
1996, respectively, will terminate on August 26, 1996, August 29, 1996 and
October 1, 1996, respectively. However, they have all agreed to terminate the
Good Ideas Options if the Merger is approved by the Good Ideas Minority
Stockholders.
OTHER COMPENSATION
Good Ideas currently has no pension plan in effect and has in effect
no stock option plan, no restricted stock plan, no stock appreciation rights
nor any other long-term incentive plan under which grants or allocations may be
made in fiscal 1997 or thereafter.
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<PAGE> 127
DIRECTOR COMPENSATION
Good Ideas previously paid each director who is not a compensated
officer of Good Ideas $1,000 for each Board meeting attended, plus
reimbursement of reasonable out-of-pocket expenses. This policy has been
suspended as part of the cost reduction actions.
EMPLOYMENT CONTRACTS
Messrs. William D. Robbins and Richard Snyder entered into employment
agreements with Good Ideas, which provide for terms from January 1, 1994 to
December 31, 1996 and from June 1, 1995 to May 31, 1997, respectively.
Pursuant to these agreements, Mr. Robbins is employed as Chief Executive
Officer and Mr. Snyder was employed as Chief Operating Officer and President.
Under the agreements, the Company agreed to pay Mr. Robbins and Mr. Snyder a
base annual salary of $160,000 and $110,000, respectively. Such base salaries
may be increased at the discretion of the Board of Directors. Mr. Robbins'
employment agreement further provides that Mr. Robbins will receive bonuses at
the discretion of the Board of Directors. Mr. Snyder's employment agreement
provides for a performance bonus equal to 2% of the increase in gross revenues
over the prior 12-month period first payable after May 31, 1996. In September
1995, Mr. Snyder was transferred, with his full consent, to USRR upon the same
terms and conditions as his former employment with Good Ideas.
In December 1993 and April 1994, William Rodish and Jody Harding
entered into employment agreements with Good Ideas, which provide for
three-year terms from January 1, 1994 to December 31, 1996 and from April 1,
1994 to March 31, 1997, respectively, at base annual salaries of $60,000 and
$55,000, respectively. On October 13, 1995, Mr. Rodish resigned as the Vice
President of Marketing of Good Ideas. Mr. Rodish's employment contract was
terminated with no further financial obligation on Good Ideas's part. In April
1996, Ms. Harding resigned as the Controller and the Secretary of Good Ideas.
Ms. Harding's employment contract was terminated and Good Ideas has provided a
$10,000 severance payment to Ms. Harding.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
For information as to transactions with USAT, the holder of 60.8% of
the outstanding shares of the Good Ideas Common Stock, see "Material Contacts
of USAT with Good Ideas." For information as to Mr. McCord's consulting
arrangement with USAT, see "USAT Management-Certain Transactions." For
information as to the relationship of Mr. Stutman and Ms. Masterson to USAT,
see the sections "Directors and Executive Officers" and "Employment Agreements"
under the caption "USAT Management" and also with respect to Mr. Stutman, see
"Business of the Company-Subsidiaries-ProActive Synergies, Inc./Robert Stutman
& Associates, Inc."
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<PAGE> 128
THE COMPANY'S 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 "The Company's 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
Consent Solicitation Statement/Prospectus.
<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:
Costs 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)
--------- --------- ---------- --------- ---------
</TABLE>
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<PAGE> 129
<TABLE>
<CAPTION>
For the Years Ended March 31,
-----------------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
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)
============ =========== ============ ============ ============
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)
============ =========== ============ ============ ===========
Weighted Average
Common Shares Outstanding 29,834,502 25,691,674 22,027,068 12,317,743 5,938,747
============ =========== ============ ============ ===========
</TABLE>
(1) Adjusted to reflect all common stock splits.
Selected Consolidated Balance Sheet Data:
- ----------------------------------------
<TABLE>
<CAPTION>
As of March 31
--------------------------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
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>
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<PAGE> 130
THE COMPANY'S MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
EFFECT OF U.S. DRUG MERGER
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 (i.e., the U.S. Drug Merger) are discussed below.
If the U.S. Drug Merger is consummated, USAT will 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. In June 1996, USAT repaid
its loan from U.S. Drug of $282,000 and loaned U.S. Drug $500,000, which
indebtedness is due December 31, 1996. Because no revenues from sales are
currently expected from the drug testing operations for at least 20 to 30
months, assuming that 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
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<PAGE> 131
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 private placement completed in February 1996, the recent and anticipated
future exercises of USAT 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 can be, 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 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.
EFFECT OF MERGER
During April 1996, USAT filed the Good Ideas Registration Statement to
register shares of the USAT Common Stock to be issued to the Good Ideas
Minority Stockholders upon consummation of a proposed merger of a wholly-owned
subsidiary of USAT with and into Good Ideas. The effects of the proposed
merger (i.e., the 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 believes 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
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<PAGE> 132
12 months. The Board believed that, whether or not the 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 reducing its
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
December 31, 1996. The Merger would terminate USAT's obligation to make such
repayment.
If the 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
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<PAGE> 133
any litigation or claims which would cause this type of loss to recur in 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 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 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. 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 pharmaceutical or other 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.
Management will also continue to emphasize the cost reduction programs
previously instituted.
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. USAT completed a private placement pursuant
to Regulation D under the Securities Act in February 1996 in which it realized
gross proceeds of $3,750,000. There can be, of course, no assurance that the
Company will be able to consummate any future financings on a timely and
favorable basis
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in the amount necessary to meet the Company's cash requirements should any such
financing be required.
Exercise of Warrants and Options. Between April 1, 1996 and June 14, 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 14, 1996 could generate approximately
$15,348,000 of new capital to the Company. The expiration dates for many USAT
Common Stock purchase warrants, previously extended for one year in August
1994, were extended for an additional year on June 26, 1995 and, accordingly,
expire on various dates from September 1996 through December 2001. However,
USAT will have to update or file registration statements under the Securities
Act to make these exercises more attractive to the holders. Outstanding stock
options granted to officers and directors of USAT in August 1994, at an
exercise price of $2.375, could generate proceeds of approximately $1,040,000
if exercised. These stock options expire on the later of (1) 30 days after the
effective date of a registration statement relating to the underlying shares or
(2) various dates, the last of which is October 1, 1996. 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 can be 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.
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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
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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.
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.
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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 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.
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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 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, U.S. Drug 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 "Business of the
Company-Subsidiaries-U.S. Drug Testing, Inc." 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
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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.
Net sales from Good Ideas' wooden construction toy category for fiscal
1996 were $967,000, a decrease of $1,874,000 or 66.0% from the net sales in the
comparable period in fiscal 1995. Net sales from Good Ideas' equestrian line
of toys, consisting of horses, saddles and accessories, for fiscal 1996 were
$531,000, representing a decrease of $682,000 or 56.2% from those in the prior
year. Net sales of Good Ideas' other product lines for fiscal 1996 were
$10,000, a decrease of $542,000 or 98.2% from the prior year. The decrease was
attributable to the discontinuance of Good Ideas' line of corrugated cardboard
construction toys because of significant increases in the cost of materials.
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.
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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. See "The Merger and Related Matters-Sale of
Good Ideas."
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
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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.
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.
As indicated elsewhere in this Consent Solicitation
Statement/Prospectus (see the section "Effect of Merger" under this caption
"The Company's Management's Discussion and Analysis of Financial Condition and
Results of Operations"), 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,
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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. The
contributions to operating losses by subsidiaries, representing segments other
than alcohol testing, are detailed below.
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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
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 of $44,000 on brokerage loans and depreciation 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 operating losses 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.
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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 net sales in the comparable period 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 have large inventories of products and declining sales and
customer traffic. In addition, net sales from Good Ideas' equestrian line of
toys, consisting of horses, saddles and accessories, for fiscal 1995 were
$1,123,000, representing an increase of $198,000 or 19.5% over the sales in
fiscal 1994. This increase was attributable to the sales of a new product
introduced into the equestrian line at the end of fiscal 1994. Net sales of
Good Ideas' other product lines for fiscal 1995 were $344,000, a decrease of
$69,000 or 16.7% from the net sales in fiscal 1994. Price increases in the
cost of the corrugated cardboard resulted in price increases to Good Ideas'
customers, with a resulting decline in sales. This category was ultimately
removed from the product line at the beginning of fiscal 1996. The remaining
decrease in net sales for fiscal 1995 as compared to the net sales in fiscal
1994 was the result of sales of other products which had been introduced into
the line on an unsuccessful basis and sold at discontinued prices in order to
avoid carryover of slow-moving inventory.
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.
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Pursuant to the Management Services 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 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
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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.
GOOD IDEAS' SELECTED FINANCIAL DATA
The following table sets forth selected financial data of Good Ideas
for the three fiscal years ended March 31, 1996, 1995 and 1994, the three-month
period ended March 31, 1993, the twelve-month periods ended December 31, 1992
and 1991. This selected financial data should be read in conjunction with
"Good Ideas' Management's Discussion and Analysis of Financial Condition and
Results of Operations" and the Good Ideas Financial Statements and related
notes thereto included elsewhere in this Consent Solicitation
Statement/Prospectus.
<TABLE>
<CAPTION>
Three Months Year Ended
Year Ended March 31, Ended March 31, December 31,
-------------------------------------------------------------
STATEMENT OF OPERATIONS DATA(2): 1996 1995 1994 1993(1) 1992 1991
---- ---- ---- ------- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Net Sales $1,508 $4,606 $5,544 $ 436 $3,773 $2,295
Cost of sales 1,345 3,282 4,057 325 2,845 1,698
------- ------ ------ ------- ------ ------
Gross profit 163 1,324 1,487 111 928 597
------- ------ ------ ------- ------ ------
Operating expenses:
Selling, general and administrative 1,278 1,924 1,488 297 1,015 359
Management fees - parent 225 305 425 75 150 -
Write down of Fixed Assets and
Inventory to Net Realizable Value 258 - - - - -
Projected Cost through Sale
or Liquidation 110 - - - - -
------- ------ ------ ------- ------ ------
Total Operating Expenses 1,872 2,229 1,913 372 1,165 359
------- ------ ------ ------- ------ ------
Income (Loss) from Operations (1,708) ( 905) ( 426) ( 261) ( 237) 238
Other income (expense) 142 107 ( 156) ( 57) ( 85) -
------- ------ ------ ------- ------ ------
Net income (Loss) ($1,566) ($ 798) ($ 582) ($ 318) ($ 322) ($ 238)
======= ====== ====== ======= ====== ======
Weighted Average Common Shares
Outstanding 3,968 4,065 2,942 2,788 2,788 2,788
======= ====== ====== ======= ====== ======
Net Loss Per Common Share ($ .39) ($. 20) ($. 20) ($ .11) ($ .12) ($ .09)
======= ====== ====== ======= ====== ======
</TABLE>
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<PAGE> 147
PRO FORMA DATA(3):
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Income before pro forma provision for
income tax - - - - - $ 238
Pro forma provision for income taxes - - - - - 82
-------
Pro forma net income after pro forma provision
for income taxes - - - - - $ 156
=======
Pro forma net income per common share - - - - - $ .06
=======
<CAPTION>
As of March 31, As of March 31, As of December 31,
--------------------------------------------------------------------------
BALANCE SHEET(2): 1996 1995 1994 1993(1) 1992 1991
---- ---- ---- ------- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Cash (overdraft) and cash equivalents $ 83 $ 351 $3,608 $ 430 $ 322 ($ 48)
Working capital (deficiency) 2,175 3,572 4,114 ( 769) ( 422) 182
Note receivable - parent 2,052 1,196 - - - -
Note receivable - affiliated company - 1,027 - - - -
Total assets 2,423 3,951 5,604 1,909 1,857 340
Loan payable - parent - - 437 1,960 1,815 -
Stockholders' equity (deficit) 2,175 3,735 4,253 ( 650) ( 332) 183
</TABLE>
- ---------------------
(1) Good Ideas changed its fiscal year end date from December 31 to March
31 effective March 31, 1993.
(2) The numbers presented in this table have been rounded and,
accordingly, may not exactly reflect the numbers which appear in Good
Ideas' financial statements.
(3) Proforma Data for the year ended December 31, 1991 reflects income
taxes computed at the effective tax rate that would have been reported
had Good Ideas been subject to Federal and State income taxes as a
Subchapter C corporation during this period.
GOOD IDEAS' MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
USAT acquired an interest in Good Ideas in June 1992. For the period
from July 1992 through March 1993, USAT provided management and administrative
services to Good Ideas in exchange for a fixed monthly fee of $25,000. In
April 1993, Good Ideas and USAT entered into a formal Management Agreement
pursuant to which the fee for such services from April through September 1993
was ten percent of annual net sales. Pursuant to the Management Services
Agreement effective as of October 1, 1993, such fees are computed on the basis
of a fixed monthly charge of $25,000, plus five percent of annual gross sales
in excess of $5,000,000. On February 26, 1996, USAT suspended payment of
management fees by Good Ideas to USAT retroactive to January 1, 1996.
Because of the declining sales of Good Ideas and what management
believes to be the problems generally in the toy
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<PAGE> 148
industry (see the sections "Liquidity and Capital Resources" and "Results of
Operations, Fiscal 1996 vs Fiscal 1995" under this caption), 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 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 best
opportunity for the Company maximizing revenues and securing profitability was
by concentrating on its alcohol and drug testing and human resource provider
segments as its core businesses. Accordingly, on February 26, 1996, the USAT
Board authorized management to seek a buyer for Good Ideas. The Good Ideas
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 and eliminating the management fee,)
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 and the
Good Ideas Board each 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 December 31, 1996. The Merger would terminate USAT's obligation to
make such repayment.
LIQUIDITY AND CAPITAL RESOURCES
Prior to July 1992, Good Ideas financed its operations primarily
through borrowings under a bank line of credit and cash generated from
operations. From July 1992 through Good Ideas' initial public offering in
February 1994, Good Ideas financed its operations primarily through loans from
USAT and cash generated from operations.
As of March 31, 1996, Good Ideas' working capital was $2,165,000 as
compared to working capital of $3,572,000 as of March 31, 1995. The
outstanding loans to USAT of $2,052,000 were made with funds in excess of
amounts required for operating capital and carry interest rates in excess of
those available to Good Ideas on short-term money market investments. The
loans bear interest at the rate of eight percent and are evidenced by notes
that become due on December 31, 1996. During fiscal 1996, Good Ideas received
net loan repayments of $171,000 from USAT
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<PAGE> 149
Cash used by operations was $444,000 for fiscal 1996. The net loss
for the period was $1,566,000. Significant non-cash operating charges of
depreciation in the amount of $60,000, writedown of assets to realizable value
of $258,000 and projected costs through sale or liquidation of $110,000 reduced
the cash loss. Cash was provided through payments received on accounts
receivable of $251,000, decreases in inventories of $370,000 and prepaid
expenses of $103,000, and cash was used to pay down accounts payable and
accrued expenses by $68,000.
Cash was provided by investing activities during fiscal 1996 through
the net disposal of property and equipment in the amount of $13,000.
Cash provided from financing activities was $162,000 for fiscal 1996
and related to net repayments by USAT with respect to its loan from Good Ideas
in the amount of $171,000, offset by $9,000 in payments made on capital leases.
Management believes that many retailers are minimizing the number of
vendors which they purchase from and are reducing the number of items carried
in inventory, which has the result of squeezing out smaller companies with
limited product lines. Additionally, retailers increasingly require
manufacturers to store inventory until sale, which significantly increases
manufacturing costs. Because of the declining sales and the problems generally
in the toy industry, the USAT Board authorized on February 26, 1996, management
to seek a buyer for Good Ideas. However, the Good Ideas Board believes that,
pending receipt of an acceptable offer, as to which there can be no assurance,
Good Ideas' cash resources and expected cash flows from operations, coupled
with its cost reduction actions (such as not renewing the lease for office and
warehouse facilities and eliminating the management fee), will be sufficient to
meet Good Ideas' cash requirements for the next 12 months if such time was
required to sell or liquidate. However, there can be no assurance that
additional funds may not be required. In such event, assuming no acceptable
sale offer, the Good Ideas Board could reconsider if liquidation of Good Ideas
was preferable to seeking additional funding after Good Ideas was repaid the
indebtedness from USAT. However, the USAT Board currently intends to liquidate
Good Ideas by December 31, 1996 if no acceptable sales offer is received.
RESULTS OF OPERATIONS
FISCAL 1996 VS. FISCAL 1995
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, $1,944,000 or
62.8% 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
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<PAGE> 150
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. Net sales from Good Ideas' wooden construction toy category for
the fiscal 1996 were $967,000, a decrease of $1,874,000 or 66.0% from the net
sales in the comparable period in fiscal 1995. Net sales from Good Ideas'
equestrian line of toys, consisting of horses, saddles and accessories, for
fiscal 1996 were $531,000, representing a decrease of $682,000 or 56.2% from
those in the prior year. Net sales of Good Ideas' other product lines for
fiscal 1996 were $10,000, a decrease of $542,000 or 98.2% from the prior year.
The decrease was attributable to the discontinuance of Good Ideas' line of
corrugated cardboard construction toys because of significant increases in the
cost of materials.
Gross profit for fiscal 1996 was $163,000, or 10.8% of net sales, as
compared to $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
lower sales volumes and the reserve for obsolete inventory in the amount of
$192,000.
Selling, general and administrative expenses for fiscal 1996 decreased
to $1,279,000 from $1,924,000 in fiscal 1995, which decrease was attributable
to reductions in payroll and related costs during fiscal 1996.
Good Ideas recognized interest income from its loans to its major
shareholder, USAT, and U.S. Rubber Recycling, Inc. ("USRR"), a wholly owned
subsidiary of USAT, of $158,000 during fiscal 1996 compared to $68,000 during
fiscal 1995. Good Ideas also recognized interest income from money market
investments of $3,500 and $42,000 in fiscal 1996 and 1995, respectively.
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.
The net loss for the fiscal 1996 was $1,566,000, representing an
increase of $768,000 from the net loss of $798,000 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 writedown
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<PAGE> 151
of assets in the amount of $258,000 and projected costs through sale or
liquidation in the amount of $110,000.
As March 31, 1996, Good Ideas had net operating loss carryforwards of
approximately $3,085,000 for federal income tax purposes. Good Ideas adopted
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes," effective January 1, 1992. The adoption of this statement did not have
a material effect on Good Ideas' financial condition or results of operations.
Net operating loss carryforwards can be used to offset federal taxable income
during a 15-year period from the date of the loss. Under the Tax Reform Act of
1986, the amounts of, and the benefit from, net operating losses that can be
carried forward may be impaired or limited in certain circumstances. Events
which may offset these carryforwards include, but are not limited to, a
cumulative stock ownership change of greater than 50%, as defined, over a
three-year period.
Unless Good Ideas were to add new products to its lines, as to which
there can be no assurance or there were a stronger demand for the 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 considered plans to expand the
product line, it was reluctant to implement these plans absent a change in the
industry conditions described above. As indicated in the section "General"
under this caption "Good Ideas' Management Discussion and Analysis of Financial
Condition and Results of Operations" and "The Merger and Related Matters-Sale
of Good Ideas," on February 26, 1996, management determined to seek a buyer for
Good Ideas.
FISCAL 1995 VS. FISCAL 1994
Net sales for fiscal 1995 were $4,606,000, a decrease of $938,000 or
16.9% from the net 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 net 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. 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, net sales from
Good Ideas' equestrian line of toys for fiscal 1995 were $1,123,000,
representing an increase of $198,000, or 19.5%, over the sales in fiscal 1994.
This increase was attributable to the sales of a new product introduced into
the equestrian line at the end of fiscal 1994. Net sales of Good Ideas'
corrugated
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<PAGE> 152
cardboard construction toy category for fiscal 1995 were $344,000, a decrease
of $69,000 or 16.7% from the net sales for fiscal 1994. Price increases in the
cost of the corrugated cardboard resulted in price increases to Good Ideas'
customers, with a resulting decline in sales. This category was ultimately
removed from the product line at the beginning of fiscal 1996. The remaining
decrease in net sales for fiscal 1995 as compared to the net sales in fiscal
1994 was the result of sales of other products which had been introduced into
the line on an unsuccessful basis and sold at discounted prices in order to
avoid carryover of slow-moving inventory.
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 approximately
$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 Management Services 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 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.
During fiscal 1995, Good Ideas repaid its debt to USAT and made loans
to USAT in the amount of $1,196,000 and to USRR in the amount of $1,027,000.
Good Ideas recognized interest income of $68,000 from these loans to related
parties and also received interest income of $42,000 from money market
investments. Good Ideas incurred minimal interest expense during fiscal 1995.
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
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<PAGE> 153
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.
COMMISSION POSITION ON INDEMNIFICATION
The USAT Board of Directors has authorized indemnification of
directors and officers of USAT to the fullest extent permitted by Delaware law.
Section 145 (a) of the GCL permits a corporation to indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative (other than an action by or in the
right of the corporation), by reason of the fact that he or she is or was a
director, officer, employee or agent of the corporation, or is or was serving
at the request of the corporation as a director, officer employee or agent of
another corporation, partnership, joint venture, trust or other enterprise
against expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred in connection with such action,
suit or proceeding if he or she acted in good faith and in a manner he or she
reasonably believed to be in, or not opposed to, the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his or her conduct was unlawful.
Under Section 145(b) of the GCL, a corporation also may indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that he or
she is or was a director, officer, employee or agent of the corporation, or is
or was serving at the request of the corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise against expenses (including attorneys' fees) actually and
reasonably incurred by him or her in connection with the defense or settlement
of such action or suit if he or she acted in good faith and in a manner he or
she reasonably believed to be in, or not opposed to, the best interests of the
corporation. However, in such an action by or on behalf of a corporation, no
indemnification may be in respect of any claim, issue or matter as to which the
person is adjudged liable to the corporation unless and only to the extent that
the court determines that, despite the adjudication of liability but in view of
all the circumstances, the person is fairly and reasonably entitled to
indemnity for such expenses which the court shall deem proper.
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<PAGE> 154
In addition, under Section 145(f) of the GCL, the indemnification
provided by Section 145 shall not be deemed exclusive of any other rights to
which those seeking indemnification may be entitled under any by-law,
agreement, vote of stockholders or disinterested directors or otherwise, both
as to action in his official capacity and as to action in another capacity
while holding such office.
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of USAT pursuant to the foregoing provisions, or otherwise, USAT has been
advised that in the opinion of the Commission such indemnification is against
public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by USAT of expenses incurred or paid by a
director, officer or controlling person of USAT in the successful defense of
any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, USAT
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
LEGAL MATTERS
The validity of the securities offered hereby will be passed upon for
USAT by Gold & Wachtel, LLP, New York, New York.
Rosenman & Colin, LLP, New York, New York have passed on certain legal
matters for Good Ideas relating to the Merger and the tax consequences thereof
to the Good Ideas Minority Stockholders.
EXPERTS
The audited financial statements appearing in this Consent Solicitation
Statement/Prospectus and Registration Statement of U.S. Alcohol Testing of
America, Inc. and Good Ideas Enterprises, Inc. at March 31, 1996, and for the
year then ended, have been audited by Ernst & Young LLP, independent auditors,
and at March 31, 1995, and for each of the two years in the period ended March
31, 1995, by Wolinetz, Gottlieb & Lafazan, P.C., independent certified public
accountants, as set forth in their respective reports thereon appearing
elsewhere herein, and are included in reliance upon such reports given upon the
authority of such firms as experts in accounting and auditing.
149
<PAGE> 155
CHANGE IN ACCOUNTANTS
On November 3, 1995, USAT named Ernst & Young LLP ("E&Y") as USAT's
new independent auditors for fiscal 1996 replacing Wolinetz, Gottlieb &
Lafazan, P.C. ("Wolinetz"), which firm had served as USAT's independent
auditors since USAT's inception. The Board of Directors, which authorized the
change on November 1, 1995, indicated that, in making the replacement, the
directors were not acting because of any criticism of, or dispute with,
Wolinetz, but because they concluded that, at this stage of development for
USAT and its subsidiaries, the selection of a national firm like E&Y was in
USAT's best interests.
The reports of Wolinetz on the financial statements of USAT 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.
150
<PAGE> 156
INDEX TO FINANCIAL STATEMENTS
U.S. ALCOHOL TESTING OF AMERICA, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Item Page
- ---- ----
<S> <C> <C>
1. Report of Independent Auditors........................... F-1
2. Report of Independent Certified Public Accountants....... F-2
3. Consolidated Balance Sheets as of March 31, 1996
and 1995................................................. F-3
4. Consolidated Statements of Operations for the
Years Ended March 31, 1996, 1995 and 1994................ F-4
5. Consolidated Statements of Stockholders' Equity
for the Years Ended March 31, 1996, 1995 and 1994........ F-5
6. Consolidated Statements of Cash Flows for the
Years Ended March 31, 1996, 1995 and 1994................ F-8
7. Notes to Consolidated Financial Statements............... F-10
</TABLE>
151
<PAGE> 157
INDEX TO FINANCIAL STATEMENTS
GOOD IDEAS ENTERPRISES, INC.
<TABLE>
<CAPTION>
Item Page
- ---- ----
<S> <C> <C>
1. Report of Independent Auditors........................... F-22
2. Report of Independent Certified Public Accountants....... F-23
3. Statement of Net Assets in Liquidation as of
March 31, 1996........................................... F-24
4. Balance Sheets as of March 31, 1995...................... F-25
5. Statements of Operations for the Years Ended
March 31, 1996, 1995 and 1994............................ F-26
6. Statements of Stockholders' Equity for the Years
Ended March 31, 1996, 1995 and 1994...................... F-27
7. Statements of Cash Flows for the Years Ended
March 31, 1996, 1995 and 1994............................ F-28
8. Notes to Financial Statements............................ F-30
</TABLE>
152
<PAGE> 158
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> 159
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> 160
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> 161
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> 162
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> 163
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> 164
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> 165
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> 166
U.S. ALCOHOL TESTING OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
<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> 167
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> 168
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 may 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 adoption 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> 169
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> 170
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> 171
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> 172
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> 173
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> 174
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> 175
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> 176
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> 177
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> 178
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 of $130,000, a bonus 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
<PAGE> 179
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Good Ideas Enterprises, Inc.
We have audited the statement of net assets in liquidation of Good Ideas
Enterprises, Inc. (the "Company") as of March 31, 1996, and the related
statements of operations, stockholders' equity, and cash flows for the year
ended. These financial statements are the repsonsibility 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
each of the two years in the period ended March 31, 1995, 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 provide a reasonable basis
for our opinion.
As more fully described in Note 14 to the financial statements, on February 26,
1996, the stockholders of the Company agreed to liquidate and dispose of the
net assets of the Company and commenced the liquidation process. As a result,
the Company has changed its basis of accounting as of March 31, 1996, and for
the periods subsequent to that date, from the going-concern basis to a
liquidation basis.
In our opinion, the 1996 financial statements present fairly, in all material
respects, the net assets in liquidation of Good Ideas Enterprises, Inc. as of
March 31, 1996, and the results of its operations and its cash flows for the
year then ended, in conformity with generally accepted accounting principles
applied on the basis described in the preceding paragraph.
ERNST & YOUNG LLP
/s/ ERNST & YOUNG LLP
Riverside, California
May 20, 1996
F-22
<PAGE> 180
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors and Shareholders
Good Ideas Enterprises, Inc.
Rancho Cucamonga, California
We have audited the accompanying balance sheet of Good Ideas Enterprises, Inc.
as of March 31, 1995, and the related statements of operations, stockholders'
equity (deficit), and cash flows for each of the two years in the period ended
March 31, 1995. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all materials respects, the financial position of Good Ideas Enterprises, Inc.
as of March 31, 1995, and the results of its operations and its 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 Center New York
May 26, 1995
F-23
<PAGE> 181
GOOD IDEAS ENTERPRISES, INC.
STATEMENT OF NET ASSETS IN LIQUIDATION
MARCH 31, 1996
<TABLE>
ASSETS
<S> <C>
Cash and Cash Equivalents $ 82,701
Accounts Receivable (Net of Allowance For Bad Debts of $77,061) 61,612
Inventories 196,209
Prepaid Expenses 7,358
Note Receivable - Parent 2,052,243
Property and Equipment (Net of Accumulated Depreciation of $11,287) 15,801
Other Assets 6,808
-----------
Total Assets 2,422,732
-----------
LIABILITIES
Accounts Payable 86,830
Accrued Expenses 28,858
Capital Lease Obligations 22,519
Reserve for Sale or Liquidation Costs 110,000
-----------
Total Liabilities 248,207
-----------
Commitments and Contingencies
NET ASSETS IN LIQUIDATION (Note 1) * $ 2,174,525
===========
* Comprised of the following:
Preferred Stock, $.001 Par Value, 2,000,000
Shares Authorized, None Issued and Outstanding $ -
Common Stock, $.001 Par Value, 20,000,000 Shares
Authorized, Issued and Outstanding 3,948,680
Shares at March 31, 1996 3,949
Additional Paid-In Capital 5,768,662
Accumulated Deficit (3,598,086)
-----------
$ 2,174,525
===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-24
<PAGE> 182
GOOD IDEAS ENTERPRISES, INC.
