<PAGE> 1
As filed with the Securities and Exchange Commission on May 6, 1996
Registration No. 33-
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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
U.S. Drug
<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
General Instruction G, check the following. / /
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
========================================================================================================================
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
- ------------------- ------------- -------------- ---------- ------------
<S> <C> <C> <C> <C>
Common Stock, $.01
par value......... 2,951,829 $3.0625 $9,039,976 $3,117
Common Stock, $.01
par value,
issuable upon
exercise of
Warrants.......... 257,143 $4.37 $1,123,715 $387
Warrants expiring
October 13, 1998.. 257,143
--------------------------------
Total $3,504
========================================================================================================================
</TABLE>
(1) The number of shares of the Common Stock of U.S. Alcohol Testing of
America, Inc. ("USAT") being registered is based on (a) an estimate as
to the approximate number of shares to be issued to the minority
stockholders of U.S. Drug Testing, Inc. ("U.S. Drug") in connection
with the merger of U.S. Drug with and into U.S. Drug Acquisition
Corp., a wholly-owned subsidiary of USAT, assuming a $3.0625 per share
market price for the USAT shares, which is the closing sales price on
April 30, 1996; (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 U.S. Drug Warrants; and (c) the assumption that
no U.S. Drug Options will be exercised prior to the merger.
(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 $3.0625 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 257,143 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.
U.S. Drug
<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>
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 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...... Not Applicable.
6. Material Contacts with the Company
Being Acquired....................... Material Contacts of USAT with U.S. Drug
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>
U.S. Drug
<PAGE> 4
<TABLE>
<CAPTION>
Item Number Location in Consent Solicitation
and Caption Statement/Prospectus
----------- --------------------------------
<S> <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; USAT
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 U.S. Drug; U.S. Drug Market
Information; U.S. Drug's Financial
Statements; U.S. Drug's Selected Financial
Data; and U.S. Drug's 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 U.S. Drug Principal
Stockholders.
19. Information if Proxies, Consents or
Authorizations are not to be
Solicited, or in an Exchange Offer.. Not Applicable.
</TABLE>
U.S. Drug
<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
U.S. DRUG TESTING, INC.
This Consent Solicitation Statement/Prospectus is being furnished to
the minority stockholders of U.S. Drug Testing, Inc., a Delaware corporation
("U.S. Drug"), in connection with the solicitation of consents by U.S. Alcohol
Testing of America, Inc., a Delaware corporation ("USAT"), from the holders,
other than USAT, of U.S. Drug Common Stock, $.001 par value (the "U.S. Drug
Common Stock"), in order to adopt an Agreement and Plan of Merger dated as of
April 23, 1996 (the "Merger Agreement") by and among U.S. Drug, USAT and U.S.
Drug Acquisition Corp., a Delaware corporation and a wholly-owned subsidiary of
USAT ("Acquisition Corp."), pursuant to which U.S. Drug will be merged with and
into Acquisition Corp. (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 U.S. Drug other than USAT (the "U.S. Drug Minority
Stockholders") in exchange for their 1,721,900 shares of the U.S. Drug Common
Stock (the "Minority U.S. Drug Common Stock") and (2) an aggregate of ________
shares issuable upon the exercise of Common Stock purchase warrants expiring
October 13, 1998 (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 October 13, 1998 (the "U.S. Drug Warrants") to purchase up to
150,000 shares of the U.S. Drug Common Stock. The U.S. Drug Minority
Stockholders will also receive a specified percentage of any advance cash
payment from a marketing partner under certain conditions. See "Terms of the
Transaction-Special Payment."
U.S. DRUG MINORITY STOCKHOLDERS SHOULD CONSIDER CERTAIN RISK FACTORS
IN CONNECTION WITH THE PROPOSED TRANSACTIONS. SEE "RISK FACTORS".
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
THIS CONSENT SOLICITATION STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
This Consent Solicitation Statement/Prospectus is dated __________
___, 1996.
U.S. Drug
<PAGE> 6
AVAILABLE INFORMATION
USAT and U.S. Drug 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 U.S. Drug 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 U.S. Drug Common Stock is traded on the Pacific
Stock Exchange, reports, proxy and information statements and other information
concerning U.S. Drug 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 U.S. Drug, will be required to continue to file
periodic reports, proxy and information statements and other information with
the Commission pursuant to the Exchange Act.
This Consent Solicitation Statement/Prospectus incorporates documents
by reference which are not presented herein or delivered herewith. USAT or U.S.
Drug will provide without charge to each person to whom a copy of this Consent
Solicitation Statement/Prospectus is delivered, upon written or oral request,
copies of any and all such documents. Requests for USAT documents should be
directed to U.S. Alcohol Testing of America, Inc., 10410 Trademark Street,
Rancho Cucamonga, CA 91730, Attention: Ms. Linda H. Masterson, President.
Telephone: (909) 466-8378. Requests for U.S. Drug documents should be directed
to U.S. Drug Testing, Inc. 10410 Trademark Street, Rancho Cucamonga, CA 91730,
Attention: Mr. Gary S. Wolff, Treasurer, Telephone: (909) 466-8378. In order to
ensure timely delivery of the documents, any request should be made by
__________________, 1996.
USAT has filed with the Commission a Registration Statement on Form
S-4, File No. _____________ (the "Registration Statement"), under the Securities
Act of 1933, as amended (the "Securities Act"), with respect to the shares of
the USAT Common
U.S. Drug
2
<PAGE> 7
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 U.S. Drug 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 or
is incorporated by reference herein, 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 the fees prescribed by the rules and
regulations of the Commission, or examined there without charge.
The information contained in this Consent Solicitation
Statement/Prospectus with respect to U.S. Drug has been provided by U.S. Drug
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 U.S. Drug
Minority Stockholder should read the entire Consent Solicitation
Statement/Prospectus and the Appendices hereto prior to taking any action with
respect to the proposal 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 U.S. Drug, operate in several
different industries:
1. U.S. Drug, which is 67.0% owned by USAT and whose U.S. Drug Common
Stock trades on the Pacific Stock Exchange, develops proprietary systems that
will test for drug use.
U.S. Drug
3
<PAGE> 8
2. Good Ideas Enterprises, Inc. ("Good Ideas"), which is 60.8% owned by
USAT and whose common stock, $.001 par value (the "Good Ideas Common Stock"),
also trades on the Pacific Stock Exchange, designs, markets and distributes a
variety of traditional toy products for children of various ages.
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. Alconet, Inc. ("Alconet"), which is a wholly-owned subsidiary
acquired by USAT in March 1995 and subsequently transferred by USAT to
ProActive, 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 U.S. Drug and will engage in no business operations until after
consummation of the Merger. Acquisition Corp.'s Board of Directors consists of
three USAT directors who have no direct affiliation with U.S. Drug.
The USAT Common Stock is currently traded on the American Stock
Exchange under the symbol "AAA". See "USAT Market Information-Market Data."
U.S. Drug was incorporated on October 8, 1992 under the laws of
Delaware. Effective as of January 1, 1993, USAT transferred or sub-licensed to
U.S. Drug 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. U.S. Drug maintains its principal executive offices at 10410 Trademark
Street, Rancho Cucamonga, CA 91730 and its telephone number is (909) 466-8378,
which are the same as USAT's. U.S. Drug currently has three directors, two of
whom until April 18, 1996 were directors and executive officers of USAT, one of
whom is an executive officer and former director of USAT and all three of whom
are stockholders of USAT. See "Risk Factors-Conflicts of Interest" and "Material
Contacts of USAT with U.S. Drug."
U.S. Drug
4
<PAGE> 9
U.S. Drug is developing proprietary systems that will test for drug
use, including 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 drugs
of abuse detection utilizing the United States Navy ("USN") patent for flow
immunosensor technology. U.S. Drug is developing its own proprietary
"Immunoassay Chemistry" for these five drugs which work with the USN developed
technology. U.S. Drug has received six Food and Drug Administration ("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. U.S. Drug, based on its review of current market conditions,
has decided to defer completion of the calibrators and the other elements
required to be completed in order to market the urine medium testing product
until it can complete the assays for a saliva medium testing product and, as a
result, has produced no revenues through the date hereof. Until FDA approval is
obtained of the saliva medium product and marketing has commenced, no revenues
will be generated from sales to users. U.S. Drug will consider seeking a major
company to act as a marketing partner and/or to assist in some phase of the
product development program. U.S. Drug may seek to have such partner make an
advance payment as consideration for the marketing rights and/or as an advance
payment to fund development of the products. However, there can be no assurance
that such a partner will be obtained on a timely basis, that it would make any
such advance payment and when such payment would be made. U.S. Drug has
commenced research using saliva as a testing medium in connection with the flow
immunosensor technology and currently expects to submit its five-panel screening
assay to the FDA late in 1997, but there is no assurance that such submission
will occur by such date. U.S. Drug's management expects marketing of the U.S.
Drug products to commence six months to a year later, but there is no assurance
as to when FDA approval will be given or when marketing will commence.
Accordingly, it may be 20 to 30 months before any revenues from sales of
products will be generated by U.S. Drug.
The U.S. Drug Common Stock is currently traded on the Pacific Coast
Stock Exchange under the symbol "U.S.D.P." See "U.S. Drug Market
Information-Market Data." If the Merger is consummated, trading in the U.S. Drug
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 concurrently seeking to acquire the minority stock
interests in Good Ideas by an offer of shares of the USAT Common Stock to the
minority stockholders of Good Ideas as consideration for their consent to a
merger of Good Ideas Acquisition Corp., a newly-incorporated wholly-owned
subsidiary
U.S. Drug
5
<PAGE> 10
of USAT, into Good Ideas. There is no assurance that any such merger will be
successfully consummated. The acquisition of Good Ideas 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. U.S. Drug's
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 voting stock acting without a meeting and without prior notice.