BALANCE SHEET
MARCH 31, 1995
ASSETS
<TABLE>
<S> <C>
Current Assets:
Cash and Cash Equivalents $ 351,355
Accounts Receivable (Net of Allowance For Bad Debts of $72,486) 317,207
Inventories 763,609
Prepaid Expenses 109,957
Note Receivable - Affiliated Company 1,027,334
Note Receivable - Parent 1,195,580
-----------
Total Current Assets 3,765,042
Property and Equipment (Net of Accumulated Depreciation of $78,402)
170,597
Other Assets 15,343
Total Assets $ 3,950,982
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts Payable $ 142,222
Accrued Expenses 41,317
Current Portion of Long-Term Debt 9,098
-----------
Total Current Liabilities 192,637
Long-Term Debt - Net of Current Portion 22,529
Total Liabilities 215,166
Commitments and Contingencies
Stockholders' Equity:
Preferred Stock, $.001 Par Value, 2,000,000
Shares Authorized, None Issued and Outstanding -
Common Stock, $.001 Par Value, 20,000,000 Shares
Authorized, Issued and Outstanding 4,065,200
Shares 4,065
Additional Paid-In Capital 5,763,545
Accumulated Deficit (2,031,794)
-----------
Total Stockholders' Equity 3,735,816
Total Liabilities and Stockholders' Equity $ 3,950,982
===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-25
<PAGE> 183
GOOD IDEAS ENTERPRISES, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
MARCH 31,
-------------------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Net Sales $ 1,508,819 $ 4,606,039 $ 5,544,221
Cost of Sales 1,345,349 3,281,999 4,057,259
----------- ----------- -----------
Gross Profit 163,470 1,324,040 1,486,962
----------- ----------- -----------
Operating Expenses:
Selling, General and Administrative Expenses 1,278,633 1,924,078 1,487,811
Management Fees - Parent 225,000 305,121 425,150
Writedown of Fixed Assets and Inventory to
Net Realizable Value 258,388 -- --
Projected Costs Through Sale or Liquidation 110,000 -- --
----------- ----------- -----------
Total Operating Expenses 1,872,021 2,229,199 1,912,961
----------- ----------- -----------
Loss From Operations (1,708,551) (905,159) (425,999)
----------- ----------- -----------
Other Income (Expense):
Loss on Sale of Assets (19,930) -- --
Interest Expense - Parent -- (3,862) (163,554)
Interest Income 3,516 41,930 --
Interest Income - Parent 157,813 20,803 --
Interest Income - Affiliated Company -- 47,379 --
Other Income 860 602 7,222
----------- ----------- -----------
Total Other Income (Expense) 142,259 106,852 (156,332)
----------- ----------- -----------
Net Loss $(1,566,292) $ (798,307) $ (582,331)
=========== =========== ===========
Weighted Average Common Shares Outstanding 3,968,372 4,065,200 2,942,000
=========== =========== ===========
Net Loss Per Common Share $ (.39) $ (.20) $ (.20)
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-26
<PAGE> 184
GOOD IDEAS ENTERPRISES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED MARCH 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
ADDITIONAL CAPITAL
COMMON PAID-IN CONTRIBUTIONS ACCUMULATED
STOCK CAPITAL RECEIVABLE DEFICIT TOTAL
----------- ----------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance - April 1, 1993 $ 2,788 $ -- $ (1,788) $ (651,156) $ (650,156)
Issuance of 170,000 Shares
to Parent as Payment for
$748,682 of Debt to Parent 170 748,512 -- -- 748,682
Surrender of 157,500 Shares
as Consideration for New
Employment Agreements (158) 158 -- -- --
Sale of 1,200,000 Shares of
Common Stock in Connection
With Initial Public Offering,
Net of Offering Costs of $1,265,129 1,200 4,733,671 -- -- 4,734,871
Payment of Capital Contributions
Receivable by Parent -- -- 1,788 -- 1,788
Net Loss for the Year Ended
March 31, 1994 -- -- -- (582,331) (582,331)
----------- ----------- ----------- ----------- -----------
Balance - March 31, 1994 4,000 5,482,341 -- (1,233,487) 4,252,854
Sale of 65,200 Shares of Common
Stock in Connection With Over-
allotment Provision of Initial
Public Offering, Net of
Offering Costs of $44,731 65 281,204 -- -- 281,269
Net Loss for the Year Ended
March 31, 1995 -- -- -- (798,307) (798,307)
----------- ----------- ----------- ----------- -----------
Balance - March 31, 1995 4,065 5,763,545 -- (2,031,794) 3,735,816
Issuance of 10,000 Shares of
Common Stock to Officer for
Compensation 10 4,990 -- -- 5,000
Surrender of 126,520 Shares of
Common Stock By Former Officer
in Connection With Resignation (126) 127 -- -- 1
Net Loss for the Year Ended
March 31, 1996 -- -- -- (1,566,292) (1,566,292)
----------- ----------- ----------- ----------- -----------
Balance - March 31, 1996 $ 3,949 $ 5,768,662 $ -- ($3,598,086) $ 2,174,525
=========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-27
<PAGE> 185
GOOD IDEAS ENTERPRISES, INC.
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 $(1,566,292) $ (798,307) $ (582,331)
----------- ----------- -----------
Adjustments to Reconcile Net Loss To Net Cash Used
By Operating Activities:
Provision For Bad Debts and Allowances 4,575 27,273 45,213
Depreciation 60,137 45,038 26,146
Loss on Sale of Assets 19,930 -- --
Value of Common Stock Issued to Officer for
Services 5,000 -- --
Writedown of Fixed Assets and Inventory to
Net Realizable Value 258,388 -- --
Projected Costs Through Sale or Liquidation 110,000 -- --
Changes in Operating Assets and Liabilities:
(Increase) Decrease in Accounts Receivable 251,020 713,198 (689,676)
(Increase) Decrease in Inventories 370,400 (90,235) 248,702
(Increase) Decrease in Prepaid Expenses 102,599 (15,764) (69,623)
(Increase) Decrease in Other Assets 8,535 (5,508) (2,990)
Increase (Decrease) in Accounts Payable (55,391) (585,791) 231,118
Increase (Decrease) in Accrued Expenses (12,459) (102,101) 67,729
----------- ----------- -----------
Total Adjustments 1,122,734 (13,890) (143,381)
----------- ----------- -----------
Net Cash Used By Operating Activities (443,558) (812,197) (725,712)
----------- ----------- -----------
Cash Flow From Investing Activities:
Purchase of Property and Equipment (14,846) (54,715) (126,310)
Disposition of Property and Equipment 28,187 -- --
----------- ----------- -----------
Net Cash Provided (Used) By Investing Activities 13,341 (54,715) (126,310)
----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-28
<PAGE> 186
GOOD IDEAS ENTERPRISES, INC.
STATEMENTS OF CASH FLOWS
(CONTINUED)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED MARCH 31,
-----------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Cash Flow From Financing Activities:
Proceeds of Long-Term Debt -- 21,703 51,646
Payments of Long-Term Debt (9,108) (32,819) (8,903)
Proceeds From Sale of Common Stock Pursuant
to Initial Public Offering -- 326,000 6,000,000
Expenses of Initial Public Offering -- (44,731) (1,265,129)
Net Repayment of Loan From Parent -- (437,283) (720,282)
Repayments of Notes Payable -- -- (26,518)
Net Loans to Parent 170,671 (1,195,580) --
Loans to Affiliated Company -- (1,027,334) --
----------- ----------- -----------
Net Cash Provided (Used) by Financing Activities 161,563 (2,390,044) 4,030,814
----------- ----------- -----------
Increase (Decrease) in Cash and Cash Equivalents (268,654) (3,256,956) 3,178,792
Cash and Cash Equivalents - Beginning of year 351,355 3,608,311 429,519
----------- ----------- -----------
Cash and Cash Equivalents - End of year $ 82,701 $ 351,355 $ 3,608,311
=========== =========== ===========
Supplemental Disclosure of Cash Information:
Cash Paid for Interest $ 1,047 $ 1,999 $ 5,150
=========== =========== ===========
Income Taxes Paid $ -- $ -- $ --
=========== =========== ===========
Non-Cash Financing Activities:
Value of Common Stock Issued as Payment
of Debt to Parent $ -- $ -- $ 748,682
=========== =========== ===========
Payment of Capital Contribution Receivable
by Parent $ -- $ -- $ 1,788
=========== =========== ===========
Repayment of Debt to Parent $ -- $ -- $ 51,667
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-29
<PAGE> 187
GOOD IDEAS ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1996
NOTE 1--PLAN OF SALE OR LIQUIDATION AND BASIS OF PRESENTATION
The Board of Directors of U.S. Alcohol Testing of America, Inc.,
("USAT"), owner of 60.8% of the Common Stock of Good Ideas Enterprises, Inc.
("Good Ideas" or "the Company"), decided in its February 26, 1996 meeting to
focus on its drug and alcohol testing and human resource provider business and
to dispose of what it considered to be non core businesses, such as the Company.
The USAT directors concluded that, because of the history of losses in the
Company and what it believed to be the problems general in the toy industry, it
would be difficult to make the Company's operations profitable in a reasonable
amount of time, if ever. USAT management was authorized by its Board to seek
offers to purchase the Company. There is no assurance that an acceptable offer
will be received or as to the terms of such offer. If no acceptable offer is
received, the USAT board intends to liquidate the Company by December 31, 1996.
To facilitate this plan, in April 1996, USAT filed a Registration Statement on
Form S-4 under the Securities Act of 1933, as amended (the "Securities Act") to
register shares of USAT's common stock to be issued to the minority stockholders
of the Company upon consummation of a proposed merger of a wholly-owned
subsidiary of USAT with and into the Company. (see Note 15 - Subsequent Events)
Although there are no assurances that the minority stockholders will
approve the merger, effective March 31, 1996 the Company changed its basis of
accounting from the going concern basis to a liquidation basis. Under the
liquidation basis of accounting assets are adjusted to amounts estimated to be
realizable, liabilities are stated at anticipated settlement amounts and
estimated costs of liquidating the Company are provided to the extent reasonably
determinable. Accordingly, the Company has recorded a reserve for the estimated
costs to sell or liquidate the Company. The historical cost basis balance sheet
as of March 31, 1995 and the statements of operations, statements of
stockholders' equity and cash flows for the years ended March 31, 1996, 1995 and
1994 have been prepared using the historical cost (going concern) basis of
accounting on which the Company had previously been reporting its financial
condition and results of operations.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Business
The Company was incorporated in Texas in December 1987 and
reincorporated in Delaware in December 1993. The Company, which operates in a
single industry segment, designed, manufactures, markets and distributes a
variety of toy products for children.
The Company is a 60.8%-owned subsidiary of USAT, a publicly-owned
company (see Note 9).
Concentration of Credit Risk
The Company sells its products to a number of retailers, with one
customer Toys R Us, Inc. accounting for 51% of the fiscal 1996 sales. No
significant amounts were outstanding from this major customer at March 31, 1996.
The Company's customer base is comprised primarily of major national retailers.
The financial strength of those customers are routinely reviewed and evaluated.
The Company maintains reserves for potential credit losses, and such losses have
been within management's expectations.
Financial instruments that potentially subject the Company to
concentration of credit risk consist principally of cash and cash equivalents,
trade receivables and note receivable from USAT.
F-30
<PAGE> 188
GOOD IDEAS ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1996
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Use of Estimates
Liquidation accounting includes management's best estimates of the
amounts expected to be realized on the sale or liquidation of the Company's
business. The amounts the Company will ultimately receive could differ in the
near term from the amounts assumed in evaluating the collectibility of accounts
receivable and in arriving at the writedown of fixed assets and inventory to net
realizable value and the projected costs through sale or liquidation.
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.
Inventories
In accordance with liquidation accounting described in Note 1,
inventories at March 31, 1996 are stated at net realizable value. At March 31,
1995, inventories are stated at the lower of cost or market. Cost is determined
by the first-in, first-out method.
Property and Equipment
In accordance with liquidation accounting described in Note 1, property
and equipment is stated at net realizable value at March 31, 1996. At March 31,
1995, property and equipment were stated at cost. Depreciation is computed by
straight-line method over the estimated useful lives of the related assets which
range from 5 to 7 years. Expenditures for maintenance and repairs are charged to
expense as incurred whereas major betterments and renewals are capitalized.
Management Services Agreement
The amount of management fees charged to the Company by USAT has been
determined by the anticipated diversion of USAT resources required to provide
such services to the Company. Payments pursuant to this agreement were suspended
after December 31, 1995 by USAT.
Stock Splits and Recapitalizations
In December 1993, the Board of Directors approved the Company's
reincorporation in the State of Delaware, including an increase in the common
shares authorized from 1,000 shares, no par value, to 20,000,000 shares, $.001
par value, and 2,000,000 shares of preferred stock $.001 par value. The Board of
Directors also approved a 27,875-for-1 stock split on the new Delaware common
shares. All references to the number of shares of Common Stock and to per share
data have been adjusted to reflect the stock split on a retroactive basis.
F-31
<PAGE> 189
GOOD IDEAS ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1996
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Revenue Recognition
Sales are recorded as products are shipped. The Company provides a
reserve for returns and allowances as a percentage of recorded sales. The
Company does not make consignment sales.
Income Taxes
The Company accounts for income taxes under Statement of Financial
Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes". The
objective of the asset and liability method is to establish deferred tax assets
and liabilities 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.
Accounting for Stock Based Compensation
The Company accounts for shares of 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 Share
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.
F-32
<PAGE> 190
GOOD IDEAS ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1996
NOTE 3--CASH AND CASH EQUIVALENTS
Cash and cash equivalents are summarized as follows:
<TABLE>
<CAPTION>
March 31,
---------
1996 1995
-------- --------
<S> <C> <C>
Cash in Banks $ 77,951 $ 94,483
Money Market Funds 4,750 256,872
-------- --------
$ 82,701 $351,355
======== ========
</TABLE>
NOTE 4--INVENTORIES
Inventories are summarized as follows:
<TABLE>
<CAPTION>
March 31,
---------
1996 1995
-------- ---------
<S> <C> <C>
Finished Goods $ 74,976 $ 293,282
Work in Process 43,463 91,010
Raw Materials 274,770 379,317
-------- ---------
393,209 763,609
Less: Reserve for Writedown to Net Realizable Value 197,000 --
-------- ---------
$196,209 $ 763,609
======== =========
</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 $ -- $ 7,233
Office Equipment -- 46,567
Warehouse Equipment 27,088 176,685
Vehicle -- 18,514
-------- --------
27,088 248,999
Less: Accumulated Depreciation 11,287 78,402
-------- --------
$ 15,801 $170,597
======== ========
</TABLE>
F-33
<PAGE> 191
GOOD IDEAS ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1996
NOTE 6--NOTE RECEIVABLE - AFFILIATED COMPANY
The note receivable from affiliated company at March 31, 1995 consisted
of demand loans bearing interest at the rate of 8% per annum, due December 31,
1995 and was guaranteed by USAT, the common parent of both the Company and the
affiliate. The note was assumed by USAT on September 30, 1995 (see note 7
below).
NOTE 7 --NOTE RECEIVABLE - PARENT
The note receivable from USAT consisted of demand loans bearing
interest at the rate of 8% per annum, due June 30, 1996 and secured by USAT's
shares in the Company. The balance includes the assumption of a note receivable
from an affiliated company (see Note 6). Subsequent to March 31, 1996, the due
date of the note was extended to December 31, 1996 (see Note 15).
NOTE 8 --CAPITAL LEASE OBLIGATIONS
As of March 31, 1996 and 1995, the Company had capital lease
obligations totaling $22,519 and $31,627, respectively. The capital leases are
payable in monthly installments due from February 1988 to January 1999.
NOTE 9--STOCKHOLDERS' EQUITY
On May 7, 1992, the original two stockholders of the Company entered
into a Stock Exchange Agreement and Plan of Reorganization with a subsidiary of
USAT and an investor. This transaction made the Company a 55%-owned subsidiary
of USAT, effective June 29, 1992. In November 1993, USAT acquired 100% ownership
of the subsidiary and the subsidiary transferred all of its shares of Common
Stock to USAT pursuant to the terms of a settlement agreement between USAT and
the investor.
In December 1993, William D. Robbins and Keith Parten surrendered to
the Company for cancellation an aggregate of 157,500 shares of Common Stock as
consideration for their new employment agreements.
In December 1993, the Board of Directors approved the Company's
reincorporation in the State of Delaware, including an increase in the common
shares authorized from 1,000 shares, no par value, to 20,000,000 shares $.001
par value, and 2,000,000 shares of preferred stock, $.001 par value. The Board
of Directors also approved a 27,875-for-1 stock split on the new Delaware common
shares. All references to the number of shares of Common Stock and per share
data have been adjusted to reflect the stock split on a retroactive basis.
In December 1993, the Board of Directors approved the issuance of an
additional 170,000 shares as payment for $749,000 of indebtedness to USAT.
Concurrently therewith, capital contributions receivable were offset against
loan payable-parent.
On February 17, 1994, the Company completed an initial public offering
of its Common Stock. The Company sold 1,200,000 shares at $5.00 per share and
netted approximately $4,735,000. In connection with the offering, the
underwriters were granted for a nominal fee Common Stock Purchase Warrants
entitling the underwriters to purchase up to 120,000 shares at $7.50 per share.
As a result of the sales of these securities, USAT had its ownership reduced to
60%.
F-34
<PAGE> 192
GOOD IDEAS ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1996
NOTE 9--STOCKHOLDERS' EQUITY (CONTINUED)
In April 1994, an additional 65,200 shares of Common Stock were sold
pursuant to the initial public offering's over-allotment provision and the
Company netted approximately $281,000. As a result of the sales of these
securities, USAT had its ownership reduced to 59%.
On May 5, 1995, Keith Parten resigned as director, Chief Operating
Officer and President of the Company. Mr. Parten returned to the Company 126,520
shares of his Common Stock. Such shares were canceled by the Company. The
cancellation of these shares increased USAT ownership interest in the Company
from 59% to 60.8%.
On December 1, 1995, 10,000 shares of Common Stock were issued to an
officer for compensation.
NOTE 10--STOCK OPTION/STOCK ISSUANCE PLAN
In December 1993, the Board of Directors approved a stock option/stock
issuance plan which covers 500,000 shares of the Company's Common Stock. Both
the Discretionary Option Grant Program and the Stock Issuance Program call for
options to be granted at an exercise price not less than 85% of fair market
value of such shares on the grant date. Each option granted will have a maximum
term of ten years, subject to earlier termination following the optionee's
cessation of service with the Company. The vesting period may vary subject to
each program's terms.
In December 1993, a total of 37,000 stock options with an exercise
price of $4.40 per share were granted to five directors.
A summary of stock option activity follows:
<TABLE>
<CAPTION>
Incentive Stock Options Non-Statutory Options
------------------------ ------------------------------
Number Price Range Number Price Range
of Shares Per Share of Shares Per Share
--------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Outstanding - April 1, 1993 -- -- -- $ --
Granted -- -- 37,500 4.40
------- -------
Outstanding - March 31, 1994 -- -- 37,500 4.40
Granted -- --
-------
Outstanding - March 31, 1995 -- -- 37,500 4.40
Granted -- -- -- --
Expired -- -- (15,000) 4.40
------- -------
Outstanding - March 31, 1996 -- $ -- 22,500 $ 4.40
======= ======= ======= =======
</TABLE>
F-35
<PAGE> 193
GOOD IDEAS ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1996
NOTE 11--MAJOR CUSTOMERS AND SUPPLIERS
During the years ended March 31, 1996, 1995 and 1994, a small group of
customers accounted for the major share of the Company's net sales for such
periods. The following is a summary of customers comprising 10% or greater of
the Company's net sales:
<TABLE>
<CAPTION>
Year Ended March 31, Number of Customers Percentage of Net Sales
-------------------- -------------------- ------------------------
<S> <C> <C>
1996 One 51%
1995 Two 59% and 21%
1994 Two 57% and 10%
</TABLE>
Included in account receivable as of March 31, 1996 and 1995 are
amounts due from its major customers totaling $3,000 and $268,000, respectively.
During the year ended March 31, 1996, the Company contracted for the
manufacture of a majority of its products from three suppliers.
NOTE 12--COMMITMENTS AND CONTINGENCIES
Concentration of Credit Risk
The Company's financial instruments that are exposed to concentration
of credit risk consist of cash and cash equivalents. At times, such amounts are
in excess of the FDIC insurance limits.
The Company's customer base is comprised primarily of major national
retailers. The financial strength of those customers are routinely reviewed and
evaluated.
Employment Agreements
In December 1993, the Company entered into a new employment agreement
with one of its officers which became effective on January 1, 1994 and
terminates on December 31, 1996. The agreement provides for an aggregate annual
minimum salary of $160,000 as well as for reimbursement of related business
expenses incurred.
Effective April 1, 1994, the Company entered into a three-year
employment agreement with an executive providing for an aggregate annual minimum
salary of $55,000 as well as for reimbursement of related business expenses
incurred. The executive resigned in April, 1996 (see Note 15).
On May 12, 1995, the Company entered into a two-year employment
agreement, effective June 1, 1995, with a new Chief Operating Officer. The
agreement provides for an aggregate minimum annual salary of $110,000 as well as
reimbursement of related business expenses incurred. The executive and his
employment agreement were transferred to another subsidiary of USAT, the common
Parent, during September 1995.
F-36
<PAGE> 194
GOOD IDEAS ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1996
Management Agreement - Parent
On April 1, 1993, the Company entered into a Management Agreement with
USAT which obligates the Company to pay ten (10.0%) percent of its product sales
as consideration for administrative management services to be provided by USAT.
Prior to April 1, 1993, the Company paid management fees at the rate of $25,000
per month.
In December 1993, the Company entered into a new Management Services
Agreement with USAT. Under the terms of the revised agreement, which is
retroactive to October 1, 1993, the Company is obligated to pay a management fee
of $25,000 per month plus five (5.0%) percent of its annual gross revenue in
excess of $5,000,000. The new agreement expired on September 30, 1994, and
pursuant to the terms of the agreement, was automatically renewed for one year.
At September 30, 1995, the agreement was automatically renewed for another year.
The Board of Directors of USAT suspended the management fee retroactive to
January 1, 1996, at its February 26, 1996 meeting in view of its decision to
sell or liquidate the Company by December 31, 1996.
NOTE 13--INCOME TAXES
For income tax purposes the Company has net operating loss
carryforwards at March 31, 1996 of approximately $3,085,000, expiring from
December, 2007 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, the utilization of these loss carryforwards may be
subject to an annual limitation based on a long-term tax exempt rate.
Income tax benefit attributable to net loss differed from the amounts
computed by applying the statutory Federal Income tax rate as a result of the
following:
<TABLE>
<CAPTION>
March 31,
----------------------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Computed "Expected" Tax Benefit $ 401,000 $ 263,000 $ 204,000
Decrease in Tax Benefit Resulting from:
Net Operating Loss for which no Benefit
is Currently Available (401,000) (263,000) (204,000)
--------- --------- ---------
$ -- $ -- $ --
========== ========= =========
</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 1994
---------- -------- --------
<S> <C> <C> <C>
Net Operating Loss Carryforward $1,085,000 $684,000 $421,000
Less: Valuation Allowance Under SFAS No. 109 1,085,000 684,000 421,000
---------- -------- --------
</TABLE>
F-37
<PAGE> 195
<TABLE>
<S> <C> <C> <C>
Net Deferred Tax Assets $ -- $ -- $ --
========== ========== =========
</TABLE>
GOOD IDEAS ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1996
NOTE 14--SALE OR LIQUIDATION OF THE COMPANY
The Board of Directors of USAT, at its February 26, 1996, meeting reached a
decision to either sell or liquidate the Company.
Accordingly, the financial statements reflect a writedown of inventory and fixed
assets in the amount of approximately $258,000 to reduce the carrying values of
these assets to estimated net realizable value.
In addition, the Company in fiscal 1996 projected cost of operations through the
date of sale or liquidation totaling $110.000.
NOTE 15--SUBSEQUENT EVENTS
During April 1996, USAT filed a Registration Statement on Form S-4
under the Securities Act in an attempt, through a consent solicitation, to
acquire the common shares owned by the minority interest and thus own 100% of
the Company. There is no assurance that such solicitation will be successfully
completed.
During April 1996, an executive of the Company with an employment
contract scheduled to terminate on March 31, 1997 resigned her position and will
receive $10,000 in severance compensation.
On June 25, 1996, the Board of Directors extended the due date of the
note receivable from USAT to December 31, 1996. All other terms and conditions
of the note remain unchanged.
F-38
<PAGE> 196
Appendix A
FORM OF
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER dated as of April 12, 1996 by and among
U.S. Alcohol Testing of America, Inc., a Delaware corporation ("USAT"), Good
Ideas Acquisition Corp., a Delaware corporation ("Acquisition"), and Good Ideas
Enterprises, Inc., a Delaware corporation ("Good Ideas").
WITNESSETH:
WHEREAS, of the 3,948,680 shares of the common stock, $.001 par value
(the "Good Ideas Common Stock"), of Good Ideas outstanding as of the date
hereof, USAT is the owner of 2,400,000 shares and 1,548,680 shares (the
"Minority Good Ideas Common Stock") are owned by persons other than USAT (the
"Good Ideas Minority Stockholders");
WHEREAS, the Board of Directors of each of USAT and Acquisition have
each adopted, approved and authorized the execution and delivery of this
Agreement and Plan of Merger (the "Agreement") so as to implement the subject
merger in compliance with the provisions of Section 251 of the General
Corporation Law of the State of Delaware (the "GCL");
WHEREAS, because of the relationships of three of the four directors of
Good Ideas to USAT as current or former directors thereof and of all four
Directors of Good Ideas as stockholders of USAT, the Board of Directors of Good
Ideas has only authorized execution and delivery of the Agreement on the
condition that approval of the subject merger by Good Ideas shall only be
effected as a result of the obtaining of consents thereto from the holders of
more than 50% of the Minority Good Ideas Common Stock;
WHEREAS, the Board of Directors of Good Ideas intends to, and shall,
submit this Agreement and the subject merger to the stockholders of Good Ideas
for approval to the extent required by the applicable provision of GCL; and
WHEREAS, in connection with the subject merger and solicitation of
stockholder consent thereto, USAT shall file a Registration Statement on Form
S-4 (the "Registration Statement") pursuant to the Securities Act of 1933, as
amended (the "Securities Act"), the Registration Statement to include as Part I
thereof the prospectus and consent solicitation statement to be transmitted to
the Good Ideas Minority Stockholders (such prospectus and consent solicitation
statement, as from time to time amended and/or supplemented, hereinafter
referred to as the "Consent Solicitation Statement-Prospectus") (a) with respect
to the solicitation of
<PAGE> 197
consents from the Good Ideas Minority Stockholders to the subject merger
pursuant to Section 228 of the GCL and Section 14(a) of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), and (b) with respect to the
distribution of the shares of the USAT common stock, $.01 par value (the "USAT
Common Stock"), to the Good Ideas Minority Stockholders in exchange for their
shares of the Good Ideas Common pursuant to the terms of this Agreement and the
subject merger;
NOW THEREFORE, in consideration of the premises and the mutual
representations, warranties, covenants and agreements herein contained, the
parties hereto do hereby agree as follows:
1. THE MERGER. Subject to the terms and conditions hereinbelow set
forth, on the Effective Date (as hereinafter defined in Section 10 hereof)
Acquisition shall be merged with and into Good Ideas (the "Merger") and, in
connection therewith:
(a) except to the extent provided or permitted by applicable
law, the separate existence of Acquisition shall cease and terminate;
(b) Good Ideas, as the surviving corporation, shall continue
its corporate existence under the laws of the State of Delaware and shall
possess all of the rights, privileges, immunities, powers, franchises and
authority (both public and private) of, and be subject to all of the
restrictions, disabilities and duties of, Acquisition;
(c) all of the assets and property of Acquisition of every
kind, nature and description (real, personal and mixed and both tangible and
intangible) and every interest therein, wheresoever located, including, without
limitation, all debts or other obligations belonging or due to Acquisition, all
stock subscriptions, claims and choses in action shall be, and be deemed to be,
vested, absolutely and unconditionally, in Good Ideas (to the same extent,
degree and manner as previously vested in Acquisition); and
(d) all debts and obligations of Acquisition, all rights of
creditors of Acquisition and all liens or security interests encumbering any of
the property of Acquisition shall be vested in Good Ideas and shall remain in
full force and effect without modification or impairment and shall be, and be
deemed to be, enforceable against Good Ideas and its assets and properties with
the same full force and effect as if such debts, obligations, liens or security
interests had been originally incurred or created by Good Ideas in its own name
and for its own behalf. Without limiting the generality of the foregoing, Good
Ideas specifically assumes all continuing obligations which Good Ideas would
otherwise have to indemnify its officers and directors, to the fullest extent
2
<PAGE> 198
currently provided in Acquisition's By-Laws and/or by resolution of its Board of
Directors and pursuant to the GCL, with respect to any and all claims arising
out of actions taken or omitted by such officers and director prior to the
Effective Date.
2. INSTRUMENTS OF CONVEYANCE. Without limiting the generality of the
provisions of Section 1 hereof and/or the succession provisions of applicable
law, the officers and directors of Acquisition last in office shall (to the
extent they, or any of them, possess and/or may exercise the power to do so)
execute, deliver and/or record such deeds and/or other instruments of transfer
and/or conveyance, and take or cause to be taken, such other and further
actions, as the case may be, as shall be reasonably requested by Good Ideas or
USAT, or their legal counsel, to vest, perfect, confirm, implement the transfer
of, or establish in the name, on behalf or for the account or the benefit of
Good Ideas, title and/or possession of any or all of the assets, property,
property interests, rights, privileges, immunities, powers and franchises owned
and/or exercisable by Acquisition (or in which Acquisition had an interest
and/or the power to exercise immediately prior to the Effective Date) and which
was vested, or intended to be vested, in Good Ideas pursuant to the provisions
of this Agreement and the Merger.
3. CONSTITUTIONAL DOCUMENTS, DIRECTORS AND OFFICERS. On and as of the
Effective Date:
(a) The Certificate of Incorporation of Good Ideas on such
date in full force and effect shall be the Certificate of Incorporation of Good
Ideas, as the surviving corporation, until the same shall be altered, amended,
modified, terminated or rescinded in the manner provided by the GCL, which
rights of alteration, amendment, modification, termination and/or rescission are
hereby expressly reserved by Good Ideas;
(b) The By-Laws of Good Ideas on such date in full force and
effect shall be the By-Laws of Good Ideas, as the surviving corporation, until
the same shall be altered, amended, modified, terminated or rescinded in the
manner provided in the Certificate of Incorporation of Good Ideas and/or the
GCL, which rights of alteration, amendment, modification, termination and/or
rescission are hereby expressly reserved by Good Ideas.
(c) The members of the Board of Directors and the officers of
Good Ideas, the surviving corporation, shall consist of the persons described on
Exhibit "A" annexed hereto and made a part hereof, each of such persons to hold
such membership and/or officership as provided in the By-Laws and/or the GCL.
(d) The Certificate of Incorporation of USAT on such date in
full force and effect shall be the Certificate of
3
<PAGE> 199
Incorporation of USAT until the same shall be altered, amended, modified,
terminated or rescinded in the manner provided by the GCL, which rights of
alteration, amendment, modification, termination and/or rescission are hereby
expressly reserved by USAT.
(e) The By-Laws of USAT on such date in full force and effect
shall be the By-Laws of USAT until the same shall be altered, amended, modified,
terminated or rescinded in the manner provided in the Certificate of
Incorporation of USAT and/or the GCL, which rights of alteration, amendment,
modification, termination and/or rescission are hereby expressly reserved by
USAT.
4. CONVERSION RATES. On the Effective Date the shares of the Good Ideas
Common Stock shall be converted and exchanged into shares of the USAT Common
Stock (and options, warrants and similar rights exercisable with respect to
shares of the Good Ideas Common Stock shall become exercisable with respect to
shares of the USAT Common Stock) in the following manner:
(a) Each issued and outstanding share of the Good Ideas Common
Stock shall, by virtue of the Merger and without any action on the part of the
holder thereof, be converted and exchanged into a number of shares of the USAT
Common Stock having a value of One Dollar ($1.00) per share; provided, however,
that to the extent any holder of the Good Ideas Common Stock shall be entitled,
as a result of the foregoing conversion and exchange, to receive less than a
whole share of the USAT Common Stock, then and in any such event:
(i) no fractional share and/or fractional interest in
a whole share shall be issued and
(ii) the fractional interest of such holder shall be
liquidated for cash equivalent calculated on the basis of the closing sales
price of the USAT Common Stock on the Effective Date or on the first day
thereafter that such price is available.
The number of shares, or that portion of a share, of the USAT Common Stock that
has a value of $1.00 per share shall be determined by computing the average of
the closing sales prices per share of the USAT Common Stock as reported on the
American Stock Exchange during the 30 days prior to the record date set by the
Board of Directors of Good Ideas pursuant to Section 213 of the GCL for the
solicitation of consents pursuant to Section 228 of the GCL for the adoption of
the Merger pursuant to Section 251 of the GCL.
(b) Each outstanding warrant expiring February 16, 1999 (the
"Warrant") to purchase shares of the Good Ideas Common Stock shall, by virtue of
the Merger and without any action on the part
4
<PAGE> 200
of the holder thereof, be converted and exchanged into a warrant to purchase
shares of the Good Ideas Common Stock equal to the number of shares that the
holder would have received under Section 4(a) hereof had the warrant been
exercised immediately prior to the Effective Date. The exercise price and the
expiration date of the Warrant shall not be changed.
(c) Each option expiring December 17, 2003 (the "Option") to
purchase shares of the Good Ideas Common Stock shall be canceled on the
Effective Date.
(d) Anything in this Section 4 to the contrary
notwithstanding:
(i) Any and all issued shares of the Good Ideas
Common Stock owned by Good Ideas and held as treasury stock shall be canceled
and retired and no shares of the USAT Common Stock shall be issued with respect
thereto;
(ii) Any and all issued shares of the Good Ideas
Common Stock owned by USAT, except for ten (10) shares, shall be canceled and
retired and no shares of the USAT Common Stock shall be issued to USAT with
respect thereto;
(iii) Good Ideas shall secure from each person who
holds an Option to purchase shares of the Good Ideas Common Stock and who is a
current director of Good Ideas a waiver of the Option so that it is not assumed
by USAT or exercisable by the holder thereof;
(iv) Upon the issuance of shares of the USAT Common
Stock to the Good Ideas Minority Stockholders in exchange for their shares of
the Good Ideas Common Stock, there shall be credited to the capital account of
USAT an amount equal to the average of the closing sales prices per share of the
USAT Common Stock as determined in accordance with subsection (a) of this
Section 4 and, of the amount so credited, the portion thereof in excess of the
aggregate par value thereof shall be credited to the capital surplus account;
and
(v) Upon the issuance of shares of the USAT Common
Stock to the Good Ideas Minority Stockholders all shares of the Good Ideas
Common Stock shall be canceled except for the ten (10) shares held by USAT as
described in subsection (d)(ii) of this Section 4.
5. APPOINTMENT OF EXCHANGE AGENT. Prior to the Effective Date USAT
shall, subject to the provisions of Paragraph 8 hereof:
(a) Designate U.S. Stock Transfer Corporation (the "Exchange
Agent") to implement the exchange (subsequent to the
5
<PAGE> 201
Effective Date) of certificates representing shares of the Good Ideas Common
Stock (the "Old Certificates") for certificates representing shares of the USAT
Common Stock (the "New Certificates");
(b) engage the Exchange Agent for a period of the lesser of
(i) 12 consecutive months following the Effective Date and (ii) the date on
which all of the Old Certificates held by the Good Ideas Minority Stockholders
have been surrendered for the New Certificates; and
(c) provide to the Exchange Agent sufficient supplies of New
Certificates so as to enable a holder of an Old Certificate(s) to surrender such
Certificate(s) and receive New Certificate(s).
6. CERTIFICATE EXCHANGE. Subsequent to the Effective Date the issuance
and distribution of New Certificates in exchange for Old Certificates shall be
implemented as follows:
(a) As promptly after the Effective Date as shall be
reasonably possible, the Exchange Agent shall be directed to, and shall, notify
(the "Notification") each holder of an Old Certificate of the consummation of
the Merger, the availability of New Certificates and a description of the
procedure to be followed (and documents to be executed and submitted) in
connection with the surrender of the Old Certificate and the issuance of the New
Certificate. Upon compliance by a holder thereof with the requirements for the
certificate surrender and issuance specified in the Notification, the Exchange
Agent shall be directed to, and shall, issue and transmit to such holder New
Certificates (representing that number of shares of the USAT Common Stock to
which such holder shall be entitled as herein provided). Until surrendered and
replaced as aforesaid:
(i) each Old Certificate shall, and be deemed to,
represent and evidence (for all corporate purposes other than the payment of
dividends and other distributions) that number of shares of the USAT Common
Stock into which the shares of the Good Ideas Common Stock therein referred to
are convertible and exchangeable as herein provided and
(ii) each Old Certificate shall not be transferable
on the books and records of Good Ideas and/or USAT.
(b) From and after the Effective Date any and all dividends
and/or distributions of every kind, nature or description declared and payable
by USAT on, or with respect to, the USAT Common Stock to any holder of an Old
Certificate (collectively "Distributions") shall be paid, retained, invested and
paid over as follows:
6
<PAGE> 202
(i) Until such time as the Old Certificate is
surrendered for replacement by a New Certificate(s) as herein provided, no
Distribution shall be paid over by USAT and/or the Exchange Agent to such holder
on, or with respect to, the shares of the USAT Common Stock evidenced by such
Old Certificate;
(ii) All Distributions payable on, or with respect
to, shares of the USAT Common Stock represented by Old Certificates shall be
paid over by USAT to the Exchange Agent and dealt in and with by the Exchange
Agent as follows:
(A) All Distributions in cash shall be deposited by
the Exchange Agent in an interest bearing account (the "Distribution Account")
and retained and disposed of as hereinbelow provided;
(B) Upon surrender by, or on behalf of, a holder of
an Old Certificate for surrender and replacement as hereinabove provided (or
satisfactory proof of loss and an indemnity in favor of, and acceptable to, USAT
and the Exchange Agent), the Exchange Agent shall pay over and/or deliver to
such holder (in addition to the New Certificate(s) to which such holder shall be
entitled) (y) the principal amount of any cash dividends and any property (other
than shares of the USAT Common Stock) previously received by the Exchange Agent
with respect to the shares of the USAT Common Stock evidenced by such Old
Certificate and (z) a certificate representing any shares of the USAT Common
Stock forming part of any Distribution made prior to the date of any such
surrender;
(C) Any and all interest earned and/or credited on,
or with respect to, Distributions shall be applied by the Exchange Agent to the
payment of its fees and disbursements and the remainder, if any, paid over to
USAT upon the termination of the engagement of the Exchange Agent.
(c) From and after the Effective Date the sole rights of the
holders of Old Certificates (except as otherwise provided by law) shall be those
to which they are entitled as owners of the USAT Common Stock into which the
shares of the Good Ideas Common Stock evidenced by such Old Certificates shall
have been converted as herein provided.
7. TRANSFERS. If the holder of any Old Certificate desires that the New
Certificate to be issued in replacement therefor (as hereinabove provided) is to
be issued in a name other than that on the Old Certificate which it replaces,
any such issuance shall be subject to and conditioned upon:
(a) Delivery to the Exchange Agent of the Old Certificate duly
endorsed in blank or accompanied by a duly
7
<PAGE> 203
executed stock assignment power and otherwise in form for transfer
acceptable to the Exchange Agent and
(b) Payment to USAT or the Exchange Agent of any and all
transfer and/or other taxes payable, in the opinion of the Exchange Agent, by
reason of the issuance and/or transfer of such New Certificate and/or the shares
of the USAT Common Stock evidenced thereby.
8. TERMINATION OF EXCHANGE AGENT. Upon the termination of the Exchange
Agent's engagement as hereinabove provided, the Exchange Agent shall deliver to
USAT the then balance of the Distribution Account and, upon such delivery, the
Exchange Agent shall have no further duties or obligations as exchange agent to
USAT, Acquisition, Good Ideas or their respective stockholders. Thereafter, the
duties to be performed by the Exchange Agent as described in Sections 6 and 7
hereof shall be performed by USAT in lieu of, and instead of, the Exchange
Agent. All blank stock certificates evidencing the USAT Common Stock shall be
retained by the Exchange Agent for utilization by it in the performance of its
duties as transfer agent for, and with respect to, the USAT Common Stock.
9. THE CLOSING. The closing of the transactions contemplated by this
Agreement shall take place on such date, at such place and at such time within
five (5) business days after the satisfaction or waiver of the last of the
conditions set forth in Sections 17 and 18 hereof as shall be designated by
USAT. The closing of such transactions shall be referred to herein as the
"Closing" and the date of the Closing shall be referred to herein as the
"Closing Date"; and the Closing Date may be the same as the Effective Date.
10. THE EFFECTIVE DATE. Subject to the satisfaction and/or waiver of
the conditions herein described, the Merger shall become effective (the
"Effective Date") as at the close of business on the date specified in the
Certificate of Merger to be filed in the manner required by the GCL or, if none,
on the date of filing. Upon the receipt by Good Ideas of consents from the
holders of more than 50% of the outstanding shares of the Minority Good Ideas
Common Stock held by the Good Ideas Minority Stockholders and of a consent from
USAT to the Merger, Good Ideas and Acquisition shall cause to be filed the
Certificate of Merger in the manner required by the GCL. Subject to the
provisions of Section 19 hereof, such filing shall be made on, or as soon as
practicable after, the Closing Date; and the parties hereto shall thereafter
execute, acknowledge, deliver and/or record such other and further instruments,
documents or certificates and/or take and perform such other and further actions
as may be required to effect and/or implement the Merger. If the Merger is
consummated, USAT will take such actions as are necessary to deregister the Good
Ideas Common
8
<PAGE> 204
Stock pursuant to Section 12(b) of the Exchange Act and to delist the Good Ideas
Common Stock from the Pacific Stock Exchange.
11. THE REGISTRATION STATEMENT AND CONSENT SOLICITATION STATEMENT. In
connection with the preparation, utilization and/or distribution of the Consent
Solicitation Statement-Prospectus to be issued and distributed to the Good Ideas
Minority Stockholders in connection with the Merger and the preparation and
utilization of the Registration Statement of which the Consent Solicitation
Statement-Prospectus constitutes Part I thereof, the parties shall follow the
procedures as provided in this Section 11.
(a) The parties hereto shall cooperate in the preparation
thereof consistent with the applicable requirements of the GCL, the Securities
Act and the Exchange Act and the rules and regulations promulgated under the
Securities Act and the Exchange Act by the Securities and Exchange Commission
(the "SEC"); and, without limiting the generality of the foregoing, each of USAT
and Good Ideas shall promptly supply to the other any and all information and
material (relating to itself and/or the subject transaction) as may be requested
or required in connection with the preparation and filing of the Registration
Statement, including, without limitation, all information concerning their
respective officers, directors and principal stockholders that is reasonably
requested for inclusion in the Consent Solicitation Statement- Prospectus; and
each shall take and perform such other and further acts and actions as shall be
necessary or appropriate to cause the prompt preparation, completion, filing,
review, finalization and clearance of the Registration Statement.
(b) Subject to the Registration Statement being declared
effective by the SEC, the Consent Solicitation Statement-Prospectus and any
other communication required by the Exchange Act or the rules and regulations
promulgated thereunder or reasonably requested by USAT shall be mailed by Good
Ideas or its transfer agent to the Good Ideas Minority Stockholders as soon
after such effective date as is reasonably possible. Subsequent thereto Good
Ideas shall transmit to the Good Ideas Minority Stockholders such amended and/or
supplemental consent solicitation materials as may be necessary, in light of
subsequent developments or otherwise, to render the Consent Solicitation
Statement-Prospectus, as so amended or supplemented, not false or misleading
with respect to any material fact and so as not to omit to state any information
necessary to make the statements made, within the context made, not misleading.
Prior to the Effective Date (or earlier termination of this Agreement) neither
party hereto shall distribute any material (other than the Consent Solicitation
Statement-Prospectus as herein provided) which might constitute, or be deemed to
constitute, a "prospectus" relating to the Merger within the meaning of the
Securities Act without the prior written consent of all of the parties hereto in
each instance.
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(c) Good Ideas hereby authorizes the utilization by USAT in
the Registration Statement or in any filing with a state securities
administrator of all information concerning Good Ideas either provided to USAT
by Good Ideas in connection with or contained in the Consent Solicitation
Statement-Prospectus and/or contained in any filings heretofore made by Good
Ideas pursuant to the Securities Act and/or the Exchange Act. Good Ideas shall
promptly advise USAT if at any time any of such information or material is or
becomes incorrect, inaccurate or incomplete in any material respect and, in
connection therewith, Good Ideas shall provide USAT with such information and
material as shall be needed to correct any such inaccuracy or omission. USAT
shall promptly advise Good Ideas if at any time any of the information or
material contained in the Registration Statement and supplied by USAT is or
becomes incorrect, inaccurate or incomplete in any material respect. USAT shall
cause the preparation, review, clearance, approval and distribution of such
amended or supplemented material as shall be necessary to correct or eliminate
any such inaccuracies and/or omissions as provided in this Section 11(c).
(d) Each of USAT and Good Ideas covenants and warrants to the
other that any and all information and/or material supplied by it to the other
and/or in connection with the Registration Statement and/or the within
transactions (i) will, at the time made and at each Relevant Date (as
hereinafter defined), be true and correct in all material respects; (ii) will
comply in all material respects with the requirements of the Securities Act and
the Exchange Act and the rules and regulations promulgated thereunder by the
SEC; and (iii) will not contain any statement which, at the time made and at
each Relevant Date and in light of the circumstances under which it is made, is
false or misleading with respect to any material fact, or which omits to state
any material fact necessary in order to make the statements therein made not
false or misleading. For the purposes of this Agreement, the term "Relevant
Date" shall be and mean each of (x) the effective date of the Registration
Statement, (y) the mailing date of the Consent Solicitation Statement-Prospectus
and (z) the Effective Date. Each of USAT and Good Ideas specifically agrees to
indemnify and hold harmless the other (and their respective officers, directors,
employees, agents and representatives) from and against any and all costs,
expenses, losses, demands, claims and liabilities of every kind, nature and
description (including reasonable attorneys' fees) arising out of, or relating
to, any breach or anticipatory breach by it of its duties and obligations
pursuant to this Section 11(d).
(e) USAT does hereby agree to indemnify and hold harmless Good
Ideas and each of its directors and officers, and each person, if any, other
than USAT who controls Good Ideas within the meaning of Section 15 of the
Securities Act, from and against any and all losses, claims, damages, expenses
or liabilities, joint or several (including, without limitation, reasonable
attorneys'
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fees as herein provided), to which they or any of them may become subject under
the Securities Act, any other statute, common law or otherwise and, except as
provided below, shall reimburse Good Ideas and each such director, officer or
controlling person for any legal or other expenses reasonably incurred by them
or any of them in connection with investigating or defending any actions and/or
claims, whether or not resulting in any liability, insofar as such losses,
claims, damages, expenses, liabilities or actions result from a breach or
alleged breach of the representations and warranties contained in Sections 13 or
14 hereof or are based upon any untrue statement of alleged untrue statement of
a material fact contained in the Registration Statement or the Consent
Solicitation/Prospectus or arise out of, or are based upon, the omission or
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, but only insofar as
any such untrue statement or omission or alleged untrue statement or omission is
with respect to the description of USAT or as to the terms of its offer.
Promptly after receipt by a party to be indemnified pursuant to this Section
11(e) (the "Indemnitee") of notice of the commencement of any action in respect
of which indemnity may be sought against USAT hereunder, the Indemnitee will
promptly notify USAT in writing of the commencement thereof and USAT shall,
subject to the provisions stated below, assume the defense of the action
(including the employment of counsel, who shall be counsel reasonable
satisfactory to Good Ideas), and shall make payment of expenses (including
attorneys' fees as herein provided) insofar as such action shall relate to any
alleged liability in respect of which indemnity may be sought against USAT. The
Indemnitee or Indemnitees shall have the right to employ separate counsel in any
such action and to participate in the defense thereof, but the fees and expenses
of such separate counsel shall not be at the expense of USAT unless the
employment of such separate counsel has been specifically authorized by USAT or
there is a conflict of interest which under the canon of ethics requires the
employment of separate counsel. USAT shall not be liable to any Indemnitee for
any settlement of any action effected without USAT's consent. Notwithstanding
any provision of this Agreement to the contrary, the obligations of USAT
hereunder shall survive the consummation of the transactions contemplated by
this Agreement.
12. GOOD IDEAS REPRESENTATIONS AND WARRANTIES. In order to induce USAT
and Acquisition to execute and perform this Agreement, Good Ideas does hereby
represent, warrant, covenant and agree (which representations, warranties,
covenants and agreements shall be, and be deemed to be, continuing and survive
the execution and delivery of this Agreement, the Closing and the Effective
Date) as follows:
(a) Good Ideas is a corporation duly organized, validly
existing and in good standing under the laws of the State of
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Delaware, with full power and authority, corporate and otherwise, and with all
licenses, permits, certifications, registrations, approvals, consents and
franchises necessary to own or lease and operate its properties and to conduct
its business as presently being conducted.
(b) Subject only to the consent of its stockholders as
required by the GCL: (i) Good Ideas has the full power and authority, corporate
and otherwise, to execute, deliver and perform this Agreement and to consummate
the transactions contemplated hereby; (ii) the execution, delivery and
performance of this Agreement, the consummation by Good Ideas of the
transactions herein contemplated and the compliance by Good Ideas with the terms
of this Agreement have been duly authorized by Good Ideas; (iii) this Agreement
is the valid and binding obligation of Good Ideas, enforceable in accordance
with its terms, subject, as to enforcement of remedies, to applicable
bankruptcy, insolvency, reorganization, moratorium and other laws affecting the
rights of creditors generally and the discretion of courts in granting equitable
remedies; (iv) the execution, delivery and performance of this Agreement by Good
Ideas and the consummation by Good Ideas of the transactions herein contemplated
do not, and will not, with or without the giving of notice or the lapse of time,
or both, (A) result in any violation of the Certificate of Incorporation or
ByLaws of Good Ideas or (B) result in a breach of, or a conflict with, any of
the terms or provisions of, or constitute a default under, or result in the
modification or termination of, or result in the creation or imposition of any
lien, security interest, charge or encumbrance upon any of the properties or
assets of Good Ideas pursuant to, any indenture, mortgage, note, contract,
commitment or other agreement or instrument to which Good Ideas is a party or by
which it is, or any of its respective properties or assets are, or may be, bound
or affected.
13. USAT REPRESENTATIONS AND WARRANTIES. In order to induce Good Ideas
to execute and perform this Agreement, USAT does hereby represent, warrant,
covenant and agree (which representations, warranties, covenants and agreements
shall be, and be deemed to be, continuing and survive the execution and delivery
of this Agreement, the Closing and the Effective Date) as follows:
(a) USAT is a corporation duly organized, validly existing and
in standing under the laws of the State of Delaware, with full power and
authority, corporate and otherwise, and with all licenses, permits,
certifications, registrations, approvals, consents and franchises necessary to
own or lease and operate its properties and to conduct its business as presently
being conducted. USAT is duly qualified to do business as a foreign corporation,
and is in good standing, in all jurisdictions, if any, wherein such
qualification is necessary and where failure so to qualify would have a material
adverse effect on the business,
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properties or financial conditions of USAT. USAT has no subsidiaries other than
as set forth on Exhibit "B" annexed hereto and made a part hereof (the
"Subsidiaries"). USAT owns and has and marketable title in and to 100% of the
issued and outstanding capital stock (of all classes) of each of the
Subsidiaries, free and clear of all liens, security interests, claims and
encumbrances and rights and options of others, except as set forth on Exhibit
"B".
(b) Each of the Subsidiaries (other than Good Ideas as to
which USAT makes no representation) is a corporation duly organized, validly
existing and in good standing under the laws of the state of its incorporation,
with full power and authority, corporate and otherwise, and with all licenses,
permits, certifications, registrations, approvals, consents and franchises
necessary to own or lease and operate its properties and to conduct its business
as presently being conducted. Each such Subsidiary is duly qualified to do
business as a foreign corporation, and is in good standing, in all
jurisdictions, if any, wherein such qualification is necessary and where failure
so to qualify would have a material adverse effect on the business, properties
or finances of such Subsidiary.
(c) (i) USAT has the full power and authority, corporate and
otherwise, to execute, deliver and perform this Agreement and to consummate the
transactions contemplated hereby; (ii) the execution, delivery and performance
of this Agreement, the consummation by USAT of the transactions herein
contemplated and the compliance by USAT with the terms of this Agreement have
been duly authorized by USAT; (iii) this Agreement is the valid and binding
obligation of USAT, enforceable in accordance with its terms, subject, as to
enforcement of remedies, to applicable bankruptcy, insolvency, reorganization,
moratorium and other laws affecting the rights of creditors generally and the
discretion of courts in granting equitable remedies; (iv) the execution,
delivery and performance of this Agreement by USAT and the consummation by USAT
of the transactions herein contemplated do not, and will not, with or without
the giving of notice or the lapse of time, or both, (A) result in any violation
of the Certificate of Incorporation or By-Laws of USAT, (B) result in a breach
of, or a conflict with, any of the terms or provisions of, or constitute a
default under, or result in the modification or termination of, or result in the
creation or imposition of any lien, security interest, charge or encumbrance
upon any of the properties or assets of USAT pursuant to, any indenture,
mortgage, note, contract, commitment or other agreement or instrument to which
USAT is a party or by which it is, or any of its respective properties or assets
are, or may be, bound or affected; (C) to the best knowledge of USAT, after due
investigation, violate any existing applicable law, rule, regulation, judgment,
order or decree of any governmental agency or court, domestic or foreign, having
jurisdiction over USAT and/or
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any of the Subsidiaries (other than Good Ideas as to which USAT makes no
representation), or any of their respective properties or businesses; or (D)
have any effect on any license, permit, certification, registration, approval,
consent or other authorization necessary for USAT and/or any of the Subsidiaries
(other than Good Ideas as to which USAT makes no representation) to own or lease
and operate any of its respective properties and to conduct its businesses or
the ability of USAT and/or any of the Subsidiaries (other than Good Ideas as to
which USAT makes no representation) to make use thereof. No consent, approval,
authorization or order of any court, governmental agency, authority or body
(other than as required pursuant to the Securities Act, the Exchange Act and/or
state securities or "take over" statutes and the rules and regulations
promulgated under any of the foregoing and/or any party to an agreement to which
USAT is a party and/or by which it is bound) is required in connection with the
execution, delivery and performance of this Agreement and/or the consummation by
USAT of the transactions contemplated by this Agreement.
(d) Neither USAT nor any of the Subsidiaries (other than Good
Ideas as to which USAT makes no representation) is in violation of, or in
default under, (i) any term or provision of its Certificate of Incorporation or
By-Laws; (ii) any material term or provision of any financial covenant of any
indenture, mortgage, contract, commitment or other agreement or instrument to
which it is a party or by which it or any or its properties or business is, or
may be, bound or affected; or (iii) any existing applicable law, rule,
regulation, judgment, order or decree of any governmental agency or court,
domestic or foreign, having jurisdiction over it or any of its properties or
business, including, without limitation, all reporting obligations pursuant to
the Exchange Act and the rules and regulations promulgated thereunder. USAT and
each Subsidiary (other than Good Ideas as to which USAT makes no representation)
owns, possesses or has obtained all governmental and other licenses, permits,
certifications, registrations, approvals or consents and other authorizations
necessary to own or lease, as the case may be, and to operate its properties and
to conduct its business or operations as presently conducted and all such
governmental and other licenses, permits, certifications, registrations,
approvals, consents and other authorizations are outstanding and in good
standing and there are no proceedings pending or, to the best of its knowledge,
threatened or any basis therefor existing, seeking to cancel, terminate or limit
such licenses, permits, certifications, registrations, approvals or consents or
authorizations.
(e) Prior to the date hereof USAT has delivered to Good Ideas
the audited consolidated financial statements (the "USAT Audited Financial
Statements") and unaudited interim financial statements (the "USAT Interim
Financial Statements") described on Exhibit "C" annexed hereto and made a part
hereof (collectively the
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"USAT Financial Statements). The USAT Audited Financial Statements fairly
present the financial position of USAT and the Subsidiaries as of the respective
dates thereof and the results of operations, and the changes in financial
position of USAT and the Subsidiaries, for each of the periods covered thereby.
The USAT Audited Financial Statements have been prepared in conformity with
generally accepted accounting principles, applied on a consistent basis
throughout the entire periods involved. The USAT Unaudited Financial Statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and the instructions to Form 10-Q and Item 310
of Regulation S-K of the SEC. Accordingly, the interim financial statements may
not include all of the information and footnotes required by generally accepted
accounting principles. In the opinion of USAT's management, all adjustments
(consisting of normal recurring adjustments) considered necessary for a fair
presentation have been included. As of the date of any balance sheet forming a
part of the USAT Financial Statements and, except as and to the extent reflected
or reserved against therein, neither USAT nor any of the Subsidiaries (other
than Good Ideas as to which USAT makes no representation) had any material
liabilities, debts, obligations or claims (absolute or contingent) asserted
against it or them and/or which should have been reflected in a balance sheet or
the notes thereto; and all assets reflected thereon are properly reported and
present fairly the value of the assets therein stated in accordance with
generally accepted accounting principles.
(f) The financial and other books and records of USAT and each
of the Subsidiaries (other than Good Ideas as to which USAT makes no
representation) are in all material respects true, complete and correct and
have, at all times, been maintained in accordance with good business and
accounting practices.
(g) USAT and the Subsidiaries (other than Good Ideas as to
which USAT makes no representation) own and have good and marketable title in
and to all of their respective assets, properties and interests in properties
(both real and personal) which are reflected in the latest balance sheet
included in the USAT Financial Statements and/or are utilized in connection with
the operation of the business of USAT and such Subsidiaries as presently
constituted and/or acquired after that date (except to the extent any of the
same were disposed of since such date in the ordinary course of business), in
all cases free and clear of all liens, security interests, claims and
encumbrances of every kind, nature and description and rights and options of
others except as expressly set forth in such balance sheet.
(h) Except as is set forth on Exhibit "D" hereto, USAT and the
Subsidiaries (other than Good Ideas as to which USAT makes no representation)
own all trademarks, service marks, tradenames, copyrights, similar rights and
their registrations, trade secrets,
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methods, practices, systems, ideas, know how and confidential materials used or
proposed to be used in the conduct of their respective businesses as conducted
as of the date hereof (collectively the "Intangibles") free and clear of all
liens, security interests, claims and encumbrances and rights and options of
third parties (including, without limitation, former or current officers,
directors, stockholders, employees and agents); neither USAT nor any such
Subsidiary has licensed or leased any of the Intangibles and/or any interest
therein to any person and/or entity except a Subsidiary; neither USAT nor any
such Subsidiary has infringed, nor is infringing, upon the rights of others with
respect to the Intangibles; neither USAT nor any such Subsidiary has received
any notice of conflict with the asserted rights of others with respect to the
Intangibles which could, singly or in the aggregate, materially adversely affect
its business as currently conducted or prospects, financial condition or results
of operations and USAT knows of no basis therefor; and, to the best of the
knowledge of USAT, no others have infringed upon the Intangibles.
(i) Except as and to the extent reflected or reserved against
in the USAT Financial Statements and/or as set forth on Exhibit "E" annexed
hereto and made a part hereof, neither USAT nor any of the Subsidiaries (other
than Good Ideas as to which USAT makes no representation) had, as at the
respective date of such USAT Financial Statements, any material liabilities,
debts, obligations or claims asserted against it, whether accrued, absolute,
contingent or otherwise, and whether due or to become due, including, but not
limited to, liabilities on account of due and unpaid taxes, other governmental
charges or lawsuits.
(j) Since the date of the most recent balance sheet included
in the USAT Financial Statements, neither USAT nor any Subsidiary (other than
Good Ideas as to which USAT makes no representation) has, except as set forth on
Exhibit "F" annexed hereto and made a part hereof, (i) incurred any obligation
or liability (absolute or contingent, secured or unsecured) except obligations
and liabilities incurred in the ordinary course of the operation of its business
as carried on at and prior to such date; (ii) canceled, without payment in full,
any notes, loans or other obligations receivable or other debts or claims held
by it other than in the ordinary course of business; (iii) sold, assigned,
transferred, abandoned, mortgaged, pledged or subjected to lien or security
interest any of its material properties, tangible or intangible, or rights under
any contract, permit, license, franchise or other agreement other than sales or
other dispositions of goods or services in the ordinary course of business at
customary prices; (iv) entered into any line of business other than that
conducted by it on such date or entered into any transaction not in the ordinary
course of its business; (v) conducted any line of business in any manner except
by transactions customary in the
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operation of its business as conducted on such date; or (vi) declared, made or
paid, or set aside for payment, any cash or non-cash dividends or other
distribution on any shares of its capital stock.