Accordingly, USAT as the owner of 67.0% of the U.S. Drug Common Stock, which is
the sole voting stock in U.S. Drug, 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 U.S. Drug Common Stock owned by U.S. Drug
stockholders other than USAT (i.e., the U.S. Drug 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 U.S. Drug after the
holders of more than 50% of the outstanding shares of the Minority U.S. Drug
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 U.S. Drug Common Stock
are not obtained.
U.S. Drug
6
<PAGE> 11
(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 U.S. Drug Testing, 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 U.S. Drug. 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
U.S. Drug Testing, 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 U.S. DRUG 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.
U.S. Drug
7
<PAGE> 12
(5) RECORD DATE, QUORUM AND REQUIRED VOTE
Only holders of record of shares of the U.S. Drug Common Stock on
________________, 1996 (the "Record Date") will be entitled to consent to
adoption of the Merger Agreement.
On the Record Date, there were 5,221,900 shares of the U.S. Drug Common
Stock outstanding, of which 1,721,900 shares were the Minority U.S. Drug Common
Stock. The affirmative consent of the holders of more than 50% of the
outstanding shares of the Minority U.S. Drug Common Stock is necessary to adopt
the Merger Agreement. Thus, the holders of at least 860,951 shares of the
1,721,900 shares of the Minority U.S. Drug Common Stock must consent to the
adoption of the Merger Agreement. (USAT intends not to include an aggregate of
78,400 shares held by a current and a former director of USAT and a consultant
to USAT and his affiliates in determining whether it has a majority; however, if
the necessary consents are obtained, these holders will receive shares of the
USAT Common Stock, and share in the Special Payment (as hereinafter defined), on
the same basis as the other U.S. Drug Minority Stockholders. See the subsections
"The Consent Procedure-Miscellaneous" and "Special Payment" under the caption
"Terms of the Transaction". USAT will execute and deliver a consent to such
adoption only after the holders of more than 50% of the Minority U.S. Drug
Common Stock (excluding the aforesaid 78,400 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.
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 and, accordingly, Acquisition Corp. has approved the Merger.
(6) APPRAISAL RIGHTS
The U.S. Drug 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 U.S. Drug Stockholders."
THE MERGER
(1) GENERAL
Pursuant to the Merger Agreement, U.S. Drug will be merged with and
into Acquisition Corp. (the "Merger") and each outstanding share of the Minority
U.S. Drug Common Stock will be converted into __________ shares of the USAT
Common Stock. The shares of the U.S. Drug Common Stock owned by USAT will be
canceled upon the Merger becoming effective. Holders of the Minority U.S. Drug
Common Stock may receive an additional payment
U.S. Drug
8
<PAGE> 13
based on payments, if any, by a marketing partner within one year of the
Effective Date (as defined below). See "Terms of the Transaction-Special
Payment."
(2) OPTIONS AND WARRANTS
As of the Record Date, there were outstanding options expiring October
2, 2004 (the "U.S Drug Options") to purchase an aggregate of 152,000 shares of
the U.S. Drug Common Stock and Common Stock purchase warrants expiring October
13, 1998 (the "U.S. Drug Warrants") to purchase an aggregate of 150,000 shares
of U.S. Drug Common Stock. The U.S. Drug Options are all owned by current or
former officers and members of the Board of Directors of U.S. Drug and are
exercisable at $7.00 per share. Current directors of U.S. Drug who hold U.S.
Drug Options to purchase an aggregate of 110,000 shares of the U.S. Drug Common
Stock have agreed to waive their rights under such Options upon the consummation
of the Merger. The remaining U.S. Drug Options to purchase an aggregate of
42,000 shares of the U.S. Drug Common Stock have, by their terms, become
exercisable only until the effective date of the Merger and, because USAT has
declined to assume them, the Options will expire if not so exercised. Because of
the higher exercise price as compared to the USAT offer, USAT does not
anticipate any exercise. The U.S. Drug Warrants are owned by Baraban Securities,
Inc. ("Baraban"), the underwriter of the initial public offering of the U.S.
Drug Common Stock, and Baraban's designees. The exercise price of the U.S. Drug
Warrants is $7.50 per share. If the Merger is consummated, as a result of the
anti-dilution provisions of the U.S. Drug Warrants, the U.S. Drug Warrants will
be converted into USAT Common Stock purchase warrants expiring October 13, 1998
(the "Merger Warrants") to purchase an aggregate of __________ shares of the
USAT Common Stock, which is the same number of shares of the USAT Common Stock
which the holders of the U.S. Drug Warrants would have been entitled to receive
after the consummation of the Merger had the U.S. Drug Warrants been exercised
immediately prior to the consummation of the Merger. The exercise price will
proportionately adjusted to $_________ per share. See "The Merger and Related
Matters-U.S. Drug 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 U.S.
Drug and, on February 6, 1996, authorized execution of the Merger Agreement. On
April 23, 1996, the U.S. Drug Board of Directors authorized execution of, and
submission to the U.S. Drug Minority Stockholders for approval of, the Merger
Agreement. In taking such action, the U.S. Drug Board concluded that the offer
was fair to the U.S. Drug Minority Stockholders from a financial point of view
(a conclusion also
U.S. Drug
9
<PAGE> 14
reached by the USAT Board) and recommended to the U.S. Drug Minority
Stockholders adoption of the Merger Agreement. The U.S. Drug Board directs the
attention of the U.S. Drug Minority Stockholders to the affiliation of the
directors of U.S. Drug with USAT. See "Risk Factors-Conflicts of Interest" and
"Material Contacts of USAT with U.S. Drug." For a review of the factors each of
the USAT Board and the U.S. Drug Board considered in making its decision, see
"The Merger and Related Matters- Reasons for the Merger and Approval."
(4) FAIRNESS OPINION
The Board of Directors of U.S. Drug will receive an opinion from Whale
Securities Co., L.P. ("Whale Securities") as to the fairness of the Merger to
the U.S. Drug Minority Stockholders from a financial point of view as of the
date of the opinion. A copy of such opinion will be attached as Appendix B
hereto and should be read in its entirety. See "The Merger and Related
Matters-Fairness Opinion."
(5) 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 U.S. Drug Common Stock, will be mailed to the
holders of record as of the Effective Date of the shares of the Minority U.S.
Drug Common Stock. The U.S. Drug Minority Stockholders are requested not to
surrender their certificates for shares of the Minority U.S. Drug Common Stock
until they receive such a letter of transmittal. See "The Merger and Related
Matters-Exchange of Certificates."
(6) CONDITIONS OF THE MERGER
The obligations of USAT, U.S. Drug 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 a
majority of the outstanding shares of the Minority U.S. Drug 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
U.S. Drug
10
<PAGE> 15
Merger that may be waived (other than the requirement of a fairness opinion) if
the respective Board 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 Agreement attached as Appendix
A hereto for additional information as to the conditions of the Merger.
(7) 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 U.S. Drug 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 U.S. Drug 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 U.S. Drug Minority Stockholders: (1) by mutual
written consent of the Boards of Directors of USAT and U.S. Drug, (2) by either
USAT or U.S. Drug if the respective Board of Directors, based on the opinion of
its outside counsel, determines that making a recommendation to the U.S. Drug
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
U.S. Drug 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, U.S. Drug 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.
(8) MARKET PRICES
The following table sets forth the closing sales prices per share for
the USAT Common Stock and the U.S. Drug Common Stock as reported by the American
Stock Exchange and the Pacific Coast 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
May __, 1996, the latest available date. See "USAT Market Information" and "U.S.
Drug Market Information" for a historical
U.S. Drug
11
<PAGE> 16
comparison of market prices of the USAT Common Stock and the U.S. Drug Common
Stock, respectively.
<TABLE>
<CAPTION>
USAT U.S. Drug
Common Stock Common Stock
------------ -----------
<S> <C> <C>
February 5, 1996 $2.375 $3.75
May __, 1996 $ $
</TABLE>
(9) 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 or of U.S.
Drug until a stockholder thereafter sells his, her or its shares of the USAT
Common Stock, except that U.S. Drug Minority Stockholders receiving cash in lieu
of fractional shares may recognize income as to such payment. U.S. Drug Minority
Stockholders realizing cash upon receipt of the Special Payment (see "The Terms
of the Transaction-Special Payment") may recognize income in the amount of such
payment or payments. See "The Merger and Related Matters-Certain Federal Tax
Consequences."
(10) 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.
(11) 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
U.S. Drug
12
<PAGE> 17
Committee or affiliated stockholders took certain actions, including the
formulation of certain recommendations by the Committee which it attempted to
communicate to management.
On August 17, 1995, the Committee determined to seek consents (1) to
remove and replace incumbent directors with its own nominees; (2) to amend the
by-laws of USAT to delete the provision that establishes three classes of
directors on USAT's Board of Directors; and (3) to amend the by-laws of USAT to
fix the number of directors at seven instead of five and to require that a
majority of the directors be independent. On September 11, 1995, the Committee,
acting through Georgeson & Company Inc. as its solicitation agent, first
delivered and mailed definitive consent solicitation material pursuant to
Regulation 14A under the Exchange Act to brokers and certain stockholders of
record of USAT. USAT thereafter initiated an action in the Delaware District
Court alleging that the Committee had violated Section 14 of the Exchange Act,
sent out a "stop, look and listen letter" and filed its preliminary consent
revocation statement.
On September 26, 1995, as reported in USAT's Current Report on Form 8-K
filed on October 2, 1995, the following events occurred:
1. the Committee and USAT settled the above litigation;
2. the number of directors of USAT was increased from five to seven;
3. incumbent directors Glenn A. Bergenfield, William DiTuro and Gary S.