(k) Except as set forth on Exhibit "G" annexed hereto and made
a part hereof, neither USAT nor any of the Subsidiaries (other than Good Ideas
as to which USAT makes no representation) is in default, in any material
respect, under the terms of any outstanding agreement which is material to the
business, operations, properties, assets or condition of USAT and/or the
Subsidiaries (other than Good Ideas as to which USAT makes no representation);
and there exists no event of default or event which, with notice and/or the
passage of time, or both, would constitute any such default.
(l) Except as reported in the USAT Financial Statements and/or
as set forth on Exhibit "H" hereto and made a part hereof, there are no claims,
actions, suits, proceedings, arbitrations, investigations or inquiries before
any court or governmental agency, court or tribunal, domestic, or foreign, or
before any private arbitration tribunal, pending or, to the best of the
knowledge of USAT, threatened against USAT and/or any Subsidiary (other than
Good Ideas as to which USAT makes no representation) or involving their
respective properties or businesses which, if determined adversely to USAT or
such Subsidiary, would, individually or in the aggregate, result in a material
adverse change in the financial position, stockholders' equity, results of
operations, properties, business, management or affairs of USAT or such
Subsidiary, or which question the validity of this Agreement or of any action
taken, or to be taken, by USAT pursuant to, or in connection with, this
Agreement; nor, to the best of the knowledge of USAT, is there any basis for any
such claim, action, suit, proceeding, arbitration, investigation or inquiry to
be made by any person and/or entity, including, without limitation, any
customer, supplier, lender, stockholder, former or current employee, agent or
landlord. There are no outstanding orders, judgments or decrees of any court,
governmental agency or other tribunal specifically naming USAT and/or any
Subsidiary (other than Good Ideas as to which USAT makes no representation)
and/or enjoining USAT and/or any such Subsidiary from taking, or requiring USAT
and/or any such Subsidiary to take, any action and/or by which USAT and/or any
such Subsidiary is, and/or their respective properties or businesses are, bound
or subject.
(m) USAT and each of the Subsidiaries (other than Good Ideas
as to which USAT makes no representation) has filed all federal, state,
municipal and local tax returns (whether relating to income, sales, franchise,
withholding, real or personal property or otherwise) required to be filed under
the laws of the United States and all applicable states and has paid in full all
taxes
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which are due pursuant to such returns or claimed to be due by any taxing
authority or otherwise due and owing. No penalties or other charges are, or will
become, due with respect to the late filing of any such return. To the best of
the knowledge of USAT, after due investigation, each such tax return heretofore
filed by USAT and each of such Subsidiaries correctly and accurately reflects
the amount of its tax liability thereunder. USAT has withheld, collected and
paid all other levies, assessments, license fees and taxes to the extent
required and, with respect to payments, to the extent that the same have become
due and payable.
(n) The authorized and outstanding capitalization of USAT is
as set forth on Exhibit "I" annexed hereto and made a part hereof; as of the
date hereof and the Closing Date, there shall not be authorized and/or issued
and outstanding any shares of capital stock of USAT and/or rights to purchase
shares of capital stock of USAT except as set forth on Exhibit "I". The issued
and outstanding shares of the USAT Common Stock and outstanding options,
warrants and other similar rights to purchase the USAT Common Stock have been
duly authorized and validly issued. All such outstanding shares of the USAT
Common Stock are fully paid and nonassessable. All such outstanding options,
warrants and similar rights to purchase the USAT Common Stock constitute the
valid and binding obligations of USAT, enforceable in accordance with their
respective terms, subject, as to enforcement of remedies, to applicable
bankruptcy, insolvency, reorganization, moratorium and other laws affecting the
rights of creditors generally and the discretion of courts in granting equitable
remedies. There are no preemptive rights. USAT has no reason to believe that any
holder of such outstanding shares of the USAT Common Stock is subject to
personal liability solely by reason of being such a holder. The offers and sales
of such outstanding shares of the USAT Common Stock and outstanding options,
warrants and similar rights to purchase the USAT Common Stock were, at all
relevant times, either registered under the applicable provisions of the
Securities Act and the applicable state securities laws or exempt from such
registration or prospectus filing requirements pursuant to an exemption for
which USAT and/or such offering or sale fully qualified, or any claim arising
out of, or relating to, any such offering and/or sale are barred by the statute
of limitations. The authorized shares of the USAT Common Stock and outstanding
options, warrants and similar rights to purchase the USAT Common Stock conform
to the description thereof contained in the current filings by USAT pursuant to
the Exchange Act. No dividends or other distributions of the assets of USAT have
been or will be declared and/or paid prior to the Closing Date on or with
respect to the USAT Common Stock.
(o) Except as is set forth on Exhibit "J" hereto, since the
date of the most recent balance sheet included in the USAT Financial Statements,
there has not been, with respect to USAT
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and/or the Subsidiaries (other than Good Ideas as to which USAT makes no
representation), except as set forth in or permitted by this Agreement, or, in
the ordinary course of business:
(i) Any change in their respective business,
operations or financial condition, or the manner of managing or conducting their
respective business and operations; none of which changes, if any, has had a
material adverse effect on such business, operations or financial condition,
taken as a whole;
(ii) Any change in their respective accounting
methods or practices (including, without limitation, any change in depreciation,
amortization and/or good will policies or rates);
(iii) Any damage, destruction or loss (whether or not
covered by insurance) materially and adversely affecting their respective
assets, business, operations or financial condition;
(iv) Any declaration, setting, or payment of a
dividend or other distribution with respect to the USAT Common Stock or any
direct or indirect redemption, purchase or other acquisition by USAT of any of
the shares of the USAT Common Stock;
(v) Any issuance or sale of any shares of their
respective capital stock of any class or any other securities, except for the
exercise of Warrants to purchase shares of the USAT Common Stock outstanding
prior to the date hereof;
(vi) Any loan by any of them to any person or entity
and/or the issuance of any guaranty by any of them for or with respect to their
own or another's obligations;
(vii) Any waiver or release of any material right or
claim;
(viii) Any sale, lease, abandonment, assignment,
transfer, license or other disposition (including any agreement and/or option
for, or with respect to, any of the foregoing) by any of them of any material
real property or tangible or intangible assets, property or rights (and/or
interest therein);
(ix) Any incurrence of any material obligation or
liability, absolute or contingent;
(x) Any payment of any material obligation or
liability, absolute or contingent, except for current liabilities reflected in,
or shown on, the USAT Financial Statements and/or incurred subsequent to the
date thereof in the ordinary course of business and/or in connection with the
transactions contemplated by this Agreement;
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(xi) Any labor problems and/or other events or
conditions of any character materially and/or adversely affecting, or which
might materially and/or adversely affect, the financial condition, business,
assets or prospects of any of them;
(xii) Any amendment, termination or modification of
any material agreement or license to which any of them is a party which has or
may have a material affect on the financial condition, business, assets or
prospects of any of them; and
(xiii) Any agreement by any of them to do or perform
any of the things described in this Section 13(o).
(p) At the Closing, all of the shares of the USAT Common Stock
to be issued by USAT pursuant to this Agreement shall be, and be deemed to be,
duly and validly authorized and, when issued to the Good Ideas Minority
Stockholders in exchange for their shares of the Good Ideas Common Stock, duly
and validly issued, fully paid and nonassessable and free and clear of all
federal and state issuance, stock and/or company taxes, liens, claims,
encumbrances and charges.
14. ACQUISITION REPRESENTATIONS AND WARRANTIES. In order to induce Good
Ideas to execute and perform this Agreement, Acquisition does hereby represent,
warrant, covenant and agree (which representations, warranties, covenants and
agreements shall be, and be deemed to be, continuing and survive the execution
and delivery of this Agreement, the Closing and the Effective Date) as follows:
(a) Acquisition is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware, with full
power and authority, corporate and otherwise, and with all licenses, permits,
certifications, registrations, approvals, consents and franchises necessary to
own or lease and operate its properties and to conduct its business as presently
being conducted. Neither prior to the date hereof has Acquisition engaged, nor
prior to the Closing Date will Acquisition engage, in any business activity of
any kind nature or description except in connection with the implementation of
the transactions herein described. Acquisition has no subsidiaries, nor, at the
present time is it, or at the Closing will it be, a partner or joint venturer
with any other person or entity.
(b) (i) Acquisition has the full power and authority,
corporate and otherwise, to execute, deliver and perform this Agreement and to
consummate the transactions contemplated hereby; (ii) the execution, delivery
and performance of this Agreement, the consummation by Acquisition of the
transactions herein contemplated and the compliance by Acquisition with the
terms of this Agreement have been duly authorized by Acquisition; (iii) this
Agreement is
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the valid and binding obligation of Acquisition, enforceable in accordance with
its terms, subject, as to enforcement of remedies, to applicable bankruptcy,
insolvency, reorganization, moratorium and other laws affecting the rights of
creditors generally and the discretion of courts in granting equitable remedies;
(iv) the execution, delivery and performance of this Agreement by Acquisition
and the consummation by Acquisition of the transactions herein contemplated do
not, and will not, with or without the giving of notice or the lapse of time, or
both, (A) result in any violation of the Certificate of Incorporation or By-Laws
of Acquisition, (B) result in a breach of, or a conflict with, any of the terms
or provisions of, or constitute a default under, or result in the modification
or termination of, or result in the creation or imposition of any lien, security
interest, charge or encumbrance upon any of the properties or assets of
Acquisition pursuant to, any indenture, mortgage, note, contract, commitment or
other agreement or instrument to which Acquisition is a party or by which it is,
or any of its respective properties or assets are, or may be, bound or affected;
or (C) to the best knowledge of Acquisition, after due investigation, violate
any existing applicable law, rule, regulation, judgment, order or decree of any
governmental agency or court, domestic or foreign, having jurisdiction over
Acquisition or its assets. No consent, approval, authorization or order of any
court, governmental agency, authority or body (other than as required pursuant
to the Securities Act, the Exchange Act and/or state securities or "take over"
statutes and/or any party to an agreement to which Acquisition is a party and/or
by which it is bound, is required in connection with the execution, delivery and
performance of this Agreement, and/or the consummation by Acquisition of the
transactions contemplated by this Agreement.
(c) Acquisition is not in violation of, or in default under,
(i) any term or provision of its Certificate of Incorporation or By-Laws; (ii)
any material term or provision of any financial covenant of any indenture,
mortgage, contract, commitment or other agreement or instrument to which it is a
party or by which it or any or its properties is, or may be, bound or affected;
or (iii) any existing applicable law, rule, regulation, judgment, order or
decree of any governmental agency or court, domestic or foreign, having
jurisdiction over it or any of its assets.
(d) Acquisition was incorporated on December 18, 1995 and its
sole asset is the $1,000 which USAT paid in subscription for 100 shares of its
authorized 1,500 shares of common stock, without par value, and it has incurred
no liabilities other than its incorporation costs. Prior to the date hereof,
Acquisition has conducted no business operations and, prior to the Effective
Date, its sole activities will be in connection with the transactions
contemplated by this Agreement.
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(e) The financial and other books and records of Acquisition
are in all material respects true, complete and correct and have, at all times,
been maintained in accordance with good business and accounting practices.
(f) Except as set forth on Exhibit "K" hereto and made a part
hereof, there are no claims, actions, suits, proceedings, arbitrations,
investigations or inquiries before any court or governmental agency, court or
tribunal, domestic, or foreign, or before any private arbitration tribunal,
pending or, to the best of the knowledge of Acquisition, threatened against
Acquisition or involving its assets which, if determined adversely to
Acquisition, would, individually or in the aggregate, result in a material
adverse change in the financial position, stockholders' equity, results of
operations, properties, business, management or affairs of Acquisition, or which
question the validity of this Agreement or of any action taken or to be taken by
Acquisition pursuant to, or in connection with, this Agreement; nor, to the best
of the knowledge of Acquisition, is there any basis for any such claim, action,
suit, proceeding, arbitration, investigation or inquiry to be made by any person
and/or entity. There are no outstanding orders, judgments or decrees of any
court, governmental agency or other tribunal specifically naming Acquisition
and/or enjoining Acquisition from taking, or requiring Acquisition to take, any
action, and/or by which Acquisition is, and/or its assets are, bound or subject.
15. GOOD IDEAS COVENANTS, Good Ideas shall, during the period
commencing on the date hereof and terminating immediately following the close of
business on the Effective Date (or earlier, upon the failure or refusal of the
Good Ideas Minority Stockholders to approve this Agreement and/or the
termination of this Agreement as herein provided):
(a) Take and perform any and all actions necessary to render
accurate, and/or maintain the accuracy of, all of the representations and
warranties of Good Ideas herein contained and/or satisfy each covenant or
condition required to be performed or satisfied by Good Ideas at or prior to the
Closing and/or to cause or permit the implementation of the Merger;
(b) Not take or perform any action which would or might cause
any representation or warranty made by Good Ideas herein to be rendered
inaccurate, in whole or in part, and/or which would prevent, inhibit or preclude
the satisfaction, in whole or in part, of any covenant required to be performed
or satisfied by Good Ideas at or prior to the Closing and/or the implementation
of the Merger;
(c) Carry on and maintain its business in substantially the
same form, style and manner as heretofore operated by it; perform, in all
material respects, all of its respective
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obligations under all material agreements, leases and documents relating to or
affecting its respective assets, properties and businesses; and use its best
efforts to preserve intact its business organization and the good will and
relationships with its suppliers, customers and others having business relations
with it.
(d) Not make, or permit to be made on its behalf, any
announcement to the public in general and/or within its industry and/or
otherwise with respect to this Agreement, the Merger and the current or future
business or operations of any party hereto without the prior written consent of
USAT or, in the case of an announcement required by applicable securities laws,
prior consultation with USAT; and
(e) Immediately advise USAT of any event, condition or
occurrence which constitutes, or may, with the passage of time and/or giving of
notice, constitute, a breach of any representation or warranty of Good Ideas
herein contained and/or which prevents, inhibits or limits or may prevent,
inhibit or limit Good Ideas from satisfying, in full and on a timely basis, any
covenant, term or condition herein contained and/or implementing this Agreement.
16. USAT COVENANTS. USAT shall, during the period commencing on the
date hereof and terminating immediately following the close of business on the
Effective Date (or earlier, upon the failure or refusal of the Good Ideas
Minority Stockholders to approve this Agreement and/or the termination of this
Agreement as herein provided):
(a) Take and perform any and all actions necessary to render
accurate, and/or maintain the accuracy of, all of the representations and
warranties of USAT herein contained and/or satisfy each covenant or condition
required to be performed or satisfied by USAT at or prior to the Closing and/or
to cause or permit the implementation of the Merger;
(b) Not take or perform any action which would or might cause
any representation or warranty made by USAT herein to be rendered inaccurate, in
whole or in part, and/or which would prevent, inhibit or preclude the
satisfaction, in whole or in part, of any covenant required to be performed or
satisfied by USAT at or prior to the Closing and/or the implementation of the
Merger;
(c) Carry on and maintain its business in substantially the
same form, style and manner as heretofore operated by it; perform, in all
material respects, all of its obligations under all material agreements, leases
and documents relating to or affecting its assets, properties and business; and
use its best efforts to preserve intact its business organization and the good
will and relationships with its suppliers, customers and others having business
relations with it;
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(d) Not make any announcement to the public in general and/or
within its industry and/or otherwise with respect to this Agreement, the Merger
and the current or future business or operations of any party hereto without the
prior written consent of Good Ideas or, in the case of an announcement required
by applicable securities laws, prior consultation with Good Ideas; and
(e) Immediately advise Good Ideas of any event, condition or
occurrence which constitutes, or may, with the passage of time and/or giving of
notice, constitute, a breach of any representation or warranty of USAT herein
contained and/or which prevents, inhibits or limits or may prevent, inhibit or
limit USAT from satisfying, in full and on a timely basis, any covenant, term or
condition herein contained and/or implementing this Agreement.
17. USAT AND ACQUISITION CONDITIONS PRECEDENT. The obligations of USAT
and Acquisition to implement this Agreement and consummate the Merger are, at
their respective elections, subject to, and conditioned upon, the satisfaction
(and/or waiver except as to Section 17(a), (b) and (h)) of each of the following
conditions:
(a) Prior to the Closing Date the holders of more than 50% of
the shares of the Good Ideas Common Stock owned by the Good Ideas Minority
Stockholders shall have adopted this Agreement by consenting to the adoption of
this Agreement pursuant to the Consent Solicitation Statement-Prospectus.
(b) The Registration Statement shall have been declared
effective by the SEC and all appropriate state securities administrators and no
"stop orders" shall have been issued and/or be in effect or a proceeding for
such purpose shall have been instituted and be pending.
(c) The representations and warranties of Good Ideas contained
in this Agreement shall be true and correct in all respects as of the Effective
Date with the same effect as if made on and as of the Effective Date and Good
Ideas shall have performed in all material respects all of its covenants and
obligations contemplated hereunder to be performed on or prior to the Effective
Date. At the Closing, USAT shall have received a certificate, executed by the
President and the Secretary of Good Ideas (effective as of the Closing and the
Effective Date) and in form reasonably acceptable to USAT, certifying as of both
the date of this Agreement and the Closing Date, the truth and accuracy of (and
the remaking of) the representations and warranties of Good Ideas herein
contained, including, without limitation, those set forth in Section 12 hereof.
(d) Prior to the Closing, there shall not have occurred any
material adverse change in the financial condition, business or operations of
Good Ideas, nor shall any event have occurred or
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condition exist which, with the passage of time or the giving of notice, may
cause or create any such adverse material change.
(e) Prior to the Closing, all corporate and other proceedings
in connection with the transactions contemplated by this Agreement and all
documents and instruments incident to such transactions shall be in form and
content reasonably satisfactory to USAT and its counsel and USAT and its counsel
shall have received all counterpart originals or certified or other copies of
such documents and instruments as they may reasonably request.
(f) No action or proceeding shall have been instituted and be
pending by any private party and/or governmental agency or authority challenging
the legality of this Agreement or the Merger and/or seeking to prevent or delay
consummation of the transactions herein contemplated, which action or proceeding
shall have resulted in an order granting preliminary or permanent injunctive
relief prohibiting consummation of this Agreement and/or the Merger and which
order shall not have been vacated as of the Closing.
(g) All statutory requirements for the valid consummation by
Good Ideas of the transactions herein described shall have been fully and timely
satisfied; all authorizations, consents and approvals of all Federal, state and
local governmental agencies and authorities required to be obtained in order to
permit consummation by Good Ideas of the transactions herein described and/or to
permit the businesses currently carried on by Good Ideas to continue unimpaired
in all material respects immediately following the Effective Date shall have
been obtained and shall be in full force and effect; and no action or proceeding
to suspend, revoke, cancel, terminate, modify or alter any of such
authorizations, consents or approvals shall be pending or threatened.
(h) Good Ideas shall have received a written opinion from
Whale Securities Co., L.P., satisfactory to USAT in form and content, regarding
the fairness, from a financial point of view, to the Good Ideas Minority
Stockholders of (i) the terms of the Merger and (ii) the agreements among USAT,
Good Ideas and Acquisition described in this Agreement.
18. GOOD IDEAS CONDITIONS PRECEDENT. The obligation of Good Ideas to
implement this Agreement and consummate the Merger is, at its election, subject
to, and conditioned upon, the satisfaction (and/or waiver except as to Section
18(a), (c) and (i)) of each of the following conditions:
(a) Prior to the Closing Date the holders of a majority of the
shares of Good Ideas Common owned by the Good Ideas Minority Stockholders shall
have adopted this Agreement by consenting to the
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adoption of this Agreement pursuant to the Consent Solicitation/Prospectus.
(b) Prior to the Closing Date USAT shall have adopted this
Agreement by filing with Good Ideas a consent to its adoption.
(c) The Registration Statement shall have been declared
effective by the SEC and all appropriate state securities administrators and no
"stop orders" shall have been issued and/or be in effect or a proceeding for
such purpose shall have been instituted and be pending.
(d) The representations and warranties of USAT and Acquisition
contained in this Agreement shall be true and correct in all material respects
as of the Effective Date with the same effect as if made on and as of the
Effective Date. At the Closing, Good Ideas shall have received a certificate,
executed by the President and the Secretary of USAT and Acquisition (effective
as of the Closing and the Effective Date) and in form and content reasonably
acceptable to Good Ideas, certifying, as to both the date of this Agreement and
the Closing Date the truth and accuracy of (and the remaking of) the
representations and warranties of USAT and Acquisition herein contained,
including, without limitation, those set forth in Sections 13 and 14 hereof.
(e) Prior to the Closing, there shall not have occurred any
material adverse change in the financial condition, business or operations of
USAT and the Subsidiaries (excluding Good Ideas) as a consolidated entity, nor
shall any event have occurred or condition exist which, with the passage of time
or the giving of notice, may cause or create any such adverse material change.
(f) Prior to the Closing, all corporate and other proceedings
in connection with the transactions contemplated by this Agreement and all
documents and instruments incident to such transactions shall be in form and
content reasonably satisfactory to Good Ideas and its counsel and Good Ideas and
its counsel shall have received all counterpart originals or certified or other
copies of such documents and instruments as they may reasonably request.
(g) No action or proceeding shall have been instituted and be
pending by any private party and/or governmental agency or authority challenging
the legality of this Agreement or the Merger and/or seeking to prevent or delay
consummation of the transactions herein contemplated, which action or proceeding
shall have resulted in an order granting preliminary or permanent injunctive
relief prohibiting consummation of this Agreement and/or the Merger and which
order shall not have been vacated as of the Closing.
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(h) All statutory requirements for the valid consummation by
USAT of the transactions herein described shall have been fully and timely
satisfied; all authorizations, consents and approvals of all Federal, state and
local governmental agencies and authorities required to be obtained in order to
permit consummation by USAT of the transactions herein described and/or to
permit the businesses currently carried on by USAT to continue unimpaired in all
material respects immediately following the Effective Date shall have been
obtained and shall be in full force and effect; and no action or proceeding to
suspend, revoke, cancel, terminate, modify or alter any of such authorizations,
consents or approvals shall be pending or threatened.
(i) Good Ideas shall have received a written opinion from
Whale Securities Co., L.P., satisfactory to Good Ideas in form and content,
regarding the fairness, from a financial point of view, to the Good Ideas
Minority Stockholders of (i) the terms of the Merger and (ii) the agreements
among USAT, Good Ideas and Acquisition described in this Agreement.
19. TERMINATION.
(a) This Agreement may be terminated and the Merger abandoned
at any time prior to the Effective Date, whether before or after submission to,
or approval by, the Good Ideas Minority Stockholders as herein provided either:
(a) by mutual agreement of the Boards of Directors of Good Ideas and USAT; or
(b) by the Board of Directors of either Good Ideas or USAT if either (i) by the
board of directors of either USAT or Good Ideas if, based upon the opinion of
its outside counsel, the board of directors determines that making a
recommendation to the Good Ideas Minority Stockholders to adopt the Merger
Agreement would reasonably cause the members of such board of directors to
breach their fiduciary duties under applicable law to their respective
stockholders or (ii) there is any statute, rule or regulation which makes
consummation of the Merger illegal or otherwise prohibited or any order, decree,
injunction or judgment enjoining USAT, Good Ideas or Acquisition from
consummating the Merger is issued by a court of competent jurisdiction and such
order, decree, injunction or judgment has become final and non-appealable. This
Agreement shall terminate if the closing shall not have taken place on or prior
to December 31, 1996.
(b) If this Agreement shall be terminated and/or the Merger
abandoned pursuant to the provisions of subsection (a) of this Section 19 hereof
(other than by reason of the default of any party hereunder), then and in that
event USAT shall bear all of the costs and its special expenses except for those
of Whale Securities Co., L.P. and of special counsel to Good Ideas and there
shall be no liability on the part of any party hereto (and/or their respective
officers, directors, agents and employees) to any other
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party hereto (and/or their respective officers, directors, agents and
employees).
20. COSTS AND EXPENSES. USAT shall pay all costs and expenses relating
to the transactions contemplated by this Agreement, including, without
limitation, the costs and expenses relating to the preparation of this Agreement
and the Registration Statement, such as attorneys' fees, accounting fees,
printing expenses and consent solicitation expenses, except that Good Ideas will
pay all costs and expenses of Whale Securities Co., L.P. and of its special
counsel.
21. NOTICES. Any and all notices, requests or instructions desired to
be given by any party hereto to any other party hereto shall be in writing and
shall be either be hand delivered or mailed to the recipient first class,
postage prepaid, certified, return receipt requested at the following respective
addresses:
To: Good Ideas Enterprises, Inc.
10410 Trademark Street
Rancho Cucamonga, California 91730
Attn: President
With a copy to:
Rosenman & Colin, LLP
575 Madison Avenue
New York, New York 10022
Attn: Edward H. Cohen, Esq.
To: USAT or Acquisition
10410 Trademark Street
Rancho Cucamonga, California 91730
Attn: Chief Executive Officer
With a copy to:
Gold & Wachtel, LLP
110 East 59th Street
New York, New York 10022
Attn: Robert W. Berend, Esq.
or to such other address as any party hereto shall designate in a writing
complying with the provisions of this Section 21.
22. WAIVER. Each of the parties hereto may, by written instrument, (a)
extend the time for the performance of any of the obligations or other acts of
any party hereto; (b) waive any inaccuracies of such other party in the
representations and
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warranties contained herein or in any document delivered pursuant to this
Agreement; (c) waive compliance with any of the covenants of such other party
contained in this Agreement; (d) waive such other party's performance of any of
such party's obligations set out in this Agreement; and (e) waive any condition
to its obligation to effect the Merger. Anything in this Section 22 to the
contrary notwithstanding, no party hereto may waive the requirement that the
holders of a majority of the shares of the Good Ideas Common owned by the Good
Ideas Minority Stockholders must consent to the adoption of this Agreement and
the Merger.
23. AMENDMENTS. This Agreement may be amended at any time prior to the
Effective Date (whether before or after the consent of stockholders of Good
Ideas as herein provided) by a writing executed by the respective Presidents of
USAT, Good Ideas and Acquisition (upon due authorization by their respective
Boards of Directors); provided, however, that after the satisfaction of the
condition set forth in Sections 17(a) and 18(a) in no event may the amount or
the form of the consideration to be received by the holders of the Good Ideas
Minority Stockholders be changed without the approval of the Good Ideas Minority
Stockholders.
24. GOVERNING LAW. This Agreement shall be governed by, and construed
in accordance with, the laws of the State of Delaware applicable to contracts
executed and to be fully performed therein and without regard to principles of
conflicts of laws.
25. EFFECTIVENESS. This Agreement shall inure to the benefit of, and be
binding upon, the parties hereto and any controlling person of any party hereof
as provided in Section 15 of the Securities Act and their respective successors,
transferees, heirs, assigns and beneficiaries.
26. COUNTERPARTS. This Agreement may be executed in multiple copies,
each of which shall constitute an original, but all of which shall constitute
one and the same agreement.
27. PARTIAL INVALIDITY. If any term, covenant or condition in this
Agreement, or the application thereof to any person or circumstance, shall be
invalid or unenforceable, the remainder of this Agreement or the application of
such term, covenant or condition to persons or circumstances, other than those
as to which it is held invalid, shall be unaffected thereby and each term,
covenant or condition of this Agreement shall be enforced to fullest extent
permitted by law.
28. INTEGRATION. This Agreement (including the Exhibits hereto, the
documents and instruments delivered by the parties hereto and any other
documents executed and delivered and/or to be executed and delivered pursuant to
the provisions of this Agreement as herein provided) sets forth the entire
agreement among the
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parties hereto with respect to the subject matter herein contained. There are no
covenants, promises, agreements, conditions or understandings, either oral or
written, between or among the parties hereto with respect to the subject matter
hereof except as herein and in such ancillary documents provided. This Agreement
can only be altered, amended, modified, terminated or rescinded by a writing
executed by the party to be charged.
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement and
Plan of Merger as of the date first above written.
ATTEST: U.S. ALCOHOL TESTING OF
AMERICA, INC.
By:
- ---------------------------------- ----------------------------------
Secretary
GOOD IDEAS ACQUISITION CORP.
By:
- ---------------------------------- ----------------------------------
Secretary
GOOD IDEAS ENTERPRISES, INC.
By:
- ---------------------------------- ----------------------------------
Secretary
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DRAFT APPENDIX B
August __, 1996
The Board of Directors
Good Ideas Enterprises, Inc.
10410 Trademark Street
Rancho Cucamonga, CA 91730
Members of the Board:
You have requested our opinion as investment bankers as to the fairness to
the minority stockholders of Good Ideas Enterprises, Inc. ("Good Ideas"), from
a financial point of view, of the exchange ratio to be offered to the minority
stockholders of Good Ideas under the Agreement and Plan of Merger dated as of
April 12, 1996 (the "Merger Agreement") among Good Ideas, U.S. Alcohol Testing
of America, Inc. ("USAT") and Good Ideas Acquisition Corp., a wholly owned
subsidiary of USAT ("Acquisition Corp."), pursuant to which Acquisition Corp.
will be merged with and into Good Ideas (the "Proposed Merger"). As more
specifically set forth in the Merger Agreement, holders of the 1,548,680 issued
and outstanding shares of Good Ideas' common stock, par value $.001 per share,
not owned by USAT (the "Minority Good Ideas Drug Common Stock"), will receive
___ of a share (the "Exchange Ratio") of USAT's common stock, par value $.01
per share (the "USAT Common Stock"), for each share of the Minority U.S. Drug
Common Stock. The holders of the Minority Good Ideas Common Stock will thus
receive an aggregate of _____________ shares of the USAT Common Stock, subject
to adjustment for fractional shares. Cash will be paid in the Proposed Merger
in lieu of fractional shares of the USAT Common Stock. The terms and
conditions of the Proposed Merger are more fully set forth in the Merger
Agreement.
In arriving at our opinion, we have reviewed and considered, among other
things: (i) the Merger Agreement; (ii) Good Ideas' and USAT's Annual Reports on
Form 10-K for the three fiscal years ended March 31, 1996, 1995 and 1994 and
Quarterly Reports on Form 10-Q for the quarterly periods ended June 30, 1995,
September 30, 1995 and December 31, 1995; (iii) certain information, including
financial forecasts, relating to the businesses, earnings and prospects of U.S.
Drug and USAT, furnished to us by senior management; (iv) the historical market
prices and trading activity for U.S. Drug and USAT shares; and (v) publicly
available information concerning certain other companies and transactions we
considered relevant to our analysis. In addition, we have held discussions
with the managements of Good
<PAGE> 228
Ideas and USAT for the purpose of reviewing the historical and current
operations of such companies and the business prospects for each.
In conducting our analysis and in arriving at our opinion, we have, with
your consent, relied upon and assumed the accuracy and completeness of the
financial and other information that was publicly available or provided to us
and we have not undertaken to independently verify the same. We have not
prepared or obtained any independent evaluation or appraisal of Good Ideas' or
USAT's assets or liabilities. We have assumed and relied upon the senior
management of Good Ideas and USAT as to the reasonableness and achievability of
the financial and operating forecasts furnished by management (and the
assumptions and bases therefor). Our opinion is necessarily based on economic,
market and other conditions as in effect on, and the information made available
to us as of, the date hereof. We have been retained by the Board of Directors
of Good Ideas to act as financial advisor to Good Ideas only with respect to
this fairness opinion. We have not in the past three years previously acted on
behalf of Good Ideas or USAT. We are currently separately engaged to render a
fairness opinion to the Board of Directors of U.S. Drug Testing, Inc. ("U.S.
Drug"), an affiliate of Good Ideas and USAT, for which we will receive a
customary fee. In addition, in the ordinary course of our securities business,
we may actively trade equity securities of Good Ideas and/or USAT and/or U.S.
Drug for our own account and the accounts of customers, and we, therefore, may
from time to time hold a long or short position in such securities. Our
opinion is directed to the Board of Directors of Good Ideas and does not
constitute a recommendation to any stockholder of Good Ideas as to how such a
stockholder should consent on any matter submitted for Good Ideas stockholder
consent in connection with the Proposed Merger.
On the basis of and subject to the foregoing, as of the date hereof, we
are of the opinion that the Exchange Ratio in the Proposed Merger is fair to
the minority stockholders of Good Ideas from a financial point of view.
Very truly yours,
Whale Securities Co., L.P.
<PAGE> 229
<TABLE>
<S> <C>
====================================================== ======================================================
No person has been authorized to give any information
or to make any representations in connection with
this offering other than those contained in this
Consent Solicitation Statement/Prospectus and, if
given or made, such information or representations U.S. ALCOHOL TESTING OF
must not be relied upon as having been authorized AMERICA, INC.
by USAT or Good Ideas. This Prospectus does not
constitute an offer to sell or a solicitation of an
offer to buy the securities offered hereby to any
person in any state or other jurisdiction in which
such offer or solicitation would be unlawful.
Neither the delivery of this Prospectus nor any sale
made hereunder shall, under any circumstances, create
any implication that the information contained herein
is correct as of any time subsequent to the date
hereof.
_____________________
TABLE OF CONTENTS
<CAPTION>
Page
----
<S> <C> <C>
Available Information....................... 2
Summary..................................... 3 CONSENT SOLICITATION
Summary Historical and Proforma STATEMENT/
Combined Financial Data................... 17 PROSPECTUS
Risk Factors................................ 23 TO
Terms of the Transaction.................... 33 MINORITY STOCKHOLDERS
The Merger and Related Matters.............. 38 OF
Material Contacts of USAT with Good Ideas... 71 GOOD IDEAS ENTERPRISES, INC.
Business of the Company..................... 74
Business of Good Ideas...................... 93
USAT Principal Stockholders................. 101
--------------------
Good Ideas Principal Stockholders........... 105
USAT Market Information..................... 107
Good Ideas Market Information............... 108
USAT Management............................. 110
Good Ideas Management....................... 119
The Company's Selected Financial Data....... 123
The Company's Management's Discussion
of Financial Condition and Results of
Operations................................ 125
Good Ideas' Selected Financial Data......... 141
Good Ideas' Management's Discussion of
Financial Condition and Results of
Operations................................ 142
Commission Position on Indemnification...... 148
Legal Matters............................... 149
Experts..................................... 149
Change in Accountants....................... 150 _________________, 1996
Index to The Company's Financial
Statements................................ 151
Index to Good Ideas Financial
Statements................................ 152
Appendix A - The Merger Agreement...........
Appendix B - Opinion of Whale
Securities Co., L.P.......................
====================================================== ======================================================
</TABLE>
<PAGE> 230
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Board of Directors of U.S. Alcohol Testing of America, Inc. (the
"Registrant" or "USAT") has authorized indemnification of directors and
officers of the Registrant to the fullest extent permitted by Delaware law.
Section 145(a) of the General Corporation Law of Delaware (the "GCL")
permits a corporation to indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of the corporation), by reason of the
fact that he or she is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred in connection with such action, suit or proceeding if he or she acted
in good faith and in a manner he or she reasonably believed to be in, or not
opposed to, the best interests of the corporation, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe his or her
conduct was unlawful.
Under Section 145(b) of the GCL, a corporation also may indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that he or
she is or was a director, officer, employee or agent of the corporation, or is
or was serving at the request of the corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise against expenses (including attorneys' fees) actually and
reasonably incurred by him or her in connection with the defense or settlement
of such action or suit if he or she acted in good faith and in a manner he or
she reasonably believed to be in, or not opposed to, the best interests of the
corporation. However, in such an action by or on behalf of a corporation, no
indemnification may be in respect of any claim, issue or matter as to which the
person is adjudged liable to the corporation unless and only to the extent that
the court determines that, despite the adjudication of liability but in view of
all the circumstances, the person is fairly and reasonably entitled to
indemnity for such expenses which the court shall deem proper.
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<PAGE> 231
In addition, under Section 145(f) of the GCL, the indemnification
provided by Section 145 shall not be deemed exclusive of any other rights to
which those seeking indemnification may be entitled under any by-law,
agreement, vote of stockholders or disinterested directors or otherwise, both
as to action in his official capacity and as to action in another capacity
while holding such office.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
All of the following exhibits designated with a footnote reference are
incorporated herein by reference to a prior registration statement filed under
the Securities Act of 1933, as amended (the "Securities Act"), or a periodic
report filed by USAT pursuant to Section 13 of the Securities Exchange Act of
1934, as amended. An exhibit marked with an asterisk is filed with this
Amendment No. 1 to this Registration Statement. If no footnote reference or
marking with an asterisk is made, the exhibit was previously filed with this
Registration Statement.
<TABLE>
<CAPTION>
Number Exhibits
- ------ --------
<S> <C>
2(a) Copy of Exchange of Stock Agreement and Plan of Reorganization dated May 7, 1992 between Good Ideas
Enterprises, Inc., a Texas corporation ("Good Ideas Texas"), U.S. Alcohol & Drug Testing International
N.V. and David Brooks. (1)
2(b) Copy of Agreement and Plan of Merger dated as of April 12, 1996 by and among USAT, Good Ideas
Acquisition Corp. and Good Ideas Enterprises, Inc., a Delaware corporation ("Good Ideas"). (Reference
is made to Appendix A to Part I of this Registration Statement.)
2(c) Copy 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 Testing, Inc. ("U.S. Drug"). (2)
2(d) Copy of the Certificate of Merger of Good Ideas Texas with and into Good Ideas as filed on December 17,
1992.(1)
3(a) Copy of Certificate of Incorporation of USAT as filed in Delaware on April 15, 1987. (3)
3(a)(1) Copy of Amendment to the Certificate of Incorporation as filed in Delaware on July 10, 1989. (3)
</TABLE>
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<PAGE> 232
<TABLE>
<CAPTION>
Number Exhibits
- ------ --------
<S> <C>
3(a)(2) Copy of Amendment to the Certificate of Incorporation as filed in Delaware on September 25, 1989. (3)
3(a)(3) Copy of Amendment to the Certificate of Incorporation as filed in Delaware on October 5, 1990. (3)
3(a)(4) Copy of Amendment to the Certificate of Incorporation as filed in Delaware on December 26, 1990. (4)
3(a)(5) Copy of Amendment to the Certificate of Incorporation as filed in Delaware on November 1, 1991. (4)
3(a)(6) Copy of Amendment to the Certificate of Incorporation as filed in Delaware on May 20, 1992. (5)
3(b) Copy of By-Laws of USAT. (3)
4(a) Specimen of Common Stock certificate of USAT. (3)
4(b) Specimen of Class "A" Cumulative and Convertible Preferred Stock certificate of USAT. (3)
4(c) Specimen of Class "B" Non-Voting Preferred Stock certificate of USAT. (6)
4(d)* Form of Common Stock purchase warrant expiring February 16, 1999 of USAT to be issued in lieu of the
Common Stock purchase warrant of Good Ideas filed as Exhibit 10(aa)(1) hereto.
5(a) Opinion of Gold & Wachtel, LLP.
8* Opinion of Rosenman & Colin, LLP.
10(a) Form of the Company's Indemnification Agreement with Officers and Directors. (3)
10(b) Copy of Employment Agreement dated December 13, 1993 between USAT and James C. Witham. (6)
10(c) Copy of Employment Agreement dated December 13, 1993 between USAT and Karen B. Laustsen. (6)
10(d) Copy of Employment Agreement dated December 13, 1993 between USAT and Gary S. Wolff. (6)
</TABLE>
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<PAGE> 233
<TABLE>
<CAPTION>
Number Exhibits
- ------ --------
<S> <C>
10(e) Copy of Employment Agreement dated December 13, 1993 between USAT and Michael J. Witham. (6)
10(f) Copy of Employment Agreement dated March 1, 1993 between Douglas G. Allen, USAT and U.S. Drug. (2)
10(g) Copy of Employment Agreement dated as of December 15, 1993 between William D. Robbins and Good Ideas.
(1)
10(h) Copy of License Agreement dated January 24, 1992 by and between the United States Department of the
Navy and USAT. (Confidential Treatment Requested for Exhibit.) (7)
10(h)(1) Copy of Amendment dated March 15, 1994 to License Agreement filed as Exhibit 10(h) hereto. (2)
10(h)(2) Copy of Amendment dated June 16, 1995 to License Agreement filed as Exhibit 10(h) hereto. (2)
10(h)(3) Copy of Letter dated May 15, 1995 from the USN to USAT. (2)
10(i) Copy of Assignment dated as of January 1, 1993 between USAT and U.S. Drug of the Licensing Agreement
filed as Exhibit 10(h) hereto. (7)
10(i)(1) Copy of Amended Sublicense Agreement dated September 23, 1993 superseding the Assignment filed as
Exhibit 10(i) hereto. (2)
10(i)(2) Copy of Approval dated September 24, 1993 by Department of the Navy of Amended Sublicense Agreement
filed as Exhibit 10(i) hereto. (2)
10(j) 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. (7)
10(j)(1) Copy of Assignment of CRDA Agreement dated as of January 1, 1993 by and between U.S. Drug and USAT. (7)
10(k) Copy of Management Agreement dated April 1, 1993 by and between U.S. Drug and USAT. (7)
</TABLE>
II-4
<PAGE> 234
<TABLE>
<CAPTION>
Number Exhibits
- ------ --------
<S> <C>
10(k)(1) Copy of Amendment dated July 20, 1993 to Management Services Agreement filed as Exhibit 10(k) hereto.
(7)
10(l) Copy of Management Services Agreement dated December 29, 1993 by and between Good Ideas and USAT. (1)
10(m) Copy of Equipment, Licensing, Servicing and Maintenance Agreement dated as of December 13, 1994 by and
between USAT and METPATH, Inc. (6)
10(n) Copy of Equipment, Licensing, Servicing and Maintenance Agreement dated as of December 22, 1994 by and
between USAT and National Health Laboratories Incorporated. (6)
10(o) Copy of Lease dated March 18, 1991 by and between Rancho Cucamonga Business Park as landlord and USAT
as tenant. (6)
10(o)(1) Copy of Lease Modification Agreement to Lease filed as Exhibit 10(o) hereto. (6)
10(o)(2) Sub-Lease Agreement dated as of January 1, 1993 by and between USAT as sublandlord and U.S. Drug as
subtenant. (7)
10(p) Copy of Lease dated December 9, 1992 by and between Melvin E. Evans as landlord and Good Ideas as
tenant. (1)
10(q) 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. (6)
10(r) Copy of Asset Purchase Agreement dated June 20, 1988 between Luckey Laboratories, Inc. and USAT. (3)
10(r)(1) Copy of Consulting and Royalty Agreement dated June 20, 1988 between Manley Luckey and USAT. (3)
10(r)(2) Copy of Amendment dated August 1990 to Consulting and Royalty Agreement filed as Exhibit 10(r)(1)
hereto. (3)
</TABLE>
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<PAGE> 235
<TABLE>
<CAPTION>
Number Exhibits
- ------ --------
<S> <C>
10(s) Copy of Investment Banking Agreement dated July 1, 1991, as revised October 1, 1991, between Jeffrey
Brooks Securities, Inc. and USAT. (3)
10(t) Copy of Asset Purchase Agreement dated November 2, 1992 by and between Adflo International, Inc. and
USAT. (8)
10(u) Copy of Stock Purchase Agreement dated March 30, 1995 between Alconet, Inc., Dakotanet, L.L.C. and
USAT. (9)
10(v) Form of Warrant Agreement dated December 17, 1990 between J. Gregory & Company Inc. and USAT. (3)
10(v)(1) Form of Underwriter's Warrant expiring December 17, 1997 of USAT. (3)
10(w) Form of Common Stock purchase warrant expiring October 31, 1996 of USAT. (5)
10(x) Form of Common Stock purchase warrant. (4)
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, April 17, 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(x)
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(y) Restricted Stock, Non-Qualified Option and Incentive Stock Option Plan of USAT. (3)
</TABLE>
II-6
<PAGE> 236
<TABLE>
<CAPTION>
Number Exhibit
- ------ -------
<S> <C>
10(y)(1) Form of Stock Option expiring August 1, 2004 issued pursuant to Exhibit 10(y) hereto. (6)
10(z) Form of Common Stock purchase warrant expiring December 17, 1999. (10)
10(aa) Form of Warrant Agreement by and between Good Ideas and Baraban Securities, Incorporated. (1)
10(aa)(1) Form of Common Stock purchase warrant expiring February 16, 1999 of Good Ideas. (1)
10(bb) Good Ideas 1993 Stock Option Plan. (1)
10(bb)(1) Form of Stock Option expiring December 17, 2003 of Good Ideas. (1)
10(cc) Copy of Agreement made as of December 14, 1995 by and between USAT, ProActive Synergies, Inc., Robert
Stutman & Associates, Inc. and Robert Stutman. (10)
10(dd) Copy of Asset Purchase Agreement dated April 30, 1996 by and among USRR, USAT and Reclamation Resources
Inc. (11)
10(ee) Copy of Stock Purchase Agreement dated as of May 21, 996 by and among USAT, Robert Stutman, Brian
Stutman, Sandra DeBow, Michael Rochelle and Kimberly Rochelle. (11)
10(ee)(1) Form of Secured Promissory Note dated May 21, 1996 is Exhibit A to Exhibit 10(ee) hereto.
10(ee)(2) Form of Security Agreement dated May 21, 1996 by and among USAT, Robert Stutman and Brian Stutman is
Exhibit C to Exhibit 10(ee) hereto.
10(ee)(3) Form of USAT Warrant expiring May 20, 1999 is Exhibit B to Exhibit 10(ee) hereto.
10(ee)(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 Sandra DeBow is Exhibit D to Exhibit 10(ee) hereto.
10(ff) Copy of Severance Agreement dated May 21, 1996 by and between USAT and Robert Stutman. (11)
</TABLE>
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<PAGE> 237
<TABLE>
<CAPTION>
Number Exhibits
- ------ --------
<S> <C>
10(gg) Copy of Severance Agreement dated May 21, 1996 by and between USAT and Brian Stutman. (11)
10(hh)* Copy of Severance Agreement dated June 27, 1996 by and between USAT and Linda H. Masterson.
10(ii)* Copy of Sublease dated as of June 20, 1996 by and between Lifecare Investments, Inc. ("Lifecare"),
Sublessor, and USAT, Sublessee.
10(ii)(2)* Copy of Wingate Commons Business Park Net Lease dated September 27, 1991 by and between Reynolds Metals
Development Company, Landlord, and Lifecare, Tenant.
10(ii)(3)* Copy of First Addendum to the Lease filed as Exhibit 10(ii)(2) hereto.
10(ii)(4)* Copy of Second Addendum to the Lease filed as Exhibit 10(ii)(2) hereto.
10(jj) Copy of the Certificate of Incorporation of Good Ideas as filed in Delaware on June 5, 1992. (1)
10(jj)(1) Copy of Restated Certificate of Incorporation of Good Ideas as filed in Delaware on February 3, 1994.
(1)
10(jj)(2) Copy of By-Laws of Good Ideas. (1)
10(kk) Copy of Employment Agreement dated as of June 1, 1995 between Richard Snyder and Good Ideas. (12)
10(ll) Copy of Employment Agreement dated as of December 15, 1993 between William Rodish and Good Ideas. (1)
10(mm) Copy of Employment Agreement dated April 1, 1994 between Jody Harding and Good Ideas. (13)
10(nn) Copy of Demand Promissory Note dated March 31, 1995 executed by USAT in favor of Good Ideas. (12)
10(nn)(1) Copy of Demand Promissory Note dated March 31, 1995 executed by USRR in favor of Good Ideas. (12)
10(oo) Copy of Certificate of Incorporation of U.S. Drug as filed in Delaware on October 8, 1999. (7)
</TABLE>
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<PAGE> 238
<TABLE>
<CAPTION>
Number Exhibits
- ------ --------
<S> <C>
10(oo)(1) Copy of Amendment to the Certificate of Incorporation of U.S. Drug as filed in Delaware on October 13,
1992. (7)
10(oo)(2) Copy of By-Laws of U.S. Drug. (7)
16(a) Letter dated November 16, 1995 from Wolinetz, Gottlieb & Lafazan, P.C. to the Securities and Exchange
Commission. (14)
21 Subsidiaries of USAT. (6)
23(a) Consent of Wolinetz, Gottlieb & Lafazan, P.C.
23(b) Consent of Gold & Wachtel, LLP is included on their opinion filed as Exhibit 5 hereto.
23(c) Consent of Rosenman & Colin, LLP is included in their opinion filed as Exhibit 8 hereto.
23(d) Consent of Ernst & Young LLP.
- ------------------
</TABLE>
1. Filed as an exhibit to Good Ideas' Registration Statement on Form S-1,
File No. 33-73494, 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 this
reference.
3. Filed as an exhibit to USAT's Registration Statement on Form S-18,
File No. 33-29718, and incorporated herein by this reference.
4. Filed as an exhibit to USAT's Registration Statement on Form S-1, File
No. 33-43337, and incorporated herein by this reference.
5. Filed as an exhibit to USAT's Registration Statement on Form S-1, File
No. 33-47855, and incorporated herein by this reference.
6. 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.
II-9
<PAGE> 239
7. 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.
8. Filed as an exhibit to USAT's Current Report on Form 8-K filed on
November 2, 1992 and incorporated herein by this reference.
9. Filed as an exhibit to USAT's Current Report on Form 8-K dated April
12, 1995 and incorporated herein by this reference.
10. Filed as an exhibit to USAT's Registration Statement on Form S-8 filed
on March 5, 1996 and incorporated herein by this reference.
11. Filed as an exhibit to USAT's Current Report on Form 8-K filed on June
5, 1996 and incorporated herein by this reference.
12. Filed as an exhibit to Good Ideas' Annual Report on Form 10-K for the
fiscal year ended March 31, 1995 and incorporated herein by this
reference.
13. 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 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.
(b) 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
the notes thereto.
(c) ITEM 4(b) INFORMATION
The opinion of Whale Securities, Inc. is furnished as Appendix B to
the Consent Solicitation Statement- Prospectus which is Part I of this
Registration Statement.
II-10
<PAGE> 240
ITEM 22. UNDERTAKINGS.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement;
(i) To include any prospectus required by Section
10(a)(3) of the Securities Act;
(ii) To reflect in the prospectus any facts or events
arising after the effective date of the Registration Statement (or the most
recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth in the
Registration Statement;
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the Registration Statement or
any material change to such information in the Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendments shall be deemed to be a new
Registration Statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of this offering.
The undersigned Registrant hereby undertakes as follows: that prior to
any public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this Registration Statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
issuer undertakes that such reoffering prospectus will contain the information
called for by the applicable registration form with respect to reofferings by
persons who may be deemed underwriters, in addition to the information called
for by the other items of the applicable form.
The Registrant undertakes that every prospectus: (i) that is filed
pursuant to the paragraph immediately preceding, or (ii) that purports to meet
the requirements of Section 10(a)(3) of the Securities Act and is used in
connection with an offering of securities subject to Rule 415, will be filed as
a part of an amendment to the Registration Statement and will not be used until
such amendment is effective, and that, for purposes of
II-11
<PAGE> 241
determining any liability under the Securities Act, each such post-effective
amendment shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes to respond to requests
for information that is incorporated by reference into the prospectus pursuant
to Item 4, 10(b), 11, or 13 of this form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through
the date of responding to the request.
The undersigned Registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the Registration Statement when it became effective.
II-12
<PAGE> 242
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this amendment to a 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 July , 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
amendment to a registration statement has been signed by the following persons
in the capacities indicated on July , 1996.
Signature Title
- --------- -----
/s/ Robert Stutman Principal Executive Officer
- ---------------------------- and Director
Robert Stutman
/s/ Joseph Bradley Acting Principal Financial and
- ---------------------------- Accounting Officer
Joseph Bradley
Director
- ----------------------------
Alan I. Goldman
Director
- ----------------------------
John C. Lawn
Director
- ----------------------------
Peter M. Mark
/s/ Linda H. Masterson Director
- ----------------------------
Linda H. Masterson
/s/ Lee S. Rosen Director
- ----------------------------
Lee S. Rosen
II-13
<PAGE> 243
EXHIBIT INDEX
U.S. ALCOHOL TESTING OF AMERICA, INC.
AMENDMENT NO. 1 TO FORM S-4
REGISTRATION STATEMENT ON FORM S-4
EXHIBITS FILED WITH AMENDMENT NO. 1
TO FORM S-4 REGISTRATION STATEMENT
<TABLE>
<CAPTION>
Number Exhibit Page Number
- ------ ------- -----------
<S> <C> <C>
2(b) Copy of Agreement and Plan of Merger Appendix A
Appendix A dated as of April 12, 1996
by and among U.S. Alcohol Testing of
America, Inc. ("USAT"), Good Ideas
Acquisition Corp. and Good Ideas
Enterprises, Inc., a Delaware corporation
("Good Ideas").
8 Opinion of Rosenman & Colin, LLP.
10(hh) Copy of Severance Agreement dated
June 27, 1996 between USAT and Linda
H. Masterson.
10(ii) Copy of Sublease dated as of June 20,
1996 by and between Lifecare
Investments, Inc. ("Lifecare"),
Sublessor, and USAT, Sublessee.
10(ii)(2) Copy of Wingate Commons Business
Park Net Lease dated September 27,
1991 by and between Reynold Metals
Development Company, Landlord, and
Lifecare, Tenant.
10(ii)(3) Copy of First Addendum to the Lease
Filed as Exhibit 10(ii)(2) hereto.
10(ii)(4) Copy of Second Addendum to the Lease
filed as Exhibit 10(ii)(2) hereto.
23(a) Consent of Wolinetz, Gottlieb &
Lafazan, P.C.
23(d) Consent of Ernst & Young LLP.
</TABLE>
<PAGE> 1
[LETTERHEAD OF ROSENMAN & COLIN LLP]
July 31, 1996
Board of Directors
Good Ideas Enterprises, Inc.
Rancho Cucamonga, CA 91730
Gentlemen:
You have requested our opinion as to the principal federal income tax effects to
the minority stockholders of Good Ideas Enterprises, Inc. ("GIE") upon
consummation of the proposed merger of a wholly-owned subsidiary of U.S. Alcohol
Testing of America, Inc. ("USAT") with and into GIE (the "Merger") as more fully
described in the combined Consent Solicitation Statement/Prospectus (the
"Prospectus") filed with the Securities and Exchange Commission on April 18,
1996 relating to the Merger, and as to certain other matters. All capitalized
terms used and not defined herein shall have the meanings ascribed to them in
the Prospectus.
In connection with your request, we have reviewed the following documents: (a)
the Agreement and Plan of Merger (the "Merger Agreement") dated April 12, 1996
by an among GIE, USAT and Good Ideas Acquisition Corp. ("Acquisition Corp."), a
wholly-owned subsidiary of USAT; (b) the Prospectus and the exhibits filed
therewith; and (c) such other documents as we have deemed necessary or
appropriate to review in rendering this opinion.
In connection with our rendering of this opinion, USAT has represented to us
that:
(1) GIE and USAT are corporations formed and validly existing under
the laws of the State of Delaware.
(2) USAT formed Acquisition Corp. as a wholly-owned subsidiary under
the laws of the State of Delaware to effectuate the Merger.
(3) USAT currently owns, and will own immediately prior to the time
the Merger
<PAGE> 2
Board of Directors
July 31, 1996
Page 2
is consummated, 60.8 percent of the stock of GIE.
(4) The Merger will be accomplished in the form of a reverse
triangular merger, i.e., Acquisition Corp. will merge with and
into GIE, with the stockholders of GIE exchanging their stock in
GIE for stock in USAT; immediately after the Merger, USAT will own
100% of the stock of GIE, and the GIE stockholders will own a
minority of the stock of USAT.
(5) USAT intends, as soon as practicable after the Merger, to sell
its 100% interest in GIE to an unrelated third party buyer. If no
such buyer can be found, USAT has determined that it will be
necessary to promptly discontinue all business operations of GIE
and liquidate GIE. USAT will not continue GIE's existing business
as a subsidiary of USAT directly or use GIE's business assets in
any new business.
Discussion
The Merger will not meet the statutory requirements of a tax free reorganization
within the meaning of Sections 368(a)(1)(A) and 368(a)(2)(E) of the Internal
Revenue Code of 1986, as amended (the "Code"). This is because, immediately
prior to the Merger, USAT already owns more than 20% of GIE's stock and,
consequently, cannot acquire 80% or more of GIE's stock through the Merger as is
required by Section 368(a)(2)(E) of the Code. Furthermore, in order for a
reorganization to qualify under any subdivision of Section 368(a)(1) of the
Code, Treasury Regulations require that there must be a continuity of the
business of the acquired enterprise. In order for there to be such continuity of
business, the transferee in a corporate reorganization (in this case, USAT) must
either (1) continue the transferor's historic business or (2) use a significant
portion of the transferor's historic business assets in a business. In the
instant transaction, USAT has represented, and the Prospectus so indicates, that
USAT will either sell or liquidate the business of GIE as soon as possible after
the Merger is consummated. Therefore, because USAT will not continue GIE's
historic assets in a business conducted as a subsidiary of USAT or otherwise
after the transaction, there will not be the requisite continuity of the
business enterprise. Finally, because the GIE stockholders will not be in
control (as defined in Section 368(c) of the Code) of USAT after the transfer of
their stock, Section 351 of the Code will not be applicable so as to preclude
the recognition of gain or loss in the transaction.
Conclusion
<PAGE> 3
Board of Directors
July 31, 1996
Page 3
On the basis of our review of the aforementioned documents, the representations
set forth above and on the basis of federal income tax law as currently in
effect, including the Code, existing judicial decisions and administrative
regulations, rulings, procedures and practice, it is our opinion that the Merger
will be treated as a taxable transaction, with the following consequences: (a)
gain or loss, as the case may be, will be recognized by the GIE minority
stockholders upon the receipt of USAT stock to the extent the fair market value
of the USAT stock received in the Merger is greater than or less than any such
stockholder's tax basis in its GIE stock transferred as part of the Merger; (b)
the tax basis of USAT stock in the hands of the GIE minority stockholders will
be the fair market value of such stock on the date received; and (c) the holding
period for federal income tax purposes of the USAT stock received by the GIE
minority stockholders will commence on the date of receipt.
In addition, we have reviewed the discussion under the heading "Income Tax
Consequences" in the Prospectus. In our opinion, such discussion is accurate as
of the date hereof in all material respects insofar as it relates to the federal
income tax aspects of the Merger as they affect GIE or the GIE minority
stockholders. We have not, however, independently verified any of the financial
statements or assumptions set forth in the Prospectus, and, accordingly, our
opinion is qualified to that extent.
We hereby consent to the use of this opinion as an exhibit to the Prospectus and
to the use of our name under the heading "Income Tax Consequences".
Very truly yours,
ROSENMAN & COLIN LLP
By: /s/ ROSENMAN & COLIN LLP
------------------------
ELV:sep
<PAGE> 1
SEVERANCE AGREEMENT
This Agreement ("Agreement") date June 27, 1996 by and between U.S. Alcohol
Testing of America, Inc., a Delaware Corporation (the "Company") and Linda H.
Masterson (the "Executive").
WITNESSETH
WHEREAS, since May 13, 1996, the Executive has been employed on an at-will
basis by the Company and effective as of the date hereof is employed by the
Company on an at-will basis as its President and Chief Operating Officer.