Wolff resigned as directors of USAT; however, they continued to serve as
directors of U.S. Drug and Good Ideas (Mr. Bergenfield and Dr. DiTuro
subsequently resigned as directors of both subsidiaries on November 15, 1995);
4. Alan I. Goldman, a nominee of the Committee, Peter M. Mark, a member
of the Committee, and Lee S. Rosen, a member of the Committee and also a
Committee nominee, were elected as directors of USAT;
5. John C. Lawn and Linda H. Masterson were elected as directors of
USAT; and
6. James C. Witham, Chairman of the Board, President and Chief
Executive Officer, and Karen B. Laustsen, Executive Vice President, continued to
serve USAT in such capacities and as directors (see second succeeding
paragraph), while Gary S. Wolff remained as Chief Financial Officer on an
interim basis and will serve USAT in other capacities after a new Chief
Financial Officer is appointed. See "USAT Management."
U.S. Drug
13
<PAGE> 18
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, as indicated above, Mr. Witham and Ms. Laustsen
resigned their officerships and directorships in USAT; however, they have agreed
to remain until May 31, 1996 as employees of USAT to assist in the transition
and other matters relating to the Company, including the Merger. They are also
continuing to serve as directors of U.S. Drug and Good Ideas until May 31, 1996.
On April 18, 1996, Robert Stutman was elected as Chairman of the Board
and a director of USAT and designated as its Chief Executive Officer. On the
same day, but effective May 13, 1996, Ms. Masterson, a director, was elected as
the President of USAT and designated as its Chief Operating Officer.
On April 18, 1996, USAT agreed in principle to acquire Robert Stutman &
Associates, Inc. ("RSA"), a provider of corporate drug-free work place programs
and of which Mr. Stutman was President and founder. Since January 1996, RSA has
been designing policies and programs for the ProActive subsidiary. There can be
no assurance that a definitive agreement for the acquisition of RSA will be
executed or a closing consummated, although the addition of Mr. Stutman as
described in the preceding paragraph should, in the opinion of the USAT Board,
facilitate such acquisition.
SUMMARY HISTORICAL AND PROFORMA COMBINED FINANCIAL DATA
The following summary historical financial data of the Company for the
five years ended March 31, 1995 is derived from the audited consolidated
financial statements of the Company. The following summary historical financial
data of U.S. Drug for the two years ended March 31, 1995 and for the period
October 8, 1992 (inception) through March 31, 1993 is derived from the audited
financial statements of U.S. Drug. The information presented for the nine-month
periods ended December 31, 1995 and 1994 is unaudited, but, in the opinion of
USAT's management in the case of the Company's financial information, and, in
the opinion of U.S. Drug's management in the case of U.S. Drug's financial
information, such information reflects all adjustments (consisting only of
normal recurring accruals) necessary for a fair presentation of the financial
data for the periods. The results for the interim periods presented are not
necessarily indicative of the results for a full year.
U.S. Drug
14
<PAGE> 19
The proforma condensed combined balance sheet of the Company as of
December 31, 1995 and the proforma condensed combined statement of operations
for the nine months ended December 31, 1995 give effect to the Merger under the
purchase method of accounting and the proposed sales of Good Ideas and USRR. No
effect is given in these proforma statements to the proposed merger of U.S. Drug
into a wholly-owned subsidiary of USAT because even prior thereto U.S. Drug was
included in the financial statements of the Company and the only change
thereafter will be to eliminate U.S. Drug's share of the "Minority Interest in
Net Loss (Income) of Subsidiaries, Net of Subsidiary Preferred Stock Dividends
Paid" in the Consolidated Statement of Operations and the elimination of the
minority interest relating to U.S. Drug on the consolidated balance sheet.
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 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 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," "U.S.
Drug's Management's Discussion and Analysis of Financial Condition and Results
of Operation" and the financial statements and related notes for the Company and
U.S. Drug included elsewhere in this Consent Solicitation Statement/Prospectus.
U.S. Drug
15
<PAGE> 20
HISTORICAL FINANCIAL DATA
THE COMPANY
<TABLE>
<CAPTION>
For the Nine Months
Ended December 31, For the Year Ended March 31,
------------------------------ --------------------------------------------------------------
1995 1994 1995 1994 1993 1992 1991
---- ---- ---- ---- ---- ---- ----
(Consolidated) (Consolidated) (Consolidated) (Consolidated) (Consolidated) (Consolidated)
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Income Statement
Data:
Total Revenues $3,015,006 $7,467,137 $8,437,150 $ 7,182,417 $ 4,166,104 $ 688,412 $ 445,244
========== ========== ========== =========== =========== ============ ==========
Net Loss ($5,850,715) ($4,409,786) ($7,236,396) ($10,066,035) ($7,997,253) ($3,490,024) ($1,103,247)
========== ========== ========== =========== ========== ========== ==========
Weighted Average
Common Shares
Outstanding 29,248,777 25,340,817 25,691,674 22,027,068 12,317,743 5,938,747 3,261,285
========== ========== ========== ========== ========== ========= =========
Loss Applicable to
Common Stock:
Net Loss ($5,850,715) ($4,409,786) ($7,236,396) ($10,066,035) ($7,997,253) ($3,490,024) ($1,103,247)
Preferred Stock
Dividend Class "A" (14,405) (31,977) (39,179) (26,358) (39,992) (199,362) (76,307)
Preferred Stock
Dividend Class "B" - ( 2,425) ( 2,425) ( 13,826) ( 331,767) ( 227,083) -
---------- ---------- ---------- ----------- ---------- ---------- ----------
Loss Applicable to
Common Stock ($5,865,120) ($4,444,188) ($7,278,000) ($10,106,219) ($8,369,012) ($3,916,469) ($1,179,554)
========== ========== ========== =========== ========== ========== ==========
Net Loss per
Common Share ($ .20) ($ .18) ($ .28) ($ .46) ($ .68) ($ .66) ($ .36)
========== ========== ========== =========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
December 31, 1995
-----------------
(Consolidated)
(Unaudited)
<S> <C>
Summary Balance Sheet Data:
Working Capital $ 2,204,198
===========
Total Assets $ 8,987,126
===========
Shareholders' Equity $ 5,320,299
===========
</TABLE>
U.S. Drug
16
<PAGE> 21
U.S. DRUG
(A DEVELOPMENT STAGE ENTERPRISE)
<TABLE>
<CAPTION>
For the Nine Months For the Year Ended For the Period Cumulative From
Ended December 31, March 31, October 8, 1992 October 8, 1992
------------------------ --------------------------- (Inception) to (Inception) to
1995 1994 1995 1994 March 31, 1993 December 31, 1995
---- ---- ---- ---- -------------- -----------------
(Unaudited) (Unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C>
Income Statement
Data:
Total Revenues $ - $ - $ - $ - $ - $ -
========== ========== ========== ========== ======== ==========
Net Loss ($1,194,389) ($1,807,561) ($2,332,217) ($2,260,292) ($257,422) ($6,044,320)
========== ========== ========== ========== ======== ==========
Weighted Average
Common Shares
Outstanding 5,221,900 5,221,900 5,221,900 4,342,458 3,500,000
========== ========== ========== ========== =========
Net Loss per
Common Share ($ .23) ($ .35) ($ .45) ($ .52) ($ .07)
========== ========== ========== ========== =========
</TABLE>
<TABLE>
<CAPTION>
December 31, 1995
-----------------
(Unaudited)
<S> <C>
Summary Balance Sheet Data:
Working Capital $ 945,996
==========
Total Assets $1,683,656
==========
Shareholders' Equity $1,503,303
==========
</TABLE>
U.S. Drug
17
<PAGE> 22
PROFORMA FINANCIAL DATA
U.S. ALCOHOL TESTING OF AMERICA, INC. AND SUBSIDIARIES
PROFORMA CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1995
(Unaudited)
<TABLE>
<CAPTION>
Historical Adjustments Proforma
---------- ---------------------- --------
Debit Credit
----- ------
<S> <C> <C> <C> <C>
ASSETS
Current Assets: $ { 33,903(1)
Cash and Cash Equivalents $ 635,558 {105,489(2) $ 496,166
Trading Securities 42,188 42,188
Accounts Receivable (Net of
Allowances for Bad Debts of { 94,255(1)
$112,812 and $22,278) 707,055 {192,075(2) 420,725
Other Receivables 47,568 6,251(1) 41,317
{245,996(1)
Inventories 2,095,248 {594,951(2) 1,254,301
5,282(1)
Prepaid Expenses 403,944 12,656(2) 386,006
---------- ----------- ----------
Total Current Assets 3,931,561 1,290,858 2,640,703
Property and Equipment (Net of
Accumulated Depreciation of {318,826(1)
$1,835,089 and $1,591,926) 3,111,714 { 84,314(2) 2,708,574
{ 8,502(1)
Other Assets 1,943,851 {1,054,904(2) 880,445
---------- ----- ----------- ---------
Total Assets $8,987,126 $ - $ 2,757,404 $6,229,722
========== ===== =========== ==========
</TABLE>
- ---------------
(1) Assumes sale of U.S. Rubber Recycling Inc. on April 1, 1995.
(2) Assumes sale of Good Ideas Enterprises Inc. on April 1, 1995.