WHEREAS, a condition subsequent to the Executive accepting the Company's offer
of employment was that the Company and the executive enter into this Severance
Agreement which provides for the Executive's right to severance pay upon her
termination as an employee of the Company without cause, and
WHEREAS, the compensation to be paid to the Executive by the Company for the
services to be performed is as follows:
(i) a base salary of One Hundred Seventy Five Thousand
($175,000) Dollars per annum (the "Base Salary");
(ii) grant to her (a) a stock option to purchase 600,000
shares of the Corporation's Common Stock, $.01 par value (the "Common Stock"),
at $3.125 per share pursuant to an employee stock option plan (the "Option
Plan") to be adopted by the Board of Directors of the Corporation or (b) a
Common Stock purchase warrant to purchase 600,000 share of the Common Stock
also at $3.125 per share if the Option Plan is not adopted, provided that (I)
the option or warrant shall become exercisable as follows: (A) as to 50,000
shares upon the commencement of her employment, (B) as to 100,000 shares on the
first anniversary of such commencement of employment, (C) as to 150,000 shares
on the second anniversary of such commencement of employment, (D) as to 150,000
shares on the third anniversary of such commencement of employment, and (E) as
to 150,000 shares on the fourth anniversary of such commencement of employment,
(ii) the option, if granted, shall expire in accordance with the terms of the
Option Plan and (iii) the warrant, if granted, shall expire as to a specified
number of shares of the Common Stock four years from the respective date on
which the warrant becomes exercisable as to such shares. In the advent of the
acquisition, sale or relocation of the Company, or the elimination of the
position of President/COO, in Rancho Cucamonga, all stock option shares or
warrants will immediately be 100% vested and Registered within 60 days.
(iii) grant to her a bonus for the fiscal year ending March
31, 1997
<PAGE> 2
("fiscal 1997") in the form of a stock option pursuant to the Option Plan, or
a warrant if no Option Plan is adopted, to purchase (a) 33,000 shares of the
Common Stock if the Corporation and its subsidiaries operate without a net loss
for fiscal 1997 and (b) an additional 50,000 shares of the Common Stock if the
Corporation and its subsidiaries have net income of at least $.06 per share of
the Common Stock for fiscal 1997, the exercise price of the option or warrant
to be the closing sales price in the date of grant which shall be the date on
which the results of the operations for fiscal 1997 are reported and the
expiration date of which option or warrant shall be as set forth in the Option
Plan if an option and four years from the date of grant if a warrant.
(iv) bonuses in respect to subsequent fiscal years shall
be determined by the Company's Board of Directors or Compensation Committee.
NOW, THEREFORE, in consideration of the promises of the mutual
agreements contained herein, the Company and the Executive hereby agree as
follows:
1. COMPANY'S AND EXECUTIVE'S RIGHT TO TERMINATE. The Company may
terminate the Executive's employment at any time, subject to providing the
benefits hereinafter specified in the accordance with the terms hereof. The
Executive may terminate her employment at any time.
2. TERMINATION OF EMPLOYMENT. The termination of the Executive
as an employee of the Company for Disability or Cause shall be on the
following terms and conditions:
(i) Disability. Termination by the Company of the
Executive's employment based on "Disability" shall mean termination (a) because
of the Executive's inability to perform her duties with the Company on a full
time basis for four consecutive months or 180 days out of any twelve-month
period, as a result of the Executive's incapacity due to physical or mental
illness; or (b) as a result of the Executive being certified incompetent by a
court of competent jurisdiction and which appeals from such certification have
expired.
(ii) Cause. Termination by the Company of the Executive's
employment for "Cause" shall mean termination because of: (a) the Executive's
conviction of a felony; (b) any action by the Executive involving dishonesty,
fraud or gross or willful misconduct in connection with her employment with the
Company; (c) the Executive's gross negligence in the performance or her duties
and obligations hereunder or habitual neglect of her duties; (d) the
Executive's substance abuse, including, without limitation, chronic alcoholism
or drug addiction; (e) the Executive's intentional refusal or failure to
perform her duties as an employee of the Company, including, without
limitation, the intentional disregard of a lawful directive by the Board of
Directors of the Company or any committee thereof; (f) intentional conduct on
the part of the Executive which is knowingly detrimental to the best
<PAGE> 3
interests of the Company; or (g) the Executive's failure to perform her duties
in a competent manner.
(iii) Notice of Termination. Any purported termination by
the Company pursuant to Section (i) or (ii) above or for any other reason
shall be communicated by written Notice of Termination to the Executive from
the Chief Executive Officer at the direction of the Board of Directors of the
Company. For the purposes of this Agreement, a "Notice of Termination" shall
mean a notice such shall indicate that it is without cause or the specific
termination provision in the Agreement relied upon and shall set forth in
reasonable detail the facts and circumstances claimed to provide a basis for
termination of the Executive's employment under the provision so indicated.
(iv) Date of Termination. "Date of Termination" shall
mean (a) if the Executive's employment is terminated for Disability, the date
specified in the Notice of Termination, (b) if the Executive's employment is
terminated for Cause, the date specified in the Notice of Termination, (c) if
the Executive's employment is terminated for death, the date of death, (d) if
the Executive's employment is terminated, without cause, the date on which a
Notice of Termination is given and (e) if the Executive's voluntary resigns
his employment, the effective date if such resignation.
3. CERTAIN BENEFITS UPON TERMINATION.
(i) If the Executive's employment is terminated by the
Company other than for Cause, Disability or death, then the Executive shall be
entitled to the benefits provided below:
(a) the Company shall pay the Executive her full
Base Salary through the Date of Termination at the rate in effect at the time
the Notice of Termination is given plus credit for any vacation earned but
not taken and the amount, if any, of any bonuses for a past fiscal year which
has not yet been awarded or paid to the executive.
(b) in lieu of any further salary, bonuses or
benefits payments to the Executive for periods subsequent to the Date of
Termination, the Company shall pay as severance pay to the Executive on the
30th day following the Date of Termination a lump sum amount to equal one years
Base Salary that would have been paid to the Executive had she not been
terminated during the period commencing on the Date of Termination and ending
on May 13, 1999;
(c) the Company shall maintain in full force and
effect, for the earlier of A) one calendar year or B) the Executive's
commencement of full time employment with a new employer, her automobile
allowance and all life insurance, medical, health and accident, and disability
plans, programs or arrangements in which the Executive was entitled to
participate immediately prior to the Date of
<PAGE> 4
Termination, provided that the Executive's continued participation is possible
under the general terms and provisions of such plans and programs. In the
event that the Executive's participation in any such plan or program is barred,
the Company shall arrange to provide the Executive with benefits substantially
similar to those which the Executive was entitled to receive under such plans
and programs;
(ii) If the Executive's employment is terminated for
Disability under Section 2(i)(b) the Executive shall be entitled to the
benefits provided below:
(a) the Company shall pay the Executive his full
Base Salary through the Date of Termination at the rate in effect at that time
the Notice of Termination is given plus credit for any vacation earned but not
taken and the amount, if any, of any bonus for a past fiscal year which has not
yet been awarded or paid to the Executive.
(b) in lieu of any further salary, bonuses or
benefits payments to the Executive for periods subsequent to the Date of
Termination, the Company shall pay as severance pay to the Executive on the
30th day following the Date of Termination a lump sum amount equal to the
annual Base Salary that would have been paid tot he Executive had he not been
terminated during the period commencing on the Date of Termination and ending
on the earlier of four months after the Date of Termination or May 13, 1999;
(c) the Company shall maintain in full force and
effect, the Executive's continued benefit for one year. Her automobile
allowance and all life insurance, medical, health and accident, and disability
plans, programs or arrangements in which the Executive was entitled to
participate immediately prior to the Date of Termination, provided that the
Executive's continued participation is possible under the general terms and
provisions of such plans and programs. In the event that the Executive's
participation in any such plan or program is barred, the Company shall arrange
to provide the Executive with benefits substantially similar to those which the
Executive was entitled to receive under such plans and programs;
(iii) If the Executive's employment is terminated for
Cause, Disability under Section 2(i)(a) or death, the Executive shall be paid
her full Base Salary through the Date of Termination at the rate in effect at
the time the Notice of Termination is given plus credit for any vacation earned
but not taken and the amount, if any, of any bonus for a past fiscal year which
has not yet been awarded or paid to the Executive.
4. TERM OF AGREEMENT. This Agreement shall terminate May 13, 1999.
5. SUCCESSORS; BINDING AGREEMENT. This Agreement shall be binding
upon and shall inquire to the benefit of the respective successors, assigns,
legal representatives and heirs of the parties hereto.
<PAGE> 5
6. NOTICE. Any and all notices or other communications or delivered
required or permitted to be given or made shall be in writing and delivered
personally, or sent by certified or registered mail, return receipt requested
and postage prepaid, or sent by overnight courier service as follows:
If to the Company, at:
U.S. Alcohol Testing of America, Inc.
10410 Trademark Street
Rancho Cucamonga, California 91730
Attention: President
With a copy to:
Gold & Wachtel, LLP
110 East 59th Street
New York, NY 10022
Attention: Robert Berend, Esq.
If to the Executive, at:
Linda H. Masterson
4321 N. Studebaker Road
Placerville, CA 95664
or at such other address as any party may specify by notice given to such other
party in accordance with this Section 6. The date of giving of any such notice
shall be the date of hand delivery, two days after the date of the posting of
the mail or the date when deposited with the overnight courier.
7. WAIVER. No provisions of this Agreement may be modified, waived
or discharged unless such waiver, modification or discharge is agreed to in
writing signed by the Executive and such officer as may be specifically
designated by the Board of Directors of the Company. No waiver by either party
hereto at any time of any breach by the other party hereto of, or compliance
with, any condition or provision of this Agreement to be performed by such
other party shall be deemed a waiver of similar or dissimilar provisions or
conditions at the sale or at any prior or subsequent time.
8. ENTIRE AGREEMENT. No agreements or representations, oral or
otherwise, express or implied, with respect to the subject matter hereof have
been made by either party which are not expressly set forth in this Agreement.
9. VALIDITY. The invalidity or unenforceability of any provision of
this Agreement shall not affect the Validity or enforceability of any other
provisions of
<PAGE> 6
this Agreement, which shall remain in full force and effect.
10. COUNTERPARTS. This Agreement may be executed in or one or more
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument.
11. GOVERNING LAW. This Agreement shall be construed (both as to
validity and performance) and enforced in accordance with, and governed by, the
laws of the State of California applicable to contracts to be performed
entirely within that State, without giving effect to the principles of
conflicts of law. Any suit or proceeding arising out of this Agreement shall
be brought only in a federal or state court located in the County of San
Bernardino, State of California; provided, however, that neither party waives
its right to request removal of such action or proceeding from the state court
to a federal court in such jurisdiction. The parties hereto each waive any
claim that such jurisdiction is not a convenient forum for any such suit or
proceeding and the defense of lack of personal jurisdiction.
IN WITNESS WHEREOF, this Agreement has been executed on June 27, 1996.
U.S. ALCOHOL TESTING OF AMERICA, INC.
By:
-----------------------------------
Robert M. Stutman
Chairman, and Chief Executive Officer
-----------------------------------
Linda H. Masterson
<PAGE> 1
SUBLEASE AGREEMENT
This Sublease is made as of the 20th day of June, 1996, by and between
LIFECARE INVESTMENTS, INC., a Delaware corporation ("Sublessor") and U.S.
ALCOHOL TESTING OF AMERICA, INC., a Delaware corporation ("Sublessee").
RECITALS AND REPRESENTATIONS
A. Sublessor is a Tenant under that certain lease agreement dated
September 27, 1991 by and between Reynolds Metals Development Company, a
Delaware corporation ("Landlord") and Sublessor as Tenant. The lease agreement
and existing rules and regulations, if any, are attached hereto and made a part
hereof as Exhibit A and referred to as the "Lease".
B. Sublessor represents and warrants to Sublessee that Exhibit A
is a true and complete copy of the Lease, as amended, and that the Lease is in
full force and effect; that Sublessor is not now in default under the Lease;
and that to the best of its knowledge no act has been committed by either
Landlord or Tenant which with the passage of time could lead to a lease
default.
C. The Lease covers the space depicted on Exhibit B attached
hereto and made a part hereof being a total of 8,484 +- square feet located at
4517 N.W. 31st Avenue, Fort Lauderdale, FL 33309.
D. That Sublessor desires to sublease and Sublessee desires to
take the premises covered by the Lease which is hereinafter referred to as the
Subleased Premises."
AGREEMENTS
IN CONSIDERATION OF the mutual promises contained herein, and other
valuable consideration the receipt and sufficiency of which are hereby
acknowledged, the parties agree as follows with the intention of being legally
bound hereby:
1. Sublease. Sublessor hereby demises and leases unto Sublessee
the Subleased Premises together with all its rights and easements as described
in the Lease for a term commencing August 1, 1996 and ending November 30, 2001.
Upon sublease execution Sublessee may occupy the Subleased Premises at no cost
from August 1, 1996 through December 1, 1996 (the "Rent Free Period"). If the
Sublessor's Improvements described in Section 6 below are not completed by
December 1, 1996, the Rent Free Period shall be automatically extended to
January 1, 1997. Sublessor further assigns to Sublessee any rights to continue
as Tenant under the Lease from and after November 30, 2001, exercisable in the
absence of uncured monetary default under the Sublease by Sublessee.
Revised 6/19/96 -1- _______
Initial
<PAGE> 2
2. Lease. Except as herein specifically provided, this Sublease
is subject to and Sublessee agrees to assume all of the terms and conditions of
the Lease and the terms of this Sublease, including such incorporated terms,
shall constitute all of the terms and conditions of this Sublease. In the
event of any conflict between the terms of this Sublease and the terms of the
Lease, the Sublease shall be deemed to be controlling. Sublessor shall have,
as against Sublessee, all of the rights granted or reserved in the Lease to the
Landlord thereunder; Sublessee shall have, as against Sublessor, all of the
rights granted or reserved in the Lease to the Tenant thereunder.
3. Rental. Except as otherwise provided above, throughout the
term of this Sublease, Sublessee agrees to pay to Landlord as its rental
obligations for the Subleased Premises those sums identified in the Lease as
Monthly Rent, Adjusted Monthly Rent, Common Area Maintenance Charges, Tenant's
Share of Real Property Tax, sales or use taxes or excise taxes imposed or
levied against the rent by any governmental authority having jurisdiction
thereof all as described in and to the extent required by the Lease. Sublessor
represents that such amounts, which are itemized on the attached Exhibit "C"
currently total $10,793.20 excluding sales taxes but including real estate
taxes for the month of June, 1996, and that no additional amounts are owed to
Landlord under the Lease. All payments shall be made in advance without
deduction or setoff to Reynolds Metals Development Company, 45O1 N.W. 31st
Avenue, Fort Lauderdale, Florida 33309, or as otherwise directed by Reynolds
Metals Development Company or successor.
4. Condition Of The Subleased Premises. Sublessee, except as
described elsewhere herein, agrees to accept the Subleased Premises in "as is"
condition, unfurnished and without telephone system. Sublessor hereby
warrants, represents and certifies that the nonstructural portions of the
Premises and every part thereof for which the Tenant is responsible pursuant to
the first sentence of Section 6.1(a) of the Lease are, and will be when the
Sublessee takes possession of the Premises, in good order, condition and
repair.
5. Facilities. All building services and parking shall be
provided by the Landlord under the Lease. Sublessor assumes no obligations for
providing such services and Sublessee agrees to look solely to the Landlord for
the providing of such service. Sublessor hereby assigns to Sublessee any right
it may have against Landlord as a result of Landlord's default under the Lease;
provided, however, that Sublessor represents that to the best of its knowledge,
as of the date hereof, there is no such default presently in existence.
6. Sublessor Improvements. Sublessor, prior to July 29, 1996,
subject to Building Permit approval and issuance and subject
Revised 6/19/96 -2- _______
Initial
<PAGE> 3
to concurrence by the Landlord where required by the Lease, shall provide the
following improvements in the Subleased Premises substantially completed so as
to permit occupancy and conduct of business by Sublessee:
(a) Install new commercial grade carpet throughout the Subleased
Premises except on marble floored central foyer in a single
color and quality to be selected by Sublessee.
(b) Paint ail currently painted walls and doors in a color to be
selected by Sublessee.
(c) Remove certain existing interior walls and repair ceilings,
walls and floors as needed as described on the Plan attached
hereto as Exhibit "D" and made a part hereof.
(d) Provide a walkway from the parking area to the entrance on the
south side of the Subleased Premises per Code and replace the
existing door with a glass entrance door.
(e) Install a door between office currently occupied by Richard
Weissman and the office adjacent to the east.
Sublessor shall (i) complete Improvements described in 6(a) and 6 (b) not later
than July 29, 1996 in order to permit timely Sublessee occupancy and conduct of
business (For each day therefrom until they are completed, Sublessor hereby
gives Sublessee a per diem credit against its rental obligations pursuant to
Section 3 above in the amount of $365.00, commencing with the payments required
as of January 1, 1997 with Sublessor being responsible to the Landlord until
said credit is completely exhausted) and, (ii) complete Improvements described
in 6(c), 6(d), and 6(e) subject to application and issuance of Building Permit
but not later than November 30, 1996.
7. Insurance. Sublessee shall obtain and maintain insurance with
the same limits, terms and conditions as required of Tenant under the Lease.
Such insurance shall inure to the benefit of Landlord, Sublessor and Sublessee.
8. Lease Termination. In the event the Lease terminates and this
Sublease terminates as a result thereof, then each party shall be released from
any liability or obligation under this Sublease arising thereafter except for
any amounts unpaid under the Lease as of such termination date.
Notwithstanding the foregoing, if the Lease is terminated as a result of a
default by Sublessee of any term of the Lease or of this Sublease, then
Sublessee shall indemnify and hold Sublessor free and harmless from any and all
liability and damages sustained by Sublessor as a result of the
Revised 6/19/96 -3- _______
Initial
<PAGE> 4
termination of the Lease or of this Sublease. Likewise, Sublessor shall
indemnify Sublessee for damages if the Lease terminates through the fault of
Sublessor.
9. Indemnification. Sublessor (and not Sublessee) shall be and
remain responsible to Landlord pursuant to the provisions of Section 7 of the
First Addendum to the Lease; provided, however, that Sublessee agrees to
indemnify and save Landlord and Sublessor harmless from and against any and all
losses, etc., as described therein resulting from the use of the Common Areas
(as also described therein) by the Sublessee, its customers, employees and
invitees.
10. Quiet Enjoyment. As long as Sublessee is not in default of
any provision of this Sublease and Sublessor is not in default under the Lease,
Sublessor represents and warrants that Sublessee shall and may peaceably and
quietly have, hold and enjoy the Subleased Premises during the Sublease term
pursuant to the terms hereof.
11. Notices. All notices required or permitted to be given
hereunder, shall be in writing and sent by United States registered or
certified mail, postage prepaid, return receipt request, or by personal
delivery or nationally recognized overnight delivery services addressed to the
parties as follows:
To Sublessor: LifeCare Investments, Inc.,
409 W. Hallandale Beach Boulevard
Suite 415
Hallandale, FL 33009
ATTN: MICHAEL WEISSMAN, CHAIRMAN & CEO
To Sublessee: U.S. Alcohol Testing of America, Inc.
ATTN: ROBERT M. STUTMAN, CEO
after occupancy: at the Premises
before occupancy: c/o Robert Stutman & Associates
450 Washington Street - Suite 302
Dedham, MA 02026
12. Broker. Except for Raintree Properties & Investments, Inc.,
whose commission shall be paid by Sublessor, and Craig S. Wertkin of Towngrove
Realty of Boca, Inc., whose commission shall be paid by Sublessee, Sublessor
and Sublessee hereby warrant and represent each to the other that no broker was
involved in negotiating or consummating this Sublease and each party hereby
indemnifies and holds the other harmless from any and all claims for the
brokerage commissions arising out of any communications or negotiations had by
such party with any other broker(s) regarding the Subleased Premises and/or the
consummations of this Sublease.
Revised 6/19/96 -4- _______
Initial
<PAGE> 5
13. Contingency. This Sublease is contingent upon execution of
this document by the Landlord consenting to the terms and conditions hereunder.
If such execution is not obtained within ten (10) business days after the date
hereof, either party can terminate this Sublease upon written notice to the
other party.
14. No Release. Nothing contained in this Sublease Agreement
shall relieve Sublessor of its responsibilities under the terms and conditions
of the Lease as amended.
15. Successor And Assign. This Sublease shall bind the parties and
their respective successors and assigns.
16. This Sublease shall be construed and interpreted in accordance
with Florida Law, and any disputes between the parties, if not resolved through
non-binding mediation before an independent qualified Mediator acceptable to
the parties at Fort Lauderdale, Florida with each party bearing their own
costs, shall be brought before the 17th Judicial Circuit Court for Broward
County, Florida without objection as to jurisdiction or venue by any party.
IN WITNESS WHEREOF, the parties have executed this Sublease as
of the date and year first above written.
WITNESS LIFECARE INVESTMENTS, INC.
SUBLESSOR
By:
- ----------------------------------- -----------------------------------
Name: Michael Weissman
- ----------------------------------- Title: Chairman & Chief
Executive Officer
WITNESS U.S. ALCOHOL TESTING OF AMERICA,
INC.
SUBLESSEE
By:
- ----------------------------------- -----------------------------------
Name: Robert M. Stutman
- ----------------------------------- Title: Chairman and CEO
Revised 6/19/96 -5- _______
Initial
<PAGE> 6
LANDLORD'S CONSENT
Landlord hereby:
(a) Consents to the foregoing Sublease with the understanding that
pursuant to Section 12 (Assignment and Subletting), Section 12.1 (Landlord's
Consent Required), "Notwithstanding Landlord's consent to subletting, Tenant
shall remain fully liable on this Lease and shall not be released from
performing any of the terms, covenants and conditions of this Lease."
(b) Agrees and confirms that the attached Exhibit A constitutes
the entire Lease and there are no rules and regulations presently affecting the
Subleased Premises;
(c) Agrees that the Sublessee may continue as Tenant under the
Lease (in accordance with its terms and the terms of Paragraph 1 above) from
and after November 30, 2001, provided that if Sublessee does so continue,
notwithstanding the provisions of (a) above, Sublessor shall have no continuing
responsibility thereafter as Tenant under the Lease;
(d) Agrees that the attached Exhibit C accurately reflects amounts
currently owed by Tenant, and no additional amounts are currently owed to
Landlord, under the Lease;
(e) Acknowledges that Tenant is not presently in default under the
Lease;
(f) Expressly consents to the proposed Sublessor Improvements set
forth in Paragraph 6 and the provisions of Paragraph 9 above and does not
object to any of the other provisions of the foregoing Sublease Agreement; and
(g) Acknowledges there is no Security Deposit under the Lease
applicable to the Subleased Premises.
WITNESS: REYNOLDS METAL DEVELOPMENT
COMPANY
By:
- ----------------------------------- -----------------------------------
Name:
- ----------------------------------- ---------------------------------
Title:
--------------------------------
Date: June __, 1996
Revised 6/19/96 -6- _______
Initial
<PAGE> 1
WINGATE COMMONS BUSINESS PARK
NET LEASE
1. Parties.
THIS LEASE, dated, for reference purposes only, September 27, 1991, is
made between REYNOLDS METALS DEVELOPMENT COMPANY, a Delaware corporation
("Landlord") and LIFECARE INVESTMENTS, INC. a Delaware corporation ("Tenant").
2. Premises.
Landlord hereby leases to the Tenant and Tenant leases from Landlord
for the term, at the rental, and upon all of the conditions set forth herein,
that certain real property situated in the County of Broward, State of Florida,
commonly known as Building C of Wingate Commons Business park, 4517 N.W. 31st
Avenue, Ft. Lauderdale, Florida 33309, as indicated on Exhibit "A" attached
hereto and by reference made a part hereof (the "Premises").
3. Term.
3.1 Term. The term of this Lease is twenty (20) years commencing
on the date on which a certificate of occupancy for any portion of the Premises
is issued (the "Commencement Date") and ending at midnight, twenty (20) years
thereafter, unless sooner terminated pursuant to any provision hereof.
3.2 Delay in Completion of Improvements. Landlord will take all
steps reasonably necessary in order to ensure that the Improvements, as that
term is hereinafter defined, are completed no later than
, 1991; however, if the completion of the Improvements shall be delayed due to
(a) any act or omission of the Tenant or any of its employees, agents or
contractors (including, but not limited to (i) any delays due to changes in or
additions to the Improvements, or (ii) any delays by Tenant in the submission
of plans, drawings, specification, or other information or in approving
drawings or in giving any authorizations or approvals); (b) any delays beyond
control of Landlord including, but not limited to, strikes, lockouts, civil
commotion, warlike conditions, invasion, rebellion, hostility, inclement
weather, inability to obtain material or services and acts of God; or (c) any
delays caused by governmental regulations or controls, Landlord shall not be
subject to any liability therefore, nor shall such failure affect the validity
of the Lese or the obligations of Tenant hereunder, but in such case, Tenant
shall not be obligated to pay rent until possession of the Premises is tendered
to Tenant.
3.3 Early Possession. If Tenant occupies the Premises prior to
the Commencement Date, such occupancy shall be subject to all provisions
hereof, such occupancy shall not advance the
<PAGE> 2
termination date, and Tenant shall pay rent for such period at the initial
monthly rates set forth below.
4. Rent/Security Deposit.
4.1 Rent.
(a) Tenant shall pay to Landlord annual rent for the Premises
in the amounts set forth below under the heading "Annual Rent." As long as
Tenant is not in default hereunder, rent may be paid in equal monthly
installments in the amounts set forth below under the heading "Monthly Rent,"
as adjusted by Subsection 4.1(b), in advance, on the tenth day of each month of
each Lease Year, as herein defined, during the term hereof. Rent shall be
prorated if the term does not commence on the first day of a calendar month or
expire on the last day of a calendar month. Rent shall be paid to Reynolds
Metals Development Company, 4501 N.W. 31st Avenue, Ft. Lauderdale, Florida
33309.
<TABLE>
<CAPTION>
Term Annual Rent Monthly Rent
<S> <C> <C>
First twelve months $ 99,698.75 $8,308.23
Second twelve months $103,941.25 $8,661.77
</TABLE>
(b) The term "Lease Year", as used herein, (i) shall mean the
twelve (12) month period beginning with the Commencement Date as defined in
Section 3.1 hereof, and each twelve (12) month period thereafter occurring
during the term of this Lease, and (ii) in the event the Lease expires or
terminates on a date other than the date set forth herein, then the term "Lease
Year" shall also mean the period from the end of the preceding Lease Year to
the date of said expiration or termination of this Lease. Landlord and Tenant
agree that subsequent to the end of each and every Lease Year the Monthly Rent,
or Adjusted monthly Rent, as herein defined, if applicable, which was payable
for the immediately preceding Lease Year shall be adjusted for payment during
the current Lease Year by an amount equal to the product of (i) the Monthly
Rent or adjusted Monthly Rent, if applicable, for the immediately preceding
Lease Year multiplied by (ii) the difference expressed as a percentage between
the Consumer Price Index, as herein below defined, published for the last month
of the immediately preceding Lease year and the Consumer Price Index for the
corresponding month one year prior thereto (i.e., the percentage change in said
Index over said year); provide, however, that such new Monthly rent shall in no
event be less than the Monthly Rent, or Adjusted Monthly Rent for the preceding
year. The monthly rental payment so adjusted by the Consumer Price Index shall
become the adjusted monthly rent (the "Adjusted Monthly Rent"). The initial
annual adjustment shall be computed based on the Monthly Rent and the next
annual adjustment shall be computed based on the Adjusted Monthly Rent with
each annual adjustment thereafter based on the Adjusted Monthly Rent for the
immediately proceeding year. As
<PAGE> 3
soon as practicable after the end of each Lese Year, Landlord shall prepare and
submit to Tenant a statement (the "Statement") reflecting the Adjusted Monthly
Rent which shall be paid commencing with the next monthly installment of Rent
and shall remain in effect until the next annual adjustment is made. In
addition, within twenty (20) days following receipt of Landlord's Statement,
Tenant shall pay to Landlord a sum equal to the difference between the amount
of monthly rental payments Tenant has paid Landlord since the start of the
current Lease Year, if any, and an amount computed as follows: 1/12th of the
total Adjusted Monthly Rent for the entire current Lease Year multiplied by the
number of months which have fully or partially expired between the first day of
the current lease year and the date of the first payment of the Adjusted
Monthly Rent to be made subsequent to the date of the Statement.
Any Statement sent by Landlord to Tenant shall be conclusively
binding upon Tenant unless, within thirty (30) days after such Statement is
sent, Tenant shall send a written notice to Landlord objecting to such
Statement and specifying the respects in which such Statement is claimed to be
incorrect. If such notice is sent and the parties are unable to revolve the
issues, either party hereto may refer the matter to a reputable independent
firm of certified accountants selected by Landlord, and the decision of said
accountants shall be conclusively binding upon said parties. The fees and
expenses of the accountants shall be borne by the unsuccessful party unless
both parties are unsuccessful, then said expenses shall be apportioned between
the parties by the accountants based upon the degree of success of each party.
The term "Consumer Price Index," as used herein, shall be the
Consumer Price Index for All Urban Consumers based upon the U.S. City Average
(All Items Included, 1982-94 = 100) published by the Bureau of Labor Statistics
of the United States Department of Labor. If the Consumer Price Index shall
hereafter be converted to a different standard reference base or otherwise
revised, the determination of the percentage increase in the Consumer Price
Index shall be made with the use of such conversion factor, formula or table
for converting the Consumer Price Index as may be published by the Bureau of
Labor Statistics or, if said Bureau shall not publish the same, then with the
use of such conversion factor, formula or table as may be published by Prentice
Hall, Inc., or, failing such publication, by any other nationally recognized
publisher of statistical information. If the consumer Price Index shall become
unavailable to the public because publication is discontinued, or otherwise,
Landlord will substitute therefor a comparable index based upon changes in the
cost of living or purchasing power of the consumer dollar published by any
other governmental agency, or, if no such index shall be then available, a
comparable index published by a major bank or other financial institution or by
a university or a recognized financial publication, and the substituted index
shall
<PAGE> 4
be deemed the Consumer Price Index for the purposes of this Section.
(c) Tenant agrees that any adjustments to the base monthly
Rent and other sums due Landlord from Tenant under the tomboys of this Lease
shall be considered as additional rent from Tenant (the "Additional Rent"). As
used herein the term "Rent" shall include the Monthly Rent, Adjusted Monthly
Rent, Additional Rent and such other payments as are set forth herein.
(d) It is understood and agreed that Tenant's obligation
to pay the Additional Rent shall, for the purposes of the default provision
hereof, entitle Landlord to all remedies provided herein and at law or equity
on account of Tenant's failure to pay rent.
(e) In no event shall any adjustments made pursuant to Section
4.1(b) result in the Landlord receiving an amount less than the Monthly Rent or
Adjusted Monthly Rent,if applicable for the immediately preceding Lease Year.
(f) Any delay or failure of Landlord in computing or billing
for Additional Rent shall not constitute a waiver or in any way impair the
continuing obligation of the Tenant to pay such Additional Rent.
4.2 Security Deposit. Tenant shall deposit with Landlord on the
Commencement Date $8,308.23 as security for Tenant's faithful performance of
Tenant's obligations hereunder (the "Security Deposit"). If Tenant fails to
pay rent or other charges due hereunder, or otherwise defaults with respect to
any provision of this Lease, Landlord may use, apply or retain all or any
portion of the Security Deposit for the payment of any rent or other charge in
default or for the payment of any sum to which Landlord may become obligated by
reason of Tenant's default, or to compensate Landlord for any loss or damage
which Landlord may suffer thereby. If Landlord so uses or applies all or any
portion of the Security deposit, Tenant shall within fifteen (15) days after
written demand therefore, deposit cause with Landlord in an amount sufficient
to restore the Security Deposit to the full amount hereinabove stated and
Tenant's failure to do so shall be a material breach of this Lease. Landlord
shall not be required to keep said deposit separate from its general accounts.
If Tenant performs all of Tenant's obligations hereunder, the Security Deposit,
or so much thereof as has not theretofore been applied by Landlord, shall be
returned without payment of interest or other increment for its use to Tenant
(or, at Landlord's option, to the last assignee, if any, of Tenant's interest
hereunder) at the expiration of the term hereof, and after Tenant has vacated
the Premises. No trust relationship is created herein between Landlord and
Tenant with respect to the Security Deposit.
<PAGE> 5
5. Use.
5.1 Use. The Premises shall be used by Tenant for offices and for
no other purposes, and Tenant further agrees to use the entire Premises as
herein above provided. Tenant agrees not to store any material, waste or other
products outside the Premises in any adjoining area. Tenant further agrees
that it will not store or dispose of hazardous materials in or about the
Premises. For the purposes of this Lease, "hazardous materials" includes any
hazardous, toxic or dangerous waste, substance or material defined as such in
(or for purposes of) the Comprehensive Environmental Response, Compensation and
Liability Act, any so-called "superfund" of "superlien" law, or any other
federal, state or local statute, law ordinance, code,rule, regulation, consent
agreement or other requirement of any governmental authority regulating,
relating to, or imposing liability or standards of conduct concerning, any
hazardous or toxic or dangerous waste. Tenant shall defend, indemnify and save
Landlord harmless from all costs and expenses (including consequential damages)
asserted or proven against Landlord by any party as result of Tenant's use,
storage or disposal of hazardous materials (as defined above) on the Premises.
The foregoing indemnity shall be a recourse obligation of Tenant which shall
survive termination or expiration of this Lease. In the event that any
activity of the Tenant causes an increase in the insurance rate on the building
containing the Premises as a whole, then Tenant shall pay this additional cost
of insurance as assessed by Landlord's insurer, which determination shall be
conclusive and binding upon Tenant.
5.2 Compliance with Law. Tenant shall, at Tenant's expense,
comply promptly with all applicable statutes, ordinances, rules, regulations,
orders, permits, covenants and restrictions of record, and requirements in
effect during the term or any part of their term hereof, regulating the use or
condition of the Premises, including but not limited to, environmental matters
and employee health and safety. Tenant shall not use nor permit the use of the
Premises in any manner that will tend to create waste or a nuisance or, if
there shall be more than one tenant in the building containing the Premises,
shall tend to disturb such tenants.
5.3 Condition of Premises. Tenant hereby accepts the Premises in
their condition existing as of the Commencement Date of the Lease, subject to
all applicable zoning, municipal, county and state laws, ordinances and
regulations governing and regulating the use and condition of the Premises and
any covenants or restrictions of record, and accepts this Lease subject thereto
and to all matters disclosed thereby. Tenant acknowledges that neither
Landlord nor Landlord's agent has made any representation or warranty as to the
present or future suitability of the Premises for the conduct of Tenant's
business.
5.4 Common Areas. All areas and facilities that Landlord shall
from time to time designate as being for the mutual use of Tenant, its
customers, employees and other tenants,
<PAGE> 6
including but not limited to all parking areas, sidewalks, driveways, roads and
landscaped areas located in the business park of which the Premises are a part,
shall be known as the "Common Areas". Tenant and its employees, customers and
invites shall have the non-exclusive right to use Common Areas together with
Landlord and the other tenants of the park, their customers, employees and
guests and, subject to such reasonable rules and regulations governing the use
of the Common Areas as Landlord may from time to time prescribe, such rules
specifically to include but are not limited to parking rules. Tenant shall not
use the Common Areas for storage without the prior written consent of Landlord
or take any action which would interfere with the rights of other persons to
use the Common Areas. Landlord may temporarily close any part of the Common
Areas for such period of time as is reasonably necessary to make repairs or
alterations to the Common Areas.
6. Maintenance, Repairs and Alterations.
6.1 Tenant's Obligations.
(a) Tenant, at Tenant's expense, shall keep in good order,
condition and repair the nonstructural portions of the Premises and every part
thereof, including by way of illustration, all plumbing, heating, air
conditioning, ventilation, electrical and lighting facilities and equipment
located within the Premises, interior surfaces of exterior walls (including but
not limited to damage to such surfaces caused by etching or staining from
spilled or leaked materials), ceilings, windows, doors and plate glass and
Tenant's signs located on or about the Premises. Tenant shall be obligated to
make the repairs required hereunder whether or not such portion of the
'Premises requiring repair, or the means of repairing the same are reasonably
or readily accessible to Tenant, and whether or not the need for such repairs
occurs as a result of Tenant's use, any prior use, th elements, or the age of
such portion of the Premises. All glass, both interior and exterior, is the
sole risk of Tenant and Tenant agrees to replace at Tenant's own expense any
glass broken during the term of this Lease and Tenant agrees to insure and to
keep insured all plate glass in the Premises and to furnish the Landlord with
certification of said insurance. In the event replacement is necessary, Tenant
agrees to use such insurance for the replacement of any broken glass. The term
"repair" shall be deemed to include replacements. In addition to Tenant's
obligations set forth herein, Tenant shall, at its expense, repair and replace
any and all portions of them Premises, structural and onstructural, or any
landscaping, damaged by Tenant's acts of omissions or the acts or omissions of
Tenant's employees, agents, contractors or any others for whom Tenant may be
responsible.
(b) If Tenant fails to perform Tenant's obligations under this
Section 6.1 within a reasonable time after receipt of written notice of the
need for such repairs, Landlord
<PAGE> 7
may at Landlord's option enter upon the Premises (except in the case of
emergency, in which case no notice shall be required), perform such obligations
on Tenant's behalf and put the Premises in good order, condition and repair,
and the cost thereof shall be due and payable as additional rent to Landlord,
together with Tenant's next rental installment.
(c) On the last day of the term thereof, or on any sooner
termination, Tenant shall surrender the Premises to Landlord in the same
condition as received, ordinary wear and tear excepted, and the Premises shall
be delivered to Landlord clean, uncontaminated and free of debris. Tenant
shall remove its trade fixtures, furnishings and equipment from the Premises
and shall repair any damage to the Premises occasioned by the installation or
removal of its trade fixtures, furnishings and equipment.
6.2 Landlord's Obligations. Landlord, at Landlord's expense,shall
keep in good order, condition and repair, all of the structural portions of the
Premises, including, without limiting the generality of the foregoing, the
roof, the exterior walls and the foundation of the Premises. Landlord shall
repair and replace if necessary any latent or other defects in the Premises
which arose during, or which are attributable to, construction of the Premises;
and Landlord shall maintain the Common Areas as described in Section 5.4.
Landlord shall have no obligation to make repairs under this Subsection 6.2
until a reasonable time after receipt of written notice of the need for such
repairs.
6.3 Common Area Maintenance.
(a) Each month, Tenant shall pay to Landlord, in addition to
the rent due on the Premises, Tenant's Share (defined below) of the cost of
Common Area maintenance for the Premises or the business park of which the
Premises are a part. Common Area maintenance costs shall include all expenses
reasonably incurred and paid by Landlord in operating, managing and maintaining
the Common Areas of the Premises or the business park of which the Premises are
a part, including, without limiting the generality of the foregoing, painting
and cleaning of paved and unpaved surfaces, lighting, landscaping, signage,
trash collection and other similar items.
(b) Tenant's Share" shall be a fraction, the numerator of
which shall be Tenant's leased space in the building comprising a portion of
the Premises (8,485 square feet) and the denominator of which shall be the
total leasable space in the buildings in the business park of which the
Premises are a part (33,940 square feet) or twenty-five percent (25%).
(c) During the First Lease Year, the Tenant's Share of Common
area Maintenance and Real Property Tax, as the term is defined in Subsection
10.2 of this Lease, shall be $2.00
<PAGE> 8
per square foot of leased space in the building (8,485 square feet) comprising
a portion of the Premises, which sum shall be adjusted annually pursuant to
this Subsection 6.3(c). Landlord shall prepare and submit to Tenant a
statement reflecting the Common Area expenses incurred during the prior year
and the projected Common Area expenses expected to be incurred during the
subsequent year, at which time the monthly amount to be paid by Tenant
hereunder shall be adjusted accordingly in order to pay any deficiency for the
previous year together with any increase or decrease in the projected Common
Area expenses expected to be incurred during the subsequent year over that
which was expected to be incurred during the prior year.
(d) Landlord, at Landlord's option or upon Tenant's request,
amy provide Tenant with a monthly written statement of Tenant's Share of the
Common area Maintenance costs.
6.4 Alterations and Additions.
(a) Tenant shall not make any alterations, improvements or
additions in, on or about the Premises without Landlord's prior written
consent, which consent shall not be unreasonably withheld.
(b) Any alterations, improvements or additions in the Premises
that Tenant shall desire to make shall be presented to Landlord in written form
with proposed detailed plans prepared by a professional architect or engineer.
If Landlord shall give its consent, the consent shall be deemed conditioned
upon Tenant acquiring a permit to do so from appropriate governmental agencies,
if required, furnishing a copy thereof to Landlord prior to the commencement of
the work and complying with all conditions of said permit in a prompt and
expeditious manner.
(c) Tenant shall pay, when due, all claims for labor or
materials furnished to or for Tenant at or for use in the Premises, which
claims are or may be secured by any mechanics' or materialmen's lien against
the Premises or any interest therein. Tenant shall give Landlord not less than
ten (10) days' notice prior to the commencement of any such work in the Premise
and Landlord shall have the right to post notices of non-responsibility in or
on the Premises as provided by law. If Tenant shall, in good faith, contest
the validity of any such lien, claim or demand, then Tenant shall, at is sole
expense,defend itself and Landlord against the same and shall pay and satisfy
any such adverse judgement that my be rendered thereon before the enforcement
thereof against the Landlord or the Premises. Landlord may, at its option,
require Tenant to furnish to Landlord a surety bond satisfactory to Landlord in
an amount equal to 125% of the amount of such contested lien, claim or demand
indemnifying Landlord against liability for the same and holding the Premises
free from the effect of such lien or claim.
<PAGE> 9
(d) Unless Landlord requires their removal, all alterations,
improvements and additions which may be made on the Premises shall become the
property of Landlord and remain upon and be surrendered with the Premises at
the expiration of the term. Notwithstanding the provisions of this Section
6.4, Tenant's machinery and equipment, other than that which is affixed to the
Premises so that it cannot be removed without material damage to the Premises,
shall remain the property of Tenant and may be removed by Tenant subject to the
provisions of Subsection 6. (c).
7. Insurance; Indemnity.
7.1 Liability Insurance. Tenant shall, at Tenant's expense,obtain
and keep in force during the term of this Lease, comprehensive general
liability insurance with a combined single limit of not less than $1,000,000.00
per occurrence for bodily injury and property damage insuring both Landlord and
Tenant against liability arising out of Tenant's use, occupancy and maintenance
of the Premises and all other area appurtenant thereto. Tenant shall deliver
to Landlord a certificate of insurance required under this Subsection, which
policy shall expressly name Landlord as an insured. No such policy shall be
cancelable or subject to reduction in coverage except after thirty (30) days'
prior written notice to Landlord.
7.2 Property Insurance. Landlord agrees that it will keep in
force during the term of this Lease insurance covering loss or damage to the
Premises (but not to Tenant's trade fixtures, furnishings, personal property or
improvements) providing protection against all perils included within the
classification of fire, lightning and extended coverage. Tenant shall pay the
cost of such insurance.
7.3 Waiver of Subrogation. Insofar as the following provision may
be effective without invalidating insurance coverage, Tenant and Landlord each
hereby release and relieve the other, and waive their entire right of recovery
against the other for loss or damage arising out of or incident to the perils
insured against under this Section 7, which perils occur in, on or about the
Premises, whether due to the negligence of Landlord or Tenant or their agents,
employees, contractors and/or invitees, but only to the extent that such loss
or damage is actually covered by insurance, and only to the extent that the
insured party has received proceeds of insurance therefore.
7.4 Indemnity. Tenant agrees to pay, and to defend, indemnify and
save harmless Landlord from and against any and all liabilities, losses,
damages, costs, expenses (including reasonable attorneys fees) in connection
with any injury to, or the death of, any person in, on or about the Premises or
any damage to or loss of property on the Premises, except any such liabilities,
losses, damages, costs, or expenses arising out of Landlord's negligence or
willful act. If any action or
<PAGE> 10
proceeding is brought against Landlord by reason of any such claim, Tenant upon
notice from Landlord shall defend the same at Tenant's expense by counsel
mutually satisfactory to Landlord and Tenant.
7.5 Exemption of Landlord From Liability. Tenant hereby agrees
that Landlord shall not be liable for injury to Tenant's business or any loss
of income therefrom or for damage to the goods, wares, merchandise or other
property of Tenant, Tenant's employees, invitees, customers, or any other
person in or about the Premises, not shall Landlord be liable for injury to the
person of Tenant, Tenant's employees, agents or contractors, whether such
damage or injury is caused by or results from fire, steam, electricity, gas,
water or rain, or from the breakage, leakage, obstruction or other defects of
pipes, sprinklers, wires, appliances, plumbing, air conditioning or lighting
fixtures,or from any other cause, whether the said damage or injury results
from conditions arising upon the Premises or upon other portions of the
building of which the premises are apart, or from other sources or places and
regardless of whether the cause of such damage or injury or the means of
repairing the same is inaccessible to Tenant except when such damage or injury
is caused by Landlord's negligence. Landlord shall not be liable for any
damages arising from any act or neglect of any other tenant, if any, of the
business park in which the Premises are located. Nothing contained herein
shall be construed as limiting the right of Tenant to proceed against other
third parties for any injury or damage caused to Tenant.
8. Damage or Destruction.
8.1 Definitions.
(a) "Partial Damage" means damage or destruction to the
Premises to the extent that the cost of repair is less than fifty percent (50%)
of the fair market value of the Premises immediately prior to such damage or
destruction.
(b) "Total Destruction" means damage or destruction to the
Premises to the extent that the cost of repair is fifty percent (50%) or more
of the fair market value of the Premises immediately prior to such damage or
destruction.
8.2 Partial Damage. If at any time during the term of this Lease
there is damage which falls within the classification of Partial Damage,
Landlord may, at Landlord's option, either (i) repair such damage, in which
event this Lease shall continue in full force and effect, or (ii) give written
notice to Tenant within thirty (30) days after the date of the occurrence of
such damage of Landlord's intention to terminate this Lease, which termination
shall be effective as of the date of the occurrence of such damage.
<PAGE> 11
8.3 Total Destruction. If at any time during the term of this
Lease there is damage which falls into the classification of Total Destruction,
this Lease shall automatically terminate as of the date of such total
destruction.
8.4 Abatement of Rent. If Landlord repairs or restores the
Premises pursuant to the provisions of this Section 8, the rent payable
hereunder (including "Additional Rent") for the period during which such
damage, repair or restoration continues shall be abated in proportion to the
degree to which Tenant's use of the Premises is impaired. Except for abatement
of rent, if any, Tenant shall have no claim against Landlord as a result of any
such damage. Furthermore, notwithstanding anything above to the contrary,
Tenant shall not be entitled to any rent abatement if the Partial Damage is in
any way caused by Tenant.
9. Condemnation.
If the Premises or any portion thereof or other areas appurtenant to
the Premises are taken under the power of eminent domain, or sold under the
threat of the exercise of said power (all of which are herein called
"condemnation"), this Lease shall terminate as to the part so taken as of the
date the condemning authority takes title or possession, whichever first
occurs. If in the reasonable opinion of Tenant, the portion of the Premises
taken by condemnation materially adversely affects Tenant's operations on the
premises, Tenant may, at Tenant's option, to be exercised in writing only
within thirty (30) days after Landlord shall have given Tenant written notice
of such taking (or in the absence of such notice, within thirty (30) days after
the condemning authority shall have taken possession) terminate this Lease as
of the date the condemning authority takes such possession. Landlord shall
also have an option to terminate this Lease by notice to Tenant given within
the time limits set forth above if in Landlord's reasonable opinion, it would
not be economically feasible to continue leasing the Premises to Tenant as a
result of such condemnation. If this Lease is not terminated in accordance
with the foregoing, this Lease shall remain in full force and effect as to the
portion of the Premises remaining, except that the rent shall be reduced in the
proportion that the square feet of the Premises which is taken bears to the
total square feet of the Premises. Any award for the taking of all or any part
of the Premises under the power of eminent domain or any payment made under
threat of the exercise of such power shall be the property of Landlord, whether
such award shall be made as compensation for diminution in value of the
leasehold, for the taking of the fee, or as severance damages; provided,
however, that Tenant shall be entitled to any award made specifically for loss
of or damage to Tenant's trade fixtures and removable personal property. In
the event that this Lease is not terminated by reason of such condemnation,
Landlord shall, at Landlord's expense, promptly repair any damage to the
Premises caused by such condemnation.
<PAGE> 12
10. Taxes.
10.1 Payment of Real Property Taxes. Each month, Tenant shall pay
Tenant's Share of the real property taxes applicable to the Premises during the
term of this Lease. "Tenant's Share" shall be calculated as set forth in
Section 6.3(b). All such payments shall be made within ten (10) days after
receipt of a written statement from Landlord setting forth Tenant's Share of
such taxes and a copy of the applicable real estate tax bill or bills. If any
real property taxes paid by Landlord covers any period of time prior to or
after the expiration of the term hereof, Tenant's Share of such taxes shall be
equitably prorated to cover only the period of time within the tax fiscal year
during which this Lease shall be in effect.
10.2 Definition of "Real Property Tax". As used herein, the term
"real property tax" shall include any form of real estate tax or assessment,
general, special, ordinary or extraordinary, and any license fee, commercial
rental tax, improvement bond or bonds, levy or tax (other than inheritance,
personal income or estate taxes) imposed on the Premises by any authority
having the direct or indirect power to tax, including any city, state or
federal government, or any school, agricultural, sanitary, fire, street,
drainage or other improvement district thereof, as against any legal or
equitable interest of Landlord in the Premises or in the real property of which
the Premises are a part, as against Landlord's right to rent or other income
therefore, and as against Landlord's business of leasing the Premises. The
term"real property tax" shall also include any tax, fee, levy, assessment or
charge (i) in substitution of, partially or totally, any tax, fee levy,
assessment or charge hereinabove included within the definition of "real
property tax", or (ii) the nature of which was hereinbefore included within the
definition of "real property tax", or (iii) which is imposed by reason of this
transaction or any modifications or changes hereto.
10.3 Joint Assessment. If the Premises are not separately
assessed, Tenant's liability shall be an equitable proportion of the real
property taxes for all of the land and improvements included within the tax
parcel assessed, such proportion to be determined by Landlord from the
respective valuations assigned in the assessor's work sheets or such other
information as may be reasonably available, and Landlord's reasonable
determination thereof, in good faith shall be conclusive.
10.4 Personal Property Taxes.
(a) Tenant shall pay, prior to delinquency, all taxes
assessed against and levied upon trade fixtures, furnishings, equipment and all
other personal property of Tenant contained in the Premises. When possible,
Tenant shall cause said fixtures, furnishings, equipment and all other personal
<PAGE> 13
property to be assessed and billed separately from the real property of
Landlord.
(b) If any of the Tenant's personal property shall be
assessed with the Landlord's real property, Tenant shall pay Landlord the taxes
attributable to Tenant within twenty (20) days after receipt of a written
statement setting forth the taxes applicable to Tenant's property.
10.5 Sales and Use Tax. In addition to the annual rent required
hereunder, Tenant shall also be solely responsible for all sales tax applicable
thereon, or applicable to any other charges or payments due hereunder.
11. Utilities and Services. Tenant shall pay for all water, gas, heat,
light, power, telephone and other utilities and services supplied to the
Premises, together with any taxes thereon. If any such utilities are not
separately metered, Tenant shall pay a reasonable portion of the charges for
utilities jointly metered with other premises. Tenant shall provide, at its
expense, all janitorial and security services to the Premises.
12. Assignment and Subletting.
12.1 Landlord's Consent Required. Tenant shall not voluntarily or
by operation of law assign, transfer, mortgage, sublet, o otherwise transfer or
encumber all or any part of Tenant's interest in this Lease or in the Premises,
without Landlord's prior written consent, which consent shall not be
unreasonably withheld provided (i) such assignment is to an
entity/individual(s) whose financial integrity is at lease equal to that of
Tenant; (ii) said assignee has demonstrated prior experience in the management
and operation of its business in a similar setting and of the same magnitude;
and (iii) proof thereof satisfactory to Landlord has been delivered to Landlord
at least ten (10) days prior to the effective date of any such transfer. Any
attempted assignment, transfer, mortgage, encumbrance or subletting without
such consent shall be void, and shall constitute a breach of this Lease. Any
sale, assignment or other transfer of controlling stock interest in Tenant
shall constitute an "assignment" for purposes hereof.
12.2 No Release of Tenant. Regardless of Landlord's consent, no
subletting or assignment shall release Tenant of Tenant's obligation or alter
the primary liability of Tenant to pay the rent and to perform all other
obligations to be performed by Tenant hereunder. The acceptance of rent by
Landlord from any person shall not be deemed to be a waiver by Landlord of any
provision hereof. Consent to one assignment or subletting shall not be deemed
consent to any subsequent assignment or subletting. In the event of default by
any assignee of Tenant or any successor of Tenant, in the performance of any of
the terms hereof, Landlord may proceed directly against tenant without the
<PAGE> 14
necessity of exhausting remedies against such successor. Landlord may consent
to subsequent assignments or subletting of this Lease or amendments or
modifications to this Lease with assignees of Tenant, without notifying Tenant,
or any successor of Tenant and without obtaining its or their consent thereto
and such action shall not relive Tenant of liability under this Lease.
12.3 Attorney's Fees. In the event Tenant shall assign or sublet
the Premises or request the consent of Landlord to any assignment or subletting
or if Tenant shall request the consent of Landlord for any act Tenant proposes
to do, then Tenant shall pay Landlord's reasonable attorney's fees incurred in
connection therewith, but Tenant shall be allowed to prepare all necessary
documents for the sublease at its own expense.
12.4 Landlord's Option to Terminate. Except as otherwise
specifically set forth herein, in the event that at any time during the term of
this Lease Tenant desire to assign this Lease or to sublet all or part of the
Premises, Tenant shall notify Landlord in writing of the terms of the proposed
assignment or subletting and the area so proposed to be sublet, and Landlord
shall have the option to terminate this Lease wholly in the event of a proposed
assignment or sublet of the whole Premises, or partially as to the portion of
the Premises proposed to be sublet, upon written notice to Tenant within 45
days after receipt of notice of Tenant's intention to assign or sublet. If
Landlord's election to terminate involves only a portion of the Premises, the
rent specified in this Lease shall be adjusted proportionately on the basis of
the number of square feet retained by Tenant and this Lease shall continue in
full force and effect in all other respects.
13. Defaults; Remedies.
13.1 Defaults. The occurrence of any one or more of the following
events shall constitute a material default and breach of this Lease by Tenant:
(a) The vacating or abandonment of the Premises by Tenant.
(b) The failure by Tenant to make any payment of rent or any
other payment required to be made by Tenant hereunder, as and when due, where
such failure shall continue for a period of five (5) days after Tenant's
receipt of written notice thereof. In the event that Landlord serves Tenant
with a notice to pay rent or quit pursuant to applicable unlawful detainer
statues, such notice to pay rent or quit shall also constitute the notice
required by this Section.
(c) The failure by Tenant to observe or perform any of the
covenants, conditions or provisions of this Lease to be observed or performed
by Tenant, other than described in
<PAGE> 15
Section 13.1(b) above, where such failure shall continue for a period of thirty
(30) days after written notice thereof from Landlord to Tenant; provided,
however, that if the nature of Tenant's default is such that more than thirty
(30) days are reasonably required for its cure, then Tenant shall not be deemed
to be in default if Tenant commenced such cure within the 30-day period and
thereafter diligently prosecutes such cure to completion.
(d) (i) The making by Tenant of any general arrangement or
assignment for the benefit of creditors; (ii) Tenant becomes a "debtor" as
defined in 11 U.S.C. Section 101 or any successor statute thereto (unless, in
the case of a petition filed against Tenant, the same is dismissed within 60
days); (iii) the appointment of a trustee or receiver to take possession of
substantially all of Tenant's assets located at the Premises or of Tenant's
interest in this Lease, where possession is not restored to Tenant within
thirty (30) days.
13.2 Remedies. In the event of any such material default or breach
by Tenant, Landlord may, at any time thereafter, with or without notice or
demand and without limiting Landlord in the exercise of any right or remedy
which Landlord may otherwise have under Florida law by reason of such default
or breach:
(a) Terminate tenant's right to possession of the Premises by
any lawful means and terminate this Lease, in which case Tenant shall
immediately surrender possession of the Premises to Landlord. In such event
Landlord shall be entitled to recover from Tenant all damages incurred by
Landlord by reason of Tenant's default including, but not limited to, the cost
of recovering possession of the Premises; the expense of reletting, including
necessary renovation and alteration of the Premises, reasonable attorney's fees
(including costs), and any real estate commission actually paid; the worth at
the time of award by the court having jurisdiction thereof of the amount by
which the unpaid rent for the balance of the term after the time of such award
exceeds the amount of such rental loss for the same period that Tenant proves
could be reasonably avoided; and that portion of the leasing commission paid by
Landlord pursuant to Section 14 applicable to the unexpired term of this Lease.
(b) Maintain Tenant's right to possession in which case this
Lease shall continue in effect whether or not Tenant shall have abandoned the
Premises. In such event Landlord shall be entitled to enforce all of
Landlord's rights and remedies under this Lease, including the right to recover
the rent as it becomes due hereunder; provided, however, that Landlord shall
have the right to accelerate all amounts owed to Landlord by Tenant under this
Lease as due and payable immediately upon default.
<PAGE> 16
(c) Terminate Tenant's right to possession of the Premises
without terminating this Lease and re-enter and take possession of the
Premises, in which case Landlord shall use reasonable efforts to relet the
Premises to another party for Tenant's account and Tenant shall remain liable
for all rent and other amounts due under this Lease and not paid by such other
party; provided, however, that Landlord shall have the right to accelerate all
amounts owed to Landlord by Tenant under this Lease as due and payable
immediately upon default.
(d) Pursue any other remedy now or hereafter available to
Landlord under the laws or judicial decisions of the state wherein the Premises
are located. Unpaid installments of rent and other unpaid monetary obligations
of Tenant under the terms of this Lease shall bear interest from the date due
at the maximum rate then allowable by law.
13.3 Default by Landlord. Landlord shall not be in default unless
Landlord fails to perform obligations required of Landlord within a reasonable
time, but in no even later than thirty (30) days after written notice by Tenant
to Landlord and to the holder of any first mortgage or deed or trust covering
the Premises whose name and address shall have theretofore been furnished to
Tenant in writing, specifying wherein Landlord has failed toper form such
obligation; provided, however, that if the nature of Landlord's obligation is
such that more than thirty (30) days are required for performance, then
Landlord shall not be in default if Landlord commences performance within such
30-day period and thereafter diligently prosecutes the same to completion.
13.4 Late Charges. Tenant hereby acknowledges that late payment by
Tenant to Landlord of rent and other sums due hereunder will cause Landlord to
incur costs not contemplated by this Lease, the exact amount of which will be
extremely difficult to ascertain. Such costs include, but are not limited to,
processing and accounting charges, and late charges which may imposed on
Landlord by the terms of any mortgage or trust deed covering the Premises.
Accordingly, if any installment of rent or any other sum due from Tenant shall
not be received by Landlord or Landlord's designee within ten (10) days after
such amount shall be due then, without any requirement for notice to Tenant,
Tenant shall pay to Landlord a late charge equal to 5% of such overdue amount.
The parties hereby agree that such late charge represents a fair and reasonable
estimate of the casts Landlord will incur by reason of late payment by Tenant.
Acceptance of such late charge by Landlord shall in no event constitute a
waiver of Tenant's default with respect to such overdue amount, nor prevent
Landlord from exercising any of the other rights and remedies granted
hereunder. In the event that a late charge is payable hereunder, whether or
not collected, for three (3) consecutive installments of rent, then rent shall
automatically become due and payable quarterly in advance, rather
<PAGE> 17
than monthly, notwithstanding Section 4 or any other provision of this Lease to
the contrary.
13.5 Impounds. In the event that a late charge is payable
hereunder, whether or not collected, for three (3) consecutive installments of
rent, Tenant shall pay to Landlord, if Landlord shall so request, in addition
to any other payments required under this Lease, a monthly advance installment,
payable at the same time as the monthly rent, as estimated by Landlord, for
real property tax and insurance expenses on the Premises which are payable by
Tenant under the terms of this Lease. Such fund shall be established to insure
payment when due, before delinquency, of any or all such real property taxes
and insurance premiums. If the amounts paid to Landlord by Tenant under the
provisions of this section are insufficient to discharge the obligations of
Tenant to pay such real property taxes and insurance premiums as the same
become due, Tenant shall pay to Landlord, upon Landlord's demand, such
additional sums necessary to pay such obligations. All moneys paid to Landlord
under this section may be intermingled with other moneys of Landlord and shall
not bear interest. In the event of a default in the obligations of Tenant to
perform under this Lease, then any balance reaming from funds paid to Landlord
under the provisions of this section may, at the option of Landlord, be applied
to the payment of any monetary default of Tenant in lieu of being applied to
the payment of real property taxes and insurance premiums.