U.S. Drug
18
<PAGE> 23
U.S. ALCOHOL TESTING OF AMERICA, INC. AND SUBSIDIARIES
PROFORMA CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1995
(Unaudited)
<TABLE>
<CAPTION>
Historical Adjustments Proforma
---------- ---------------------- --------
Debit Credit
----- ------
<S> <C> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities: {$ 68,176(1)
Accounts Payable $ 933,634 { 173,156(2) $ 692,302
{57,651(1)
Accrued Expenses and Taxes 739,834 {16,392(2) 665,791
Current Portion of Long-Term {3,431(1)
Debt 39,490 {9,098(2) 26,961
Brokerage Loan Payable
Preferred Stock Dividend Payable 14,405 14,405
----------- ---------- -----------
Total Current Liabilities 1,727,363 327,904 1,399,459
Long-Term Debt - Net of {11,304(1)
Current Portion 66,365 {15,702(2) 39,359
Commitments and Contingencies
----------- ---------- -----------
Total Liabilities 1,793,728 354,910 1,438,818
----------- ---------- -----------
Minority Interest 1,873,099 1,151,233(2) 721,866
----------- ---------- -----------
Stockholders' Equity:
Preferred Stock Class "A",
$.01 Par Value, 500,000
Shares Authorized, Issued and
Outstanding 41,157 Shares
(Liquidation Preference of
$205,785) 412 412
Preferred Stock Class "B", $.01
Par Value, 1,500,000 Shares
Authorized, Issued and
Outstanding -0- Shares
Common Stock, $.01 Par Value,
50,000,000 Shares Authorized,
Issued and Outstanding 306,135
30,613,510 Shares 306,135 1,992,815(2) 39,880,569
Additional Paid-In Capital 41,873,384 180,209(1)
Accumulated Deficit (36,859,632) 561,345(2) (36,118,078)
----------- ---------- -------- -----------
Total Stockholders' Equity 5,320,299 1,992,815 741,554 4,069,038
----------- ---------- -------- -----------
Total Liabilities and
Stockholders' Equity $ 8,987,126 $3,498,958 $741,554 $ 6,229,722
=========== ========== ======== ===========
</TABLE>
- ---------------
(1) Assumes sale of U.S. Rubber Recycling Inc. on April 1, 1995.
(2) Assumes sale of Good Ideas Enterprises Inc. on April 1, 1995.
U.S. Drug
19
<PAGE> 24
U.S. ALCOHOL TESTING OF AMERICA, INC. AND SUBSIDIARIES
PROFORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED DECEMBER 31, 1995
(Unaudited)
<TABLE>
<CAPTION>
Historical Adjustments Proforma
---------- ---------------------- --------
Debit Credit
----- ------
<S> <C> <C> <C> <C>
{$ 640,151(1)
Sales $ 3,015,006 { 1,473,416(2) $ 901,439
----------- ---------- -----------
Costs and Expenses:
Cost of Sales (Exclusive of {$ 294,777(1)
Depreciation Shown Below) 2,268,587 { 1,298,084(2) 675,726
Selling, General & Administrative
Expenses (Exclusive of {450,642(1)
Depreciation Shown Below) 5,820,490 {893,421(2) 4,476,427
Research and Development 789,506 789,506
Interest 75,864 {747(1) 74,311
{806(2)
{ 74,194(1)
Depreciation and Amortization 959,795 {153,077(2) 732,524
----------- ---------- -----------
Total Costs and Expenses 9,914,242 3,165,748 6,748,494
----------- ---------- -----------
Loss From Operations (6,899,236) 2,113,567 3,165,748 (5,847,055)
Other Income (Expense) 290,792 52,955(2) 343,747
----------- ---------- ---------- -----------
Loss Before Minority Interest
in Net Loss of Subsidiaries (6,608,444) 2,113,567 3,218,703 (5,503,308)
Minority Interest in Net Loss
of Subsidiaries, Net of
Subsidiary Preferred Stock
Dividends Paid 757,729 363,581(2) 394,148)
----------- ---------- ---------- -----------
Net Loss $(5,850,715) $2,477,148 $3,218,703 $(5,109,160)
=========== ========== ========== ===========
Weighted Average Common
Shares Outstanding 29,248,777 29,248,777
=========== ==========
Loss Applicable to Common
Stock
Net Loss $(5,850,715) $(5,109,160)
Preferred Stock Dividend
Class "A" (14,405) (14,405)
----------- ----------
Loss Applicable to
Common Stock $(5,865,120) $(5,123,565)
=========== ==========
Net Loss Per Common Share $ (.20) $ (.18)
=========== ==========
</TABLE>
- ---------------
(1) Assumes sale of U.S. Rubber Recycling Inc. on April 1, 1995.
(2) Assumes sale of Good Ideas Enterprises Inc. on April 1, 1995.
U.S. Drug
20
<PAGE> 25
RISK FACTORS
In analyzing this offering, the U.S. Drug Minority Stockholders should
consider all of the matters set forth below:
1. Operating Losses. The Company has sustained losses of $36,859,632
from inception through December 31, 1995. Management has initiated cost
reduction actions which, in its opinion, will reduce selling, general and
administrative expenses by an amount in excess of $1,500,000 in the fiscal year
ended March 31, 1996 ("fiscal 1996"), which savings will be offset in part by
the $903,000 in combined legal and other expenses incurred by both parties in
the consent solicitation contest (see "Summary-Recent Developments"). In
addition, management will consider seeking a marketing partner for its drug
testing products, has initiated an effort through ProActive, a subsidiary, to
tap the human resource provider market which it believes can result in
substantial revenues, has engaged the services of RSA to design drug-free
workplace policies and programs for the ProActive clients and, on April 18,
1996, agreed in principle to acquire RSA, will 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 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 the toy segment or that RSA will be acquired, although the USAT Board
considers the latter likely because of the election of RSA's President as USAT's
Chairman of the Board and Chief Executive Officer. Accordingly, the toy business
segment will continue to be operated by the Company until a sale is made,
although the USAT Board will consider liquidating the toy subsidiary if, as
expected, the operational losses continue. Because the Company had not committed
itself to a formal plan, including sales price, for disposal of either the
rubber recycling segment or the toy segment, management did not consider the
rubber recycling and the toy operations to be "discontinued operations" as of
December 31, 1995 for financial statement purposes under APB 30 when USAT filed
its Quarterly Report on Form 10-Q for that quarter. In addition, the decision to
develop a saliva based drug testing product, rather than complete 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 probably in the fiscal year ending March 31,
1997 ("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. Accordingly, it is
management's belief, especially in view of the significant losses in the fiscal
years ended March 31, 1993 ("fiscal 1993"), 1994 ("fiscal 1994") and 1995
("fiscal 1995"), that, despite these management
U.S. Drug
21
<PAGE> 26
programs, the Company will not turn profitable in fiscal 1996 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 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."
Included in the Company's losses reported above are net losses of U.S.
Drug of $2,332,217 for fiscal 1995, $2,260,292 for fiscal 1994 and $257,422 for
the period October 8, 1992 (inception) to March 31, 1993. U.S. Drug reported a
net loss of $1,194,389 for the nine months ended December 31, 1995 as compared
with a net loss of $1,807,561 for the comparable period in fiscal 1995, the
decrease being primarily due to the reduction in licensing royalties to the USN.
U.S. Drug has not produced any revenues because its products are still in the
development stage as indicated in the preceding paragraph. Since inception U.S.
Drug has spent $1,979,000 on research and development (which does not give
effect to the $678,000 previously spent by USAT relating to the drug testing
products), as well as incurring selling, general and administrative expenses
aggregating $1,716,000, management fees to USAT of $1,050,000 and interest and
depreciation expenses of $454,000. See "U.S. Drug Financial Statements" and
"U.S. Drug's Management's Discussion and Analysis of Financial Condition and
Results of Operations." Until the development work is completed, governmental
approvals obtained and marketing commenced, the operational losses will
continue. Marketing may not commence for 20 to 30 months and there is no
assurance as to when, if at all, revenues will be sufficient to exceed U.S.
Drug's costs and expenses. See "Business of USAT- Subsidiaries-U.S. Drug
Testing, Inc."
2. Need for Financing. Because of the 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 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
U.S. Drug
22
<PAGE> 27
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 April 11, 1996, Common Stock purchase
warrants to purchase 144,624 shares of the USAT Common Stock were exercised for
an aggregate exercise price of $229,040.
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 is no
assurance that management will be successful in its financing efforts), then the
Company may have to reduce operations in order to 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.
U.S. Drug will require additional capital of $4,000,000 to $6,000,000
in order to complete the development of its drug testing products. If the Merger
is not consummated, there is no assurance that U.S. Drug will be able to raise
such amount based on selling only its own U.S. Drug Common Stock and any such
equity financings, if successfully implemented, will dilute the stock ownership
and voting rights of the current stockholders of U.S. Drug, including USAT. U.S.
Drug will also consider seeking a marketing partner and will attempt to obtain
advance payments in exchange for marketing rights. In addition, U.S. Drug may
seek a major company to assist in certain product development work and to fund
such a product development program, which company may also serve as a marketing
partner. However, there can be no assurance as to when and if any such marketing
and/or product development partner, if obtained, would make such an advance.
Were U.S. Drug not to succeed in these efforts, its sublicense from USAT of the
rights to the USN technology would revert to USAT. See "The Merger and Related
Matters-Reasons for the Merger," "The Company's Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "U.S. Drug's
Management's Discussion and Analysis of Financial Condition and Results of
Operations."
3. Competition. The Company has a variety of competitors depending on
the particular segment of its business, many of which have far greater financial
resources and marketing staffs than the Company. There is no assurance that USAT
will be able
U.S. Drug
23
<PAGE> 28
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 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
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. 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 its urine sample testing
method and develops its saliva 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
U.S. Drug
24
<PAGE> 29
which have greater financial resources available to them without a marketing
partner with such resources. There is no assurance that such a partner can be
obtained. 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 it is a provider
of both substance abuse testing services and background screening services to
corporations. The competition from single source providers which ProActive
currently encounters is primarily from small local and regional companies. To
management's knowledge, currently there is no single source provider on a
national level, which is what ProActive hopes to become. However, Laboratory
Corporation of Commerce, Inc. ("Lab Corp."), through Med-Express, is currently
offering background screening services to corporation on a limited basis. In
addition, ProActive will face competition from other companies which provide
each of these services separately such as the companies mentioned above 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.
4. 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."