14. Broker's Fee.
Each party represents and warrants to the other that it has not dealt
with any broker, finder or similar agent in connection with any transaction
contemplated hereunder, other than Lehrer & Co. and In-Site Realty Associates,
Inc., whose fees shall be the sole responsibility of Landlord. Each party
hereto hereby covenants and agrees to defend, indemnify, hold harmless and
reimburse the other party for, from and against all claims of any kind of any
other broker, finder or similar agent purporting to represent the indemnifying
party in connection with any transaction contemplated hereunder.
15. Estoppel Certificate.
(a) Tenant shall at any time upon not less than ten (10) days' prior
notice from Landlord execute, acknowledge and deliver to Landlord a statement
in writing (i) certifying that this Lease is unmodified and in full force and
effect (or, if modified, stating the nature of such modifications and
certifying that this Lease, as so modified, is in full force and effect) and
the date to which the rent and other charges are paid in advance, if any, and
(ii) acknowledging that there are not, to Tenant's knowledge, any uncured
defaults on the part of Landlord hereunder, or specifying such defaults if any
are claimed. Any
<PAGE> 18
such statement may be conclusively relied upon by any prospective purchaser or
encumbrancer of the Premises.
(b) At Landlord's option, Tenant's failure to deliver such statement
within such time shall be a material default under this Lease or shall be
conclusive upon Tenant (i) that this Lease is in full force and effect, without
modification except as may be represented by Landlord, (ii) that there are no
uncured defaults in Landlord's performance, and (iii) that not more than
month's rent has been paid in advance or such failure may be considered by
Landlord as a default by Tenant under this Lease.
(c) If Landlord desires to finance, refinance, or sell the Premises
or any part thereof, Tenant hereby agrees to deliver to any lender or purchaser
designated by Landlord such financial statements of Tenant as may be reasonably
required by such lender or purchaser. such statements shall include the past
three years financial statements of Tenant. all such financial statements
shall be received by Landlord and such lender or purchaser in confidence and
shall be used only for the purposes herein set forth.
16. Landlord's Liability.
The term "Landlord" as use herein shall mean only the owner or owners
at the time in questions of the fee title or a tenant's interest in a ground
lease of the Premises. In the event of any transfer of such title or interest,
Landlord herein named (and in case of any subsequent transfers, then the
grantor) shall be relieved from and after the date of such transfer of all
liability in respect of Landlord's obligations thereafter to be performed,
provided that any funds in the hands of Landlord or the then grantor at the
time of such transfer, in which Tenant has an interest, shall be delivered to
the grantee. The obligations contained in this Lease to be performed by
Landlord shall, subject as aforesaid, be binding on Landlord's successors and
assigns, only during their respective periods of ownership.
17. Severability.
The invalidity of any provision of this Lease as determined by a court
of competent jurisdiction shall in no way affect the validity of any other
provision hereof.
18. Interest on Past-Due Obligations.
Except as expressly herein provided, any amount due to Landlord not
paid when due shall bear interest at the maximum rate then allowable by law
from the date due. Payment of such interest shall not excuse or cure any
default by Tenant under this Lease; provided, however, that interest shall not
be payable on late charges incurred by Tenant nor on any amounts upon which
late charges are paid by Tenant.
<PAGE> 19
19. Additional Rent.
Any monetary obligations of Tenant to Landlord under the terms of this
Lease shall be deemed to be Additional Rent.
20. Incorporation of Prior Agreements; Amendments.
This Lease contains all agreements of the parties with
<PAGE> 20
respect to any matter mentioned herein. No prior agreement or understanding
pertaining to any such matter shall be effective. This Lease may be modified
in writing only and signed by the parties in interest at the time of the
modification. Except as otherwise stated in this Lease, Tenant hereby
acknowledges that neither the real estate broker listed in section 14 hereof
nor any cooperating broker on this transaction nor the Landlord or any
employees or agents of any of said persons has made any oral or written
warranties or representations to Tenant relative to the condition or use by
Tenant or said Premises.
21. Notices.
Any notice required or permitted to be given hereunder shall be in
writing and may be given by express courier, personal delivery or by certified
mail, and shall be deemed sufficiently given if addressed to Tenant at the
address of the premises or to Landlord at the address noted next to the
signature of the Landlord. Either party may, by notice to the other, specify a
different address for notice purposes, except that upon Tenant's taking
possession of the Premises, the Premises shall constitute Tenant's address for
notice purposes. A copy of all notices required or permitted to be given to
Landlord hereunder shall be concurrently transmitted to such party or parties
at such addresses as Landlord may from time to time hereafter designate by
notice to Tenant.
22. Waivers.
No waiver by Landlord of any provision hereof shall be deemed a waiver
of any other provision hereof or of any subsequent breach by Tenant of the same
or any other provision. landlord's consent to, or approval of, any act shall
not be deemed to render unnecessary the obtaining of Landlord's consent to or
approval of any subsequent act by Tenant. The acceptance of rent hereunder by
Landlord shall not be waiver of any preceding breach by Tenant of any
provision hereof, other than the failure of Tenant to pay the particular rent
so accepted, regardless of Landlord's knowledge of such preceding breach at the
time of acceptance of such rent.
23. Holding Over.
If Tenant, with Landlord's consent, remains in possession of the
Premises or any part thereof after the expiration of the term hereof, such
occupancy shall be a tenancy from month to month. Al provisions of this Lease
shall apply to the holdover period. Al options and rights of first refusal, if
any, granted under the terms of this Lease shall be deemed terminated and be of
no further effect during said month-to-month tenancy.
<PAGE> 21
24. Cumulative Remedies.
No remedy or election hereunder shall be deemed exclusive but shall,
wherever possible, be cumulative with all other remedies at law or in equity.
25. Covenants and Conditions.
Each provision of this Lease performable by Tenant or Landlord shall
be deemed both a covenant and condition.
26. Binding Effect; Choice of Law.
Subject to any provisions hereof restricting assignment or subletting
by Tenant, this Lease shall bind the parties, their personal representatives,
successors and assigns. This Lease shall be governed by the laws of the State
wherein the Premises are located.
27. Subordination.
(a) This Lease, at Landlord's option, shall be subordinate to any
ground lease, mortgage, deed of trust, or any other hypothecation or security
now or hereafter placed upon the real property of which the Premises are a part
and to any advances made on the security thereof and to all renewals,
modifications, consolidations, replacements and extensions thereof. If any
mortgagee, trustee or ground landlord shall elect to have this Lease prior to
the lien of its mortgage, deed of trust or ground lease, and shall be deemed
prior to such mortgage, deed of trust, or ground lease, whether this Lease is
dated prior or subsequent to the date of said mortgage, deed of trust or ground
lease or the date of recording thereof.
28. Attorney's Fees.
If either party named herein brings an action to enforce the terms
hereof or declare rights hereunder, the prevailing party in any such action, on
trial or appeal, shall be entitled to his costs and reasonable attorney's fees,
including all appeals, to be paid by the losing party as fixed by the court.
<PAGE> 22
29. Landlord's Access.
Landlord and Landlord's agents shall have the right to enter the
Premises at reasonable times for the purpose of inspecting the same, showing
the same to prospective purchasers, lenders or tenants, and making such
alterations, repairs, improvements or additions to the Premises as Landlord may
deem necessary or desirable. Landlord's right to inspect the Premises
includes, but is not limited to, the right to take samples and make such
environmental tests as Landlord may deem appropriate from time to time.
Landlord may at any time, place on or about the premises any ordinary "For
Sale" signs and Landlord may at any time during the last 120 days of the term
hereof place on or about the Premises any ordinary "For Lease" signs, all
without rebate of rent or liability to Tenant.
30. Auctions.
Tenant shall not conduct, nor permit to be conducted, whether
voluntarily or involuntarily, any auction upon the Premises without first
having obtained Landlord's prior written consent. Notwithstanding anything to
the contrary in this Lease, Landlord shall not be obligated to exercise any
standard of reasonableness in determining whether to grant such consent.
31. Signs.
Any and all signs placed on the exterior of the Premises, including
loading and unloading signs, name signs and number signs, shall be provided by
the Landlord at the Landlord's sole cost and expense and shall be in such form,
style and color as to conform to the standard used throughout the business park
of which the Premises are a part. Tenant is expressly prohibited from
displaying any signage not authorized by Landlord.
32. Merger.
The voluntary or other surrender of this Lease by Tenant, or a mutual
cancellation thereof, or a termination by Landlord, shall not work a merger,
and shall, at the option of Landlord, terminate all or any existing
subtenancies or may, at the option of Landlord, operate as an assignment to
landlord of any or all such subtenancies.
33. Quite Possession.
Upon Tenant paying the rent for the Premises and observing and
performing all of the covenants, conditions and provisions on Tenant's part to
be observed and performed hereunder, Tenant shall have quiet possession of the
Premises subject to all of the provisions of this Lease. Landlord represents
and warrants to Tenant that the individuals executing this Lease on behalf of
Landlord are fully authorized and legally capable of executing
<PAGE> 23
this lease on behalf of Landlord and that such execution is binding upon all
parties holding an ownership interest in the Premises.
34. Multiple Tenant Business Park.
Tenant agrees that it will abide by, keep and observe all reasonable
rules and regulations which Landlord may make from time to time for the
management, safety, care and cleanliness of the business park in which the
Premises are located, the parking of vehicles and the preservation of good order
therein as well as for the convenience of other occupants and tenants of the
business park in which the Premises are located.
35. Security Measures.
Tenant hereby acknowledges that the rental payable to Landlord
hereunder does not include the cost of guard service or other security measures,
and that Landlord shall have no obligation whatsoever to provide same. Tenant
assumes all responsibility for the protection of Tenant, its agents and invitees
from acts of third parties.
36. Easements.
Landlord reserves to itself the right, from time to time, to grant such
easements, rights, and decisions that Landlord deems necessary or desirable, and
to cause the recordation of site plans, parcel maps, restrictions and similar
instruments so long as such easements, rights, dedications, maps and
restrictions do not unreasonably interfere with the use of the Premises by
<PAGE> 24
Tenant. Tenant shall sign any of the aforementioned documents upon request of
Landlord and failure to do so shall constitute a material breach of this Lease.
37. Performance' Under Protest.
If at any time a dispute shall arise as to any amount or sum of money to be paid
by one party to the other under the provisions hereof, the party against whom
the obligation to pay the money is asserted shall have the right to make payment
"under protest" and such payment shall not be regarded as voluntary payment, and
there shall survive the right on the part to institute a suit for recovery of
such sum. If it shall be adjudged that there was no legal obligation on the part
of said party to pay such sum or any part thereof, said party shall be entitle
to recover such sum or so much thereof as it was not legally required to pay
under the provision of this Lease, plus court costs and reasonably attorney's
fees, which shall not exceed five percent (5%) of the sum in dispute.
<PAGE> 25
38. Authority.
If Tenant is a corporation, trust or general or limited partnership,
each individual executing this Lease on behalf of such entity represents and
warrants that he or she is duly authorized to execute and deliver this Lease on
behalf of said entity. If Tenant is a corporation, trust or partnership, tenant
shall, within thirty (30) days after execution of this Lease, deliver to
Landlord evidence of such authority satisfactory to Landlord.
39. Survival.
Each term, agreement, obligation or provision of this Lease to be
performed by Tenant shall be construed to be both a covenant and a condition,
all of which shall survive the expiration or termination of this Lease and any
renewals or extensions of this Lease.
40. Conflict.
Any conflict between the typewritten provisions of this Lease and the
handwritten provisions shall be controlled by the handwritten provisions.
41. Abandonment.
If Tenant shall abandon or vacate the premises before the end of the
term of this lease, Landlord may, at its option, cancel this Lease, or Landlord
may enter said Premises as the agent of Tenant, by force or otherwise, with or
without notice, without being liable in any way therefore, and relet the
<PAGE> 26
Premises with or without any furniture or equipment that maybe therein, as the
agent of Tenant, at such price and upon such terms and for such duration of time
as Landlord may in its reasonable discretion determine, and receive the rent
therefore, applying the same to the payment of the rent due by these presents,
and if the full rental herein provided shall not be realized by Landlord over
and above the expenses to Landlord in such reletting, Tenant shall pay any
deficiency.
42. Assignment of Chattels.
Tenant hereby pledges and assigns to Landlord all of Tenant's rights in
the furniture, fixtures, goods and chattels of Tenant which shall or may be
brought or put on the Premises as security for the payment of said rent, and
Tenant agrees that said lien may be enforced by distress, foreclosure or
otherwise, at the election of Landlord. It is understood and agreed that any
merchandise, fixtures, furniture or equipment left in the Premises when Tenant
vacates shall be deemed to have been abandoned by Tenant and by such abandonment
Tenant automatically relinquishes any right or interest therein. Landlord is
authorized to sell, dispose of or destroy same. Tenant hereby irrevocably
appoints Landlord its agent for this purpose.
<PAGE> 27
43. Tenant's Improvements.
(a) Within five (5) days after the date hereof, Landlord will
deliver the Premises including a shell building, containing 8,485 square feet
(the "Building"), comprising a portion of the Premises, which shall be fully
enclosed with all required doors and windows in exterior walls, together with
exterior painting, roof tiles, electrical main service with capacity to handle
required load, parking, landscaping and irrigation and front walkways. Landlord
will also provide Tenant with architectural plans for the interior Improvements
(the "Improvements") to the Building, which plans will be attached hereto within
five (5) days from date hereof as Exhibit B.
(b) Tenant agrees that, upon taking possession of the Premises, it
shall cause its contractor (the "Contractor") to immediately apply for all
necessary permits and approvals for construction of the Improvements. Within
three (3) days after receipt of such permits and approvals, Tenant shall cause
the Contractor to commence construction of the Improvements.
(c) Prior to the commencement of construction of the Improvements,
Tenant shall record a Notice of Commencement in accordance with Section 713.13
of the Florida Statutes in the Clerk's Office of Broward County and post a
certified copy of such Notice of Commencement at the Premises. Tenant will
provide Landlord with a copy of the agreement between Tenant and Contractor for
the construction of the Improvements. Tenant will cause the Contractor to
provide Landlord with copies of the following: (a) all plans and specifications
approved by the necessary governmental authorities, (b) all permits and
approvals necessary for construction of the Improvements, (c) all
<PAGE> 28
contracts between the Contractor and subcontractors, and (d) all other documents
as Landlord may reasonably request.
(d) Tenant shall cause Contractor to procure and maintain, at its
expense, during the construction of the Improvements, at least the following
insurance:
COVERAGE LIMITS
(a) Worker's Compensation Statutory
(a) Employer's Liability $1,000,000 each
occurrence
(a) Comprehensive General Liability $1,000,000 limit
combined single
(a) Comprehensive Automobile Liability $1,000,000 limit
combined single
Contractor shall not commence construction of
<PAGE> 29
Improvements until it has presented Landlord with certificates of insurance
certifying that the above insurance policies are in effect at the required
limits and will remain in effect during the construction of the Improvements.
Landlord shall be named as an additional insured in all of the above liability
policies with a statement to that effect set forth in the certificates of
insurance.
(e) Tenant shall cause the Contractor to proceed diligently with the
construction of the Improvements and complete such construction in a timely and
good and workmanlike manner no later than ninety (90) days after the issuance of
a building permit for interior improvements by the Broward County Building
Department.
(f) Landlord agrees that it will pay the Contractor on behalf of Tenant for
the construction of the Improvements an amount not to exceed $32 per square foot
for such construction as hereinafter set forth. Tenant acknowledges that
improvements to only 7,111 square feet of the Building will be constructed
initially and that the amount of payment for such improvements by Landlord shall
be limited to $32 per square foot plus an additional amount of not to exceed
$16,488 (calculated on the basis of $12 per square foot for the remaining 1,374
square feet in the Building), or a total amount not to exceed $244,040 for such
improvements. The amount of payment by Landlord for construction of improvements
to the remaining 1,374 square feet in the Building shall be limited to $20 per
square foot or a total amount not to exceed $27,480. Tenant shall cause the
Contractor to provide Landlord with invoices for those completed portions of the
Improvements by the 25th day of each month. Following Landlord's inspection and
acceptance of that portion of the work for which payment is sought, Landlord
agrees to make payment to the
<PAGE> 30
Contractor, less a ten percent (10%) retainage, by the 15th day of the following
month. The Contractor shall provide Landlord with good and sufficient lien
waivers from the Contractor and, if Landlord requests, from any and all
subcontractors and sub-subcontractors, and every person, firm or corporation
furnishing labor or materials to the Contractor, any subcontractor, sub-
subcontractor. However, Landlord shall have not liability for the payment of any
amounts to any subcontractor, sub-subcontractor or anyone furnishing materials.
At the time of the issuance of a Certificate of Occupancy for any portion of the
Improvements, Landlord shall pay the Contractor any balance due, plus the ten
percent (10%) retainage, not to exceed the amounts set forth in this Section
43(f). In addition, the Contractor shall furnish Landlord with a complete final
waiver and release of its lien rights, and, if Landlord requests, with final
lien waivers and releases for all subcontractors, sub-subcontractors and every
person, firm or corporation furnishing labor or materials to the Contractor,
subcontractors or sub- subcontractors on account of any work done or materials
furnished, together with an affidavit complying with Section 713.06(d)(l) of the
Florida Statutes providing that the releases include all labor, materials,
supplies and services for which a lien can be filed and which affidavit
<PAGE> 31
will show that all lienors have been paid in full, if that is the fact, or else
shall provide the name of each lienor who has not been paid in full and the
amount due or to become due to each lienor for labor, services or materials
furnished, in which event, Landlord may, after giving the Contractor ten (10)
days written notice, pay such outstanding bills for labor, services or materials
in full, jointly to the Contractor and the supplier of such. If there should
remain minor items to be completed, the Contractor and Landlord shall list such
items and the Contractor shall deliver in writing, his guarantee to complete
said items within time limits established by the Contractor and Landlord.
Landlord may retain a sum equal to 120% of the estimated cost of completing any
unfinished items, provided that said unfinished items are listed separately and
the estimated cost of completing any unfinished items are likewise listed.
44. Radon Gas.
Radon is a naturally occurring radioactive gas that, when it
has accumulated in a building in sufficient quantities, may present health risks
to persons who are exposed to it over time. Levels of radon that exceed federal
and state guidelines have been found in buildings in Florida. Additional
information regarding radon and radon testing may be obtained from your county
public health unit.
WITNESS, the parties hereto have executed this Lease on the
dates specified immediately below their respective signatures.
Notice Address: Landlord:
<PAGE> 32
4501 N.W. 31st Avenue
Ft. Lauderdale, Florida 33309 REYNOLDS METAL
DEVELOPMENT
COMPANY
With a copy to:
6601 West Broad Street
By:_______________________________
P.O. Box 27003 D. Paul Bonevac
Richmond, Virginia 23261 Executive Vice President
Attention: Corporate Secretary
Date:______________________________
______________________________
Witness
______________________________
Witness
<PAGE> 33
______________________________ By:
Witness
Title:
_________________________
______________________________ Date:
Witness
_________________________
jld
prop/dev
wingate
lease/final
<PAGE> 34
FIRST ADDENDUM TO WINGATE COMMONS
BUSINESS PARK NET LEASE
This First Addendum to that certain Wingate Commons Business Park Net
Lease (the "Lease") dated September 27, 1991 by and between REYNOLDS METALS
DEVELOPMENT COMPANY, a Delaware corporation ("Landlord"), and LIFECARE
INVESTMENTS, INC., a Delaware corporation ("Tenant"), hereby modifies and
amends the lease to include the following:
1. Notwithstanding anything to the contrary contained in Section 3.1 of
the Lease, Tenant shall have the option of terminating this Lease at
the end of the tenth and the fifteenth Lease Year by giving Landlord
not less than ninety (90) days' prior written notice.
2. Sections 3.2 and 4.2 of the Lease are hereby deleted.
3. Notwithstanding anything to the contrary contained in Section 3.3 of
the Lease, Tenant shall not be required to pay Rent until the
Commencement Date.
4. Tenant shall have the option of purchasing the Premises during the
first five (5) Lease Years of the Lease at the purchase price set
forth below opposite the Lease Year in which the purchase is made (the
"Option Price"):
Lease Year 1 $ 1,185,150.00
Lease Year 2 $ 1,223,443.00
Lease Year 3 $ 1,284,700.00
Lease Year 4 $ 1,347,975.00
Lease Year 5 $ 1,351,241.00
Tenant shall exercise such option by giving written notice thereof to
Landlord. If Tenant exercises its option, closing shall occur within
sixty (60) days after the date of the exercise by Tenant of its option
and time is of the essence. Upon payment of the Option Price,
Landlord will convey the Premises to Tenant by warranty deed, subject
to any leases, easements, conditions and restrictions of record
affecting the Premises existing on the date of the exercise by Tenant
of its option. If Tenant does not exercise its option to purchase the
Premises or Tenant does not close the purchase within sixty (60) days
after the exercise by Tenant of its option to purchase the Premises
because of the fault of Tenant, Tenant's option to purchase the
Premises pursuant to this paragraph 4 shall expire and be of no
further force and effect.
5. Notwithstanding the provisions of paragraph 4 above, if Landlord,
during the first five (5) Lease Years, receives a bona fide offer to
purchase the Premises
<PAGE> 35
from a third party (the "Third Party Offer"), Landlord shall so advise
Tenant by notice in writing setting forth the terms and conditions of
the Third Party Offer. For a period of ten (10) days after receipt of
said notice, Tenant shall have the option of purchasing the Premises
at the higher of the Option Price or the price specified in the Third
Party Offer by giving written notice thereof to Landlord. If Tenant
exercises its option under this paragraph 5, closing shall occur
within sixty (60) days after the date of the exercise by Tenant of its
option contained in this paragraph 5 and time is of the essence. Upon
payment of the Option Price or the price set forth in the Third Party
Offer, whichever is applicable, Landlord will convey the Premises to
Tenant by warranty deed, subject to any leases, easements, conditions
and restrictions of record affecting the Premises existing on the date
of the exercise by Tenant of its option to purchase the Premises
pursuant to this paragraph 5. If Tenant does not exercise its option
to purchase the Premises pursuant to this paragraph 5 within such ten
(10) day period by written notice to Landlord or Tenant does not close
the purchase within sixty (60) days after the exercise by Tenant of
its option to purchase the Premises pursuant to this paragraph 5
because of the fault of Tenant, Tenant's option to purchase the
Premises pursuant to paragraph 4 above or this paragraph 5 shall
expire and shall be of no further force and effect and Landlord may
proceed to sell the Premises to such third party on the terms and
conditions set forth in the Third Party Offer.
6. Notwithstanding anything to the contrary contained in Section 4 of the
Lease, the following shall be applicable to the payment of Monthly
Rent and Additional Rent during the periods set forth below:
(a) During the first two (2) months of the term of the Lease,
Tenant shall not be required to pay Monthly Rent. From the
third month through the tenth month of the term of the Lease,
the Monthly Rent payable by Tenant shall be reduced by fifty
percent (50%).
(b) The Monthly Rent shall not be adjusted pursuant to the
provisions of Section 4.1(b) of the Lease until after the
second Lease Year. Thereafter the provisions of Section 4.1(b)
of the Lease shall be applicable; provided, however, that the
Adjusted Monthly Rent shall not be increased (i) by more than
twenty percent (20%) during the first five (5) Lease Years,
using the Monthly Rent of $8,308.23 for the first Lease Year
as the base, (ii) by more than twenty percent (20%) during the
<PAGE> 36
second five (5) Lease Years, using the Adjusted Monthly Rent
for the sixth Lease Year as the base, (iii) by more than
twenty percent (20%) during the third five (5) Lease Years
using the Adjusted Monthly Rent for the eleventh Lease Year as
the base, and (iv) by more than twenty percent (20%) during
the last five (5) Lease Years, using the Adjusted Monthly Rent
for the sixteenth Lease Year as the base.
7. It is hereby understood and acknowledged by Tenant that the Premises
is part of a business park known as Wingate Commons Business Park and
that the other tenants of the said business park together with their
customers, employees and invitees have mutual use of the Common Areas
including but not limited to all parking areas, driveways and roads
located in the park of which the Premises are a part and that Landlord
has the right to temporarily close any part of said Common Areas for
such period of time as is reasonably necessary to make repairs or
alterations to the Common Areas or to the buildings located adjacent
thereto. Accordingly, Tenant agrees to indemnify and save Landlord
harmless from and against any and all liabilities, losses, damages,
costs, expenses (including reasonable attorneys' fees) in connection
with any injury to, or the death of, any person or any damage to or
loss of property resulting from the use of the aforesaid Common Areas
by others or the temporary closure of same by Landlord. Landlord will
give Tenant five (5) days' notice of any non-emergency repairs,
alterations or improvements and reasonable notice of emergency
repairs, alterations or improvements to be made to the Common Areas or
to the buildings located adjacent thereto which could restrict ingress
or egress to the Premises.
8. Notwithstanding anything to the contrary contained in Section 12 of
the Lease, Tenant shall have the right at the inception of the Lease
to sublease twenty-five percent (25%) of the Building to another third
party for use as executive offices. It is agreed that such third
party subleasing a portion of the Building for use as executive
offices may enter into additional subleases of parts of such portion
with others. Any other subleases not covered by this paragraph B
shall be subject to all the terms and provisions of Section 12 of the
Lease.
9. For purposes of Section 18 of the Lease, the term "maximum rate then
allowable by law" shall mean eighteen percent (18%) per annum.
<PAGE> 37
Except as otherwise modified herein, the terms and conditions
contained in the Lease are in full force and effect.
Capitalized term when used herein and not otherwise defined herein
shall have the meanings assigned to them in the Lease.
<PAGE> 38
Except as otherwise modified herein, the terms and conditions contained
in the Lease, as amended, are hereby ratified, confirmed and approved.
Capitalized terms when used herein and not otherwise defined herein
shall have the meanings assigned to them in the Lease.
IN WITNESS WHEREOF the parties have executed this Second Addendum on
the dates specified immediately below their respective signatures.
Landlord:
WITNESS: REYNOLDS METALS DEVELOPMENT
COMPANY
By:
D. Paul Bohevac
Executive Vice President
Date:
WITNESS: Tenant:
LIFECARE INVESTMENTS, INC.
By:
Title:
Date:
<PAGE> 39
SECOND ADDENDUM TOWINGATE COMMONS
BUSINESS PARK NET LEASE
This Second Addendum to that certain Wingate Commons Business
Park Net Lease, dated September 27, 1991 (the "Lease"), by and between REYNOLDS
METALS DEVELOPMENT COMPANY, a Delaware corporation ("Landlord), and LIFECARE
INVESTMENTS, INC., a Delaware corporation ("Tenant), as amended by the First
Addendum to the Lease, hereby modifies and amends the Lease, as amended, as
follows:
1. Notwithstanding anything to the contrary contained in
Paragraph 6 of the First Addendum to the Lease, as amended
hereby, Tenant shall be required to pay to Landlord Tenant's
Share of Common Area maintenance charges and Real Property
Taxes and any other payments constituting Additional Rent
payable by Tenant under the Lease beginning with the
Commencement Date.
2. Section 4.1(a) of the Lease is hereby amended by increasing
the Annual Rent for the second twelve months of the term of
the Lease from $103,941.25 to $106,062.50 and the Monthly Rent
from $8,661.77 to $8,838.54.
3. Paragraph 6(a) of the First Addendum to the Lease is hereby
amended to read as follows:
"(a) During the first two (2) months of the term of the
Lease, Tenant shall not be required to pay Monthly
Rent. During the third and fourth months of the term
of the Lease, the Monthly Rent payable by Tenant
shall be reduced by fifty percent (50%)."
4. Section 43(f) of the Lease is hereby amended by adding the
following two sentences at the end thereof:
"Upon final completion of the Improvements, occupancy of the
Premises by Tenant and full compliance with the conditions set
forth above, if the amount paid by Landlord to Contractor
and/or any lienor on behalf of Tenant is less than $271,520,
Landlord shall pay to Tenant an amount equal to the difference
between $271,520 and the amount previously paid by Landlord
pursuant to this Section 43(f), which amount shall be used by
Tenant to pay for other business expenditures of Tenant. In
no event shall Landlord be required to
<PAGE> 40
pay more than $271,520 pursuant to this Section 43(f)."
IN WITNESS WHEREOF, the parties have executed this First Addendum on
the dates specified immediately below their respective signatures.
Landlord:
REYNOLDS METALS DEVELOPMENT COMPANY
By:
------------------------------------
Witness D. Paul Bonevac
Executive Vice President
Date:
Witness
Tenant:
LIFECARE INVESTMENTS, INC.
By:
------------------------------------
Witness
Title:
Date:
<PAGE> 1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We hereby consent to the use in this Registration Statement Form S-4 of our
report dated May 26, 1995 on the consolidated financial statements of U.S.
Alcohol Testing of America, Inc. and Subsidiaries included herein and to the
reference made to us under the caption "Experts" in the Prospectus.
WOLINETZ, GOTTLIEB & LAFAZANM, P.C.
/s/ Wolinetz, Gottlieb & Lafazanm, P.C.
Rockville Centre, New York
August 6, 1996
<PAGE> 1
Consent of Independent Auditors
We consent to the reference to our firm under the caption "Experts" and to the
use of our reports on U.S. Alcohol Testing of America, Inc. and Good Ideas
Enterprises, Inc. dated May 20, 1996, in Amendment No. 1 to the Registration
Statement (Form S-4 No. 333-3734) and related Prospectus of U.S. Alcohol
Testing of America, Inc. for the Registration of common stock, warrants to
purchase common stock, and the Consent Solicitation Statement to the Minority
Stockholders of Good Ideas Enterprises, Inc.
ERNST & YOUNG LLP
Riverside, California
August 6, 1996