5. 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. 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 March 31, 1996, 32,480,010 shares of the USAT Common Stock were
issued and outstanding, 2,233,374 of which were held by current or former
directors and executive officers of USAT and
U.S. Drug
25
<PAGE> 30
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 10%
or more of the outstanding shares of the USAT Common Stock), 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 March 31, 1996, there were also reserved for issuance: 925,250
shares of the USAT Common Stock issuable upon the exercise of Common Stock
purchase warrants expiring between September 1 and September 16, 1996, 2,204,673
shares issuable upon the exercise of Common Stock purchase warrants expiring
between September 1, 1996 and December 31, 1997, 71,250 shares issuable upon the
exercise of Common Stock purchase warrants expiring between May 17, 1997 and
September 1, 1998, 922,750 shares issuable upon the exercise of Common Stock
purchase warrants expiring between September 1, 1998 and December 31, 2001,
2,000,000 shares issuable upon the exercise of Common Stock purchase warrants
expiring December 17, 1999, 185,207 shares issuable upon the conversion of the
shares of the Class A Preferred Stock, $.01 par value (the "Class A Preferred
Stock"), 450,000 shares issuable upon the exercise of the outstanding stock
options expiring August 1, 2004 granted under USAT's 1990 Restricted Stock,
Non-Qualified and Incentive Stock Option Plan (the "1990 Option Plan"), 60,000
shares issuable upon the exercise of Common Stock purchase warrants expiring
November 15, 1998 issued to new directors of USAT and a consultant, 700,000
shares issuable upon the exercise of three Common Stock purchase warrants
expiring November 15, 1998 (as to 400,000 shares), November 15, 2000 (as to
150,000 shares) and November 15, 2000 (as to 150,000 shares) issued to a new
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, 41,000 shares issuable upon the exercise
of Common Stock purchase warrants expiring between July 17, 1998 and July 19,
1999 issued to employees of the Company, 200,000 shares issuable upon the
exercise 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,
U.S. Drug
26
<PAGE> 31
Chief Executive Officer and a director of USAT), 200,000 issuable upon the
exercise 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, 700,000 shares issuable upon the exercise of a Common Stock purchase
warrant expiring February 26, 1999 issued to a consultant to USAT for financial
public relations services, 100,000 shares issuable upon the exercise 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
150,000 shares issuable upon the exercise of a Common Stock purchase warrant
expiring January 29, 2000 issued to an individual in connection with settlement
of litigation against USAT. Were all of these 8,724,923 shares issuable upon the
exercises of the foregoing USAT Common Stock purchase warrants and stock
options, some of which shares may be sold pursuant to a Prospectus dated January
31, 1996, 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 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.
To the extent that the Merger and/or the merger of Good Ideas into a
wholly-owned subsidiary of USAT is or are consummated, the shares of the USAT
Common Stock issued on such transaction or 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
impact as described in the preceding paragraph.
6. 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 is 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, in the drug testing area,
U.S. Drug will consider seeking a major company
U.S. Drug
27
<PAGE> 32
willing to advance such funds in consideration of being named the marketing
partner for the drug testing products when developed; however, there is no
assurance that such a partner can be obtained, what will be the amount of its
financial contribution and when such financial contribution will be made. U.S.
Drug may also seek to have other companies perform certain of the research and
development activities instead of hiring or using existing internal personnel to
perform such functions and to fund such research and development activities;
however, there can be no assurance that such alternative sources will be
available or, if available, that this approach will be cost effective. See the
section "Need for Financing" under this caption "Risk Factors" and "Business of
the Company-Competition."
7. 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 is 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."
8. Conflicts of Interest. From January 1992 to January 1993, prior to
the transfer by USAT to U.S. Drug of USAT's license interest to the USN
technology, USAT conducted U.S. Drug's business operations and, in the event of
a default by U.S. Drug, its sublicensee rights would revert to USAT as licensee.
Since April 1, 1993, USAT has been managing certain of U.S. Drug's operations
pursuant to a management agreement. As of March 31, 1996, 67.0% of the
outstanding shares of the U.S. Drug Common Stock were held by USAT. In addition,
as of such date, all three directors of U.S. Drug were current or former
directors of USAT, all three were executive officers and all three are
stockholders of USAT (As of April 18, 1996, two of such U.S. Drug directors
resigned as directors and executive officers of USAT, but agreed to remain as
employers of USAT until May 31, 1996. The third director continues to serve as
an executive officer of USAT). As of March 31, 1996, there was a note receivable
from USAT to U.S. Drug of $250,000 which is due June 30, 1996. For additional
information as to the relationships between USAT and U.S. Drug, see "Material
Contacts of USAT with U.S. Drug"; "USAT Principal Stockholders"; "U.S. Drug
Principal Stockholders"; and "USAT Management".
U.S. Drug
28
<PAGE> 33
9. Possible Delisting of U.S. Drug Common Stock. Based on its December
31, 1995 balance sheet, U.S. Drug did not meet the Pacific Stock Exchange's
maintenance requirements relating to total assets and stockholders' equity,
thereby requiring an infusion of equity. Because of U.S. Drug's anticipated
continuing losses for at least 24 months, the requirement to infuse equity in
order to meet these maintenance criteria may become a periodic requirement. If
U.S. Drug is not able to meet these criteria, it would also not be able to meet
the entry requirements of the American Stock Exchange (where the USAT Common
Stock is currently listed) or of the National Association of Securities Dealers
Automated Quotation ("NASDAQ") System. If delisting were to occur, the U.S. Drug
Common Stock would trade in the "pink sheets" and the market value of the U.S.
Drug Common Stock would decline, thereby reducing the value to both USAT and the
U.S. Drug Minority Stockholders. In addition, assuming the Merger was not
consummated and delisting occurred, it might become more difficult to have
successful equity financings of the U.S. Drug Common Stock and, accordingly,
U.S. Drug might have to rely on USAT financing exclusively or increasingly at a
time USAT may prefer to use such financing for its alcohol testing and human
resource operations. Pending a determination as to whether the consents will be
obtained for the Merger, U.S. Drug will seek an extension of time from the
Pacific Stock Exchange as to compliance; however, there can be no assurance that
the Exchange will grant such an extension, in which event the U.S. Drug Board of
Directors and the USAT Board of Directors will have to consider what alternative
action must be taken to infuse equity.
TERMS OF THE TRANSACTION
CONSENT SOLICITATION STATEMENT/PROSPECTUS
This Consent Solicitation Statement/Prospectus is being furnished to
the U.S. Drug 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 U.S. Drug Minority Common Stock.
Pursuant to this Consent Solicitation Statement/Prospectus, the U.S.
Drug Minority Stockholders are being requested to consent to a proposal to adopt
a 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 U.S. Drug with and into Acquisition Corp.
(i.e., the Merger), the conversion of shares of the Minority U.S. Drug Common
Stock into shares of the USAT Common Stock on the basis set forth in the Merger
Agreement and the conversion of the U.S. Drug Warrants to acquire U.S. Drug
Common
U.S. Drug
29
<PAGE> 34
Stock into equivalent USAT Merger Warrants adjusted for the exchange rate set
forth in the Merger Agreement. The U.S. Drug Options will either be cancelled
with the holders' consent or must, by their terms, be exercised prior to the
Merger. The U.S. Drug Minority Stockholders may also share in cash payments by a
marketing partner within one year of the Effective Date. See the section
"Special Payment" under this caption "Terms of the Transaction" and the sections
"Terms of the Merger Agreement- Conversion of Shares" and "U.S. Drug Options and
Warrants" under the caption "The Merger and Related Matters" for more detailed
information.
THE MERGER
Pursuant to the Merger Agreement, at the Effective Date, each
outstanding share of the U.S. Drug Common Stock, other than the shares owned by
USAT, will be converted into ______ shares of the USAT Common Stock. Each share
of the U.S. Drug Common Stock owned by USAT will be canceled upon the Merger.
The number of shares of the USAT Common Stock to be received for each share of
the Minority U.S. Drug Common Stock was determined by dividing $5.25 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 $_________. Prior to the Merger,
USAT owned 67.0% of U.S. Drug; after the Merger, USAT will own 100% of
Acquisition Corp. as the successor by merger to U.S. Drug. See "The Merger and
Related Matters".
If the Merger is not consummated, U.S. Drug and USAT will continue to
be publicly-owned companies and U.S. Drug will continue to be a majority-owned
subsidiary of USAT.
SPECIAL PAYMENT
U.S. Drug will consider seeking a major company to act as a marketing
partner for its saliva sample and urine sample drug testing products, rather
than market the products solely by itself. USAT has agreed in the Merger
Agreement that, if a definitive agreement (the "Marketing Agreement") with such
a marketing partner is executed and if such marketing partner makes a cash
payment or payments upon the execution of the Marketing Agreement (the "Special
Payment") to Acquisition Corp. or USAT, then USAT will calculate the percentage
(to the nearest tenth) that the outstanding shares of the Minority U.S. Drug
Common Stock on the Effective Date constitute of the outstanding shares of the
U.S. Drug Common Stock on the Effective Date (the "Percentage") and (1) if the
Marketing Agreement is entered into on or prior to the 180th day following the
Effective Date, USAT will pay to each of the former U.S. Drug Minority
Stockholders his, her or its pro rata share of one third of the Percentage of
the Special Payment; (2) if the Marketing Agreement is entered
U.S. Drug
30
<PAGE> 35
into during the period after the 180th day following the Effective Date and on
or prior to the first anniversary of the Effective Date, USAT will pay to each
of the former U.S. Drug Minority Stockholders his, her or its pro rata share of
one sixth of the Percentage of the Special Payment; and (3) if the Marketing
Agreement is entered into after the first anniversary of the Effective Date, the
former U.S. Drug Minority Stockholders will receive none of the Special Payment.
If a cash payment is received from the marketing partner after
execution, but on or prior to the first anniversary of the Effective Date, and
if such payment is not based on sales effected by the marketing partner or some
similar criteria, which sales are not currently anticipated because of the
anticipated product development timetable, USAT will treat any such payments as
if received on the execution of the Marketing Agreement (i.e., to be an
installment of the Special Payment). Loans made by the marketing partner will
not be deemed to be part of the Special Payment, as would equity infusions for
which the marketing partner receives shares of the U.S. Drug Common Stock or the
USAT Common Stock.
The following are examples of how the formula would work in each
period: Assuming that there is no change from the Record Date, the 1,721,900
shares of the Minority U.S. Drug Common Stock constitute approximately 33.0% of
the 5,221,900 shares of the U.S. Drug Common Stock and assuming that there is a
Special Payment of $10,000,000 to Acquisition Corp. by the marketing partner,
then (1) if the Marketing Agreement is entered into during the initial 180 days,
the U.S. Drug Minority Stockholders would receive an aggregate of approximately
one-third of 33% of $10,000,000 or an aggregate of approximately $1,100,000
(i.e., 11% of $10,000,000 or $.64 per share); (2) if the Marketing Agreement is
entered into during the period after the 180th day following the Effective Date
and on or prior to the first anniversary of the Effective Date, the U.S. Drug
Minority Stockholders would receive an aggregate of approximately one-sixth of
33% of $10,000,000 or an aggregate of approximately $550,000 (i.e., 5.5% of
$10,000,000 or $.32 per share); and (3) if the Marketing Agreement is entered
into thereafter, Acquisition Corp. will retain the entire $10,000,000.
A transferee of the shares of the USAT Common Stock received as a
result of the Merger is not eligible to receive a proportionate share of the
Special Payment and USAT will make such payments only to the U.S. Drug Minority
Stockholders as reflected on the stock books of U.S. Drug on the Effective Date
or, in the event of the death of the U.S. Drug Minority Stockholder, his or her
heirs or legal representatives, in the case of the dissolution of a partnership,
to its partners or, in the case of a corporation, to its successor by merger or
other operation of law.
U.S. Drug
31
<PAGE> 36
In providing for the Special Payment on February 26, 1996, the USAT
Board sought to respond to comments of certain U.S. Drug Minority Stockholders
that the Merger would deprive them of the benefits of what they anticipate would
be a large initial payment from a marketing partner. However, the USAT Board
believed that both the amount and timing should be limited because (1) even if
the Merger were not consummated and the Special Payment were received, the U.S.
Drug Board would not be authorizing a cash dividend to the U.S. Drug
stockholders of the Special Payment, using the Special Payment instead for
operations, and (2) the more time that elapses after the Merger, the more USAT
may have invested in Acquisition Corp. and, accordingly, any funds generated and
not reinvested in operations should go to the benefit of all of the USAT
stockholders, not just the former U.S. Drug Minority Stockholders, many of whom
may have sold their shares of the USAT Common Stock at the time of the Special
Payment, especially if it is made later in the year following the Effective
Date. The USAT Board took note of the fact that, if there were no Merger, the
public announcement of the addition of a marketing partner for U.S. Drug would
possibly give rise to an increase in the market price of the U.S. Drug Common
Stock, so that a U.S. Drug Minority Stockholder might benefit by a sale of his,
her or its shares of the Minority U.S. Drug Common Stock at such higher price.
However, the USAT Board concluded that it was too speculative to make its
decision on the basis of speculation as to what might be the future market value
of the U.S. Drug Common Stock in view of the possibilities that no marketing
partner may be obtained during the next year, that even if such a partner was
obtained, it may not make a significant advance payment and that competitors may
introduce a saliva based drug testing product in the interim period. See also
"The Merger and Related Matters-Reasons for the Merger and Approval."
As of the date hereof, U.S. Drug has not entered into any agreement
with a marketing partner, nor does it have any basis for evaluating what the
amount of the Special Payment, if it is to be made, will be. There can be,
accordingly, no assurance that U.S. Drug will enter into a marketing arrangement
with a partner within the time frame set forth in the Merger Agreement or, if it
does, that the partner will make any cash payment to Acquisition Corp. or USAT
upon execution of the Marketing Agreement.
VOTING RIGHTS
The Record Date for the determination of the stockholders of U.S. Drug
entitled to notice of the consent solicitation and to consent hereunder is
__________________, 1996 as fixed by the Board of Directors of U.S. Drug on May
__, 1996 pursuant to Section 213(b) of the GCL.
U.S. Drug
32
<PAGE> 37
On the Record Date, there were 5,221,900 shares of the U.S. Drug Common
Stock issued and outstanding, of which 3,500,000 shares (67.0%) were owned by
USAT and 1,721,900 shares (33.0%) by stockholders other than USAT (i.e., the
U.S. Drug Minority Stockholders). See "U.S. Drug Principal Stockholders" for
information, as of the Record Date, regarding persons known by U.S. Drug to own
beneficially 5% or more of the U.S. Drug Common Stock and as to the stock
ownership of directors and executive officers of U.S. Drug. Each share of the
Minority U.S. Drug Common Stock is entitled to one vote. Although, under Section
251 of the GCL, USAT, as the majority stockholder of U.S. Drug, could adopt the
Merger Agreement without the consent of any other U.S. Drug stockholder, the
Boards of Directors of USAT and U.S. Drug have agreed that, as a condition to
the adoption of the Merger Agreement, the affirmative consent of the holders of
a majority of the outstanding shares of the U.S. Drug Common Stock owned by
stockholders other than USAT is required for the adoption of the Merger
Agreement. Holders of the Minority U.S. Drug 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 U.S. Drug Shareholders" under this caption "Terms of the
Transaction."
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.
U.S. Drug's 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 67.0% of the U.S. Drug Common Stock could
adopt the Merger Agreement without any other stockholder voting in favor of the
adoption of the Merger
U.S. Drug
33
<PAGE> 38
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 U.S. Drug Common Stock owned by U.S.
Drug stockholders other than USAT (i.e., the U.S. Drug 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 U.S. Drug
only after the holders of more than 50% of the outstanding shares of the
Minority U.S. Drug 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 U.S. Drug have agreed not to waive the requirement as
to the approval by the U.S. Drug 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 U.S. Drug Testing, 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 U.S. Drug. 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
U.S. Drug
34
<PAGE> 39
U.S. Drug Testing, 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.
IF YOUR SHARES OF THE U.S. DRUG 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 U.S. Drug
Minority Stockholders and the fees and disbursements of U.S. Drug's special
counsel. U.S. Drug 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 U.S. Drug
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.
Each of the current or former directors of U.S. Drug has advised U.S.
Drug that, except for Dr. William DiTuro, a former director, who owns 1,600
shares of the U.S. Drug Common Stock, he or she does not own any shares of the
Minority U.S. Drug Common Stock. Each of the three current directors of U.S.
Drug has advised USAT that he or she will surrender his or her U.S. Drug Option,
which Options represent the right to purchase an aggregate of 110,000 shares of
the U.S. Drug Common Stock, if the
U.S. Drug
35
<PAGE> 40
Merger is consummated. U.S. Drug Options to purchase an aggregate of 10,000
shares held by Dr. DiTuro and Glenn A. Bergenfield, another former director of
U.S. Drug, have expired. Douglas G. Allen, the President of U.S. Drug, and
Steven Kline, a Vice President of U.S. Drug, hold U.S. Drug Options to purchase
an aggregate of 42,000 shares of the U.S. Drug Common Stock. Pursuant to the
terms thereof, each such Option will, immediately prior to the consummation of
the Merger, become fully exercisable. Because USAT has declined to assume these
U.S. Drug Options, they will expire if not exercised on or before the Effective
Date. Because of the higher exercise price (i.e., $7.00 per share) as compared
with USAT's offer to the U.S. Drug Minority Stockholders, USAT does not
anticipate any exercises of the U.S. Drug Options.
Each of the directors and executive officers of USAT has advised USAT
that, except for Peter M. Mark who owns 15,500 shares of the Minority U.S. Drug
Common Stock, which Mr. Mark intends to submit a consent in favor of the Merger,
he or she does not own any shares of the Minority U.S. Drug Common Stock.
Michael S. McCord, a consultant to the USAT Board of Directors and a former
member of the Committee, has advised USAT that he and persons who may be deemed
his affiliates (as such term is defined in Rule 405 under the Securities Act)
own an aggregate of 61,300 shares of the Minority U.S. Drug Common Stock and
that each of these persons will submit a consent in favor of the Merger. James
C. Witham and Karen B. Laustsen, who were directors and executive officers of
USAT until April 18, 1996, and Gary S. Wolff, who is an executive officer of
USAT , have advised USAT that they are the U.S. Drug directors holding the U.S.
Drug Options as described in the preceding paragraph.
The USAT Board has determined that USAT will not proceed with the
Merger unless USAT has received consents from the holders of at least a majority
of the outstanding shares of the Minority U.S. Drug Common Stock without
including Dr. DiTuro's 1,600 shares, Mr. Mark's 15,500 shares or the 61,300
shares of Mr. McCord and persons who may be deemed his affiliates or an
aggregate of 78,400 shares. Accordingly, the consent of the holders of 860,951
shares of the remaining 1,643,500 shares of the Minority U.S. Drug Common Stock
or 52.4% of thereof will be necessary to consummate the Merger. If the Merger is
consummated, Dr. DiTuro and Messrs. Mark and McCord will receive shares of the
USAT Common Stock for their shares of the Minority U.S. Drug Common Stock on the
same basis as the other U.S. Drug Minority Stockholders and will have the same
right to share in the Special Payment (see the section "Special Payment" under
this caption "Terms of the Transaction").
U.S. Drug
36
<PAGE> 41
(5) RIGHTS OF DISSENTING U.S. DRUG STOCKHOLDERS
Under Section 262(b) of the GCL, appraisal rights are not available to
holders of the Minority U.S. Drug Common Stock in connection with the
consummation of the Merger because both the USAT Common Stock which will be
received by the U.S. Drug Minority Stockholders and the U.S. Drug Common Stock
were listed on national securities exchanges as of the Record Date.
THE MERGER AND RELATED MATTERS
REASONS FOR THE MERGER AND APPROVAL
On November 16, 1995, the Board of Directors of USAT approved in
principle the acquisition of the minority stockholder interest in U.S. Drug and,
on February 6, 1996, authorized execution of the Merger Agreement. On April 23,
1996, the Board of Directors of U.S. Drug authorized execution of, and
submission to the U.S. Drug Minority Stockholders for approval of, the Merger
Agreement. As of such date, there were three directors of U.S. Drug: James C.
Witham and Karen B. Laustsen, each of whom was until April 18, 1996 a director
and an executive officer of USAT, and Gary S. Wolff, who is an executive officer
of USAT and was formerly a director thereof. Each of the foregoing is a
stockholder of USAT. 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 30, 1996, Acquisition Corp.'s Board of Directors, consisting of Alan I.
Goldman, John C. Lawn and Linda H. Masterson, three USAT directors, who had no
affiliation with U.S. Drug, unanimously authorized execution of the Merger
Agreement and approved the related transactions. Effective May 13, 1996, Ms.
Masterson will become the President and Chief Operating Officer of USAT.
In approving the Merger Agreement on February 6, 1996, the Board of
Directors of USAT took into consideration the factors hereafter described in
this section and under "Terms of the Transaction-Special Payment." In the
opinion of the USAT directors, 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 divestures of its toy and rubber recycling
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 and a better combination on which to
build for the future. The Board of Directors of USAT also believes that, given
the amount of additional time and money that U.S. Drug will require to bring its
saliva based product to market (currently
U.S. Drug
37
<PAGE> 42
estimated to be 20 to 30 months and approximately $4,000,000 to $6,000,000,
respectively), U.S. Drug has an increased chance of obtaining financing for the
balance of the research and development of its products if such financing is
based on all of the Company's businesses and assets, including U.S. Drug, rather
than just on U.S. Drug's business and assets. The USAT Board of Directors
believes that, if the Merger is not completed, U.S. Drug may not be able to
obtain such financing without causing substantial dilution to both the U.S. Drug
Minority Stockholders and USAT of their stock ownership and voting rights and
that the terms for a U.S. Drug financing will not be as favorable as those which
can be obtained by USAT after the Merger. If U.S. Drug is unable to finance its
research and development efforts and defaults under its sublicense from USAT,
the rights to the USN technology will revert to USAT. The USN had rejected a
novation of the licensing rights to U.S. Drug and looks to USAT as the sole
party to the license. Additionally, as a result of the Merger, U.S. Drug will
save approximately $50,000 to $75,000 per year in expenses related to being a
public company. The USAT Board also considered as a factor that the receipt by
the U.S. Drug Minority Stockholders of __ shares of the USAT Common Stock for
each share of the Minority U.S. Drug Common Stock is, in the Board's opinion, a
better alternative than retaining their shares in U.S. Drug if the Merger is not
consummated. The U.S. Drug Common Stock is currently trading at a sales price
which is __% of the value of the USAT Common Stock being offered hereunder. See
the discussion in the succeeding paragraph and also the data under "U.S. Drug
Market Information-Market Data." While there is 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 U.S. Drug Minority
Stockholders than holding the Minority U.S. Drug Common Stock for the reasons
discussed in this section and under "Terms of the Transaction- Special Payment,"
although there is no assurance that this value will be realized.
USAT's Board, in making its evaluation, noted that, as of December 31,
1995, U.S. Drug had a net book value of approximately $.29 per share as compared
to the $5.25 per share which USAT is offering pursuant to this Consent
Solicitation Statement/Prospectus. The USAT Board also considered the
"liquidation value" of U.S. Drug, but concluded that such factor was not
relevant in view of the fact that the main asset of U.S. Drug, i.e., the USN
technology, would revert to USAT on liquidation. The USAT Board also reviewed
the possible "going concern value" of U.S. Drug, taking into account the fact
that an infusion of at least $4,000,000 to $6,000,000 would be necessary to fund
the drug testing products' research and development, that there is no certainty
that the products will be available on a timely basis and that, when available,
other companies may have developed a competing saliva based product in a mature
market, and concluded that an evaluation of "going concern value" would
U.S. Drug
38
<PAGE> 43
be entirely speculative, even though the USAT Board has confidence in the
ability of U.S. Drug to develop a marketable product. The USAT Board recognized
that, although the $5.25 per share is above the 1993 initial public offering
price of $5.00 per share and the closing sales prices during the last six
months, it is below the closing sales prices of the U.S. Drug Common Stock for
certain periods longer than six months ago. See "U.S. Drug Market
Information-Market Data." The USAT Board took into consideration that the
declining assets and stockholders' equity resulted, as of December 31, 1995, in
the U.S. Drug Common Stock not meeting the requirements for continued listing on
the Pacific Stock Exchange and U.S. Drug would require an infusion of equity to
maintain that listing if the Merger is not approved. In addition, the USAT Board
recognized that, because of the anticipated continuing losses, the possibility
of U.S. Drug not meeting such maintenance requirements would continue to be a
problem for at least 12 to 24 months. The USAT Board also recognized that, if
U.S. Drug attempted to transfer the U.S. Drug Common Stock to either the
American Stock Exchange or the NASDAQ System, infusions of equity would be a
requirement to obtain any such alternative listing. In this connection the USAT
Board considered the effect of trading of the U.S. Drug Common Stock in the
"pink sheets" if the U.S. Drug Common Stock were delisted from the Pacific Stock
Exchange and did not qualify for listing on the American Stock Exchange or
reporting on the NASDAQ System and concluded that its market price may be
substantially below the $5.25 offer. However, the USAT Board gave greater weight
to the other factors discussed in this section than historical market value.
USAT's Board recognized that an additional investment of at least
$4,000,000 and possibly as high as $6,000,000 will be necessary before U.S. Drug
will be able to offer its drug testing products to customers, assuming that its
research and development efforts are successfully implemented, as to which there
is no assurance. USAT's Board considered as an alternative that U.S. Drug should
seek to raise the necessary capital for U.S. Drug through further sales of
shares of the U.S. Drug Common Stock, but recognized that such sales would not
only dilute the stock ownership and voting rights of existing stockholders of
U.S. Drug, particularly USAT, assuming such sales were successful, as to which
there is no assurance, but also there was no assurance that any such sales would
be on as favorable terms as if USAT sought to raise funds through the sale of
shares of the USAT Common Stock. Although a rights offering to the U.S. Drug
stockholders would minimize additional dilution to such persons, USAT's Board
recognized that there was no assurance that the U.S. Drug Minority Stockholders
would respond favorably to a rights offering because many of such stockholders
purchased their shares at $5.00 per share in the initial public offering or at
higher prices in the subsequent market, while the current market price, as of
May __, 1996, is only $_____ per share. In addition, in
U.S. Drug
39
<PAGE> 44
order to preserve USAT's ownership percentage in U.S. Drug by exercising its
rights, USAT may have to obtain its own financing, thereby competing against
U.S. Drug for financing and taking away funds that might otherwise have been
used, in part, for the Company's other operations, such as its alcohol testing
and human resource provider operations. Further, the USAT Board, after taking a
look at the marketplace in 1996, concluded that a company concentrating on one
product (i.e., drug testing) has less of a chance to succeed in the highly
competitive and mature drug testing market than a company which has three
synergetic operations - alcohol testing, drug testing and human resource
provider - on which to build and which is not dependent on one market and one
product for its potential growth. Because USAT's Board does not expect U.S. Drug
to realize revenues from sales for a period of 20 to 30 months, as to which
there is no assurance that U.S. Drug will meet such timetable, having other
sources of revenues and other potential sources for attaining profitability
becomes an even more important factor. Although there is no assurance that the
USAT Board will be correct in its expectation, the USAT Board believes that the
ProActive human resource provider operations, as supplemented by those of RSA if
acquired (as to which there can be no assurance), can generate significant
revenues during this interim period and turn the Company profitable, as well as
continue to produce significant revenues even after the drug testing operations
become revenue producing. The USAT Board also believes that the ProActive
operations will increase the revenues of the Company's alcohol and drug testing
operations by utilizing their products with its customers. In addition, the USAT
Board believes that the alcohol testing operations will experience substantial
growth in subsequent years, especially when coupled with the other two
subsidiaries' businesses, because of the increasing awareness in the business
community that alcohol can adversely affect the efficiency of employees as do
drugs of abuse. The USAT Board believes that, by using Robert Stutman as its
spokesperson (see "Business of the Company-Subsidiaries-ProActive Synergies,
Inc." for information as to his prior consulting arrangement) on alcohol and
drug testing, such awareness can be developed into business opportunities for
USAT's alcohol testing products. There can be, of course, no assurance that the
alcohol testing revenues will so increase. By making the U.S. Drug Minority
Stockholders minority stockholders of USAT, the USAT Board believes that not
only will such stockholders have a better opportunity to realize an increase in
their investment, but also the USAT Board will have only one set of stockholders
to which the directors are responsible.
U.S. Drug will consider seeking a marketing partner for its products
and asking for an advance payment as consideration for granting such rights. In
addition, U.S. Drug will consider requesting, as an alternative to its seeking
financing, that a major company advance funds for the product development work
U.S. Drug
40
<PAGE> 45
and/or assist in performing certain of the development assignments. Such company
may also request that it be named as marketing partner. There can be no
assurance that any such marketing and/or product development partner can be
obtained and that, if obtained, when such partner will be obtained and to the
extent it will agree to make funds available in advance of the product
development or the sales to users. The USAT Board concluded that it should not
make its decision on the speculation as to the availability of such a partner
and should assume that financing will be required. See also the discussion under
"Terms of the Transaction-Special Payment."
The USAT Board structured the transaction as a merger, rather than as a
tender offer to the U.S. Drug Minority Stockholders followed by a merger,
because it believed that this was the fastest and least expensive method to
achieve its objective of having no minority stockholders in U.S. Drug. It
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 U.S. Drug, and had all of its corporate structural questions
resolved. If the Merger, the merger of Good Ideas and the sale of USRR are
consummated, the USAT Board will consider operating 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.
If the Merger is consummated, then USAT's indebtedness to U.S. Drug
($250,000 at March 31, 1996 - see "Material Contacts of USAT with U.S.
Drug-Loans from U.S. Drug to USAT") will be cancelled. This indebtedness is
secured by USAT's shares of U.S. Drug Common Stock, which pledge will be
released upon consummation of the Merger. If the Merger is not consummated,
although USAT will have the funds to repay the indebtedness as a result of the
private placement completed in February 1996, USAT is not required to repay the
balance of such indebtedness to U.S. Drug until its maturity date of June 30,
1996. As indicated above, even with this repayment, U.S. Drug will require, in
the opinion of management, substantial additional funds to continue its
operations, assuming no significant advance payments from a potential marketing
partner.
The Boards of USAT and U.S. Drug have concluded that, for the foregoing
reasons, the consummation of the Merger is in the best interests of USAT and
U.S. Drug and is fair to the U.S. Drug Minority Stockholders from a financial
point of view. Both Boards recommend that the U.S. Drug Minority Stockholders
consent to the adoption of the Merger Agreement. The directors of U.S. Drug
direct attention to their affiliation with USAT and the
U.S. Drug
41
<PAGE> 46
attendant conflicts of interests as described in the first paragraph of this
section.
In evaluating the Merger, the Boards of Directors of USAT and U.S. Drug
also considered the oral presentations of Whale Securities that the Merger
exchange ratio is fair to the U.S. Drug 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 a copy of which
opinion is attached as Appendix B to this Consent Solicitation
Statement/Prospectus. See the section "Fairness Opinion" below.
There is, of course, no assurance that any or all of the above
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 U.S. Drug, 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 Good Ideas 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.
Whale Securities has delivered a written opinion dated as of the date
hereof (the "Fairness Opinion") to the U.S. Drug Board stating its opinion that,
considered as a whole, the Merger exchange ratio is fair to the U.S. Drug
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 its opinion dated as of the date of this Consent
Solicitation Statement/Prospectus, in arriving at its opinion, Whale Securities
reviewed and considered, among other things: (i) the Merger Agreement; (ii) U.S.
Drug's and USAT's
U.S. Drug
42
<PAGE> 47
Annual Reports on Forms 10-K for the two fiscal years ended March 31, 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; (iii) certain
information, including financial forecasts, relating to the businesses, earnings
and prospects of U.S. Drug and USAT, furnished to Whale Securities by senior
management; (iv) the historical market prices and trading activity for U.S. Drug
and USAT shares; (v) publicly available information concerning certain other
companies and transactions which Whale Securities considered relevant to its
analysis; and (vi) such other matters as Whale Securities deemed appropriate. In
addition, Whale Securities held discussions with the managements of U.S. Drug
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
U.S. Drug's or USAT's assets or liabilities. Whale Securities assumed and relied
upon the senior management of U.S. Drug 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 U.S. Drug to act as
financial advisor to U.S. Drug 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 U.S. Drug and/or USAT and/or Good Ideas
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 Directors of U.S.
Drug and does not constitute a recommendation to any U.S. Drug Minority
Stockholder as to how such a stockholder should consent on any matter submitted
for U.S. Drug stockholder consent in connection with the Merger.
In connection with the rendering of its opinion to the Board of
Directors of U.S. Drug, 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
U.S. Drug
43
<PAGE> 48
judgments and is not necessarily susceptible to partial analysis or summary
description. The projections prepared by the management of each of U.S. Drug 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 U.S. Drug and USAT. U.S. Drug 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.
1. Certain factors considered in the evaluation of U.S. Drug:
The following is a brief summary of certain factors which Whale
Securities discussed with the Board of Directors of U.S. Drug which figured
prominently in Whale Securities's valuation of U.S. Drug and certain analyses
performed by Whale Securities in connection with the Fairness Opinion.
Whale Securities noted that U.S. Drug is a development stage company
and because it is pioneering a unique drug detection methodology, there are many
uncertainties which affect its valuation. Among these uncertainties are the
likelihood the tests can in fact be successfully developed, the cost of such
development, the time period for development of the tests and FDA approval,
identification of a manufacturer for the products and the cost of manufacture,
identification of a marketing partner to market the products and the terms of
such an arrangement, customer acceptance of the products, and the competitive
environment at such time as the products are ready for marketing. In reviewing
the elements of value in U.S. Drug, Whale Securities pointed out that U.S. Drug
has five full-time employees and that, though additional employees may be hired,
U.S. Drug is, and expects to be on a continuing basis, dependent on third
parties for significant portions of product development and future manufacture
and marketing of its products. U.S. Drug expects it will be 20 to 30 months
before its saliva based testing products will be ready for marketing and some
additional time before any
U.S. Drug
44
<PAGE> 49
significant revenues from such products are realized. Management estimates U.S.
Drug will require between $4,000,000 and $6,000,000 of capital to complete
development of its products. Because U.S. Drug currently lacks the capital
resources to fund such development, it will need to seek funding from capital
market sources or industry partners, either of which would likely be dilutive to
the current stockholders of U.S. Drug.
In reviewing the alternatives faced by the U.S. Drug Minority
stockholders, Whale Securities discussed the facts that U.S. Alcohol holds a
control position by its 67.0% ownership of the U.S. Drug Common Stock and, as
such, USAT could delay or possibly prevent a sale of U.S. Drug to a third party.
USAT currently provides both management services and facilities under contract
to U.S. Drug. Further, the core technology used by U.S. Drug in its products is
held under sublicense from USAT. Also the alcohol testing business of USAT
presents marketing synergies with the drug testing business under development by
U.S. Drug. These factors favorably position USAT as a buyer and represent a
formidable barrier to an acquisition of U.S. Drug by third parties. Whale
Securities also noted that U.S. Drug's Board and management confirmed they had
not been presented in the past year with third party offers or overtures for
purchase of U.S. Drug. It is common for third parties to initiate such
discussions during periods of management and board restructuring and upon the
announcement of an acquisition offer thought to be undervalued.
In reviewing the USAT offer, Whale Securities noted that based on
5,221,900 shares of the U.S. Drug Common Stock outstanding, the consideration of
$5.25 per share valued U.S. Drug at $27,400,000. This compared with a market
capitalization for U.S. Drug shares of $17,000,000 on January 30, 1996, one week
prior to the announcement of the USAT merger offer, and a net worth for U.S.
Drug of under $1,500,000 on the same date. Under the terms of the proposed
Merger, the U.S. Drug Minority Shareholders would be receiving registered USAT
shares, freely tradable by the holders. Whale Securities noted that in the three
months prior to the announcement of the USAT merger offer, the U.S. Drug Common
Stock had an average trading volume of approximately 64,000 shares per month.
During the same time period, the USAT Common Stock had an average trading volume
of approximately 2,000,000 shares per month. Hence, the U.S. Drug Minority
Stockholders upon the Merger would hold a far more liquid security in USAT
shares than in U.S. Drug shares. Whale Securities estimated that if USAT's share
price held constant at $3.125 throughout the 30-day period prior to the Record
Date, the U.S. Drug Minority Shareholders would receive approximately 2,900,000
shares of the USAT Common Stock under the proposed Merger. During each of two
weeks in March 1996, the USAT Common Stock traded in excess of 2,000,000 shares.
Whale Securities noted it had been advised by counsel to U.S. Drug and counsel
to USAT that, in their opinions, the receipt of USAT shares by the
U.S. Drug
45
<PAGE> 50
U.S. Drug Minority Shareholders would be treated as a tax free exchange. Whale
Securities also reviewed the possibility of the U.S. Drug Minority Shareholders
receiving additional compensation from USAT in the event, during the first year
following the proposed Merger, U.S. Drug or Acquisition Corp. receives cash
payments under a Marketing Agreement for U.S. Drug's proposed products.
2. Whale Securities' analysis encompassed a number of valuation
approaches including:
(a) Market value of U.S. Drug shares and premiums to market for
acquisitions - The USAT offer to merge U.S. Drug with and its subsidiary was
announced on February 6, 1996. The market prices for the U.S. Drug Common Stock
on February 5, 1996 and on January 30, 1996, one day and one week, respectively,
prior to the announcement, were $3.75 and $3.25 per share. The exchange offer
computed based on $5.25 payable in USAT shares for each U.S. Drug share
represents a premium of 62% over the $3.25 U.S. Drug share price one week prior
to the announcement and exceeds by 31% the highest price ($4.00) at which U.S.
Drug shares have traded at any time in the six months prior to the announcement
of the offer. Whale Securities noted that, for the market as a whole, acquirors
of U.S. publicly traded companies paid a premium of 45% in 1995, and 42% in
1994, over the quoted price of the acquiree's shares one week prior to the
announcement of the acquisition offer.
(b) Asset based methods - U.S. Drug's book value per share at December
31, 1995 was $0.29 per share based on a net worth at December 31, 1995 of
$1,503,303. Due to the fact that since that time U.S. Drug has continued to
incur expenses without revenues, U.S. Drug's net worth and book value per share
through March 31, 1996 have declined from the December 31, 1995 level. The USAT
offer valued at $5.25 per U.S. Drug share represents a multiple of 18.2 times
U.S. Drug's book value at December 31, 1995 and 18.6 times U.S. Drug's tangible
book value at December 31, 1995. Whale Securities noted that on April 12, 1996
the Market Guide Inc.(TM) composite of public companies in the medical supply
and biotechnology industry categories and the S&P 500 traded at an average price
to book value multiple of 6.5, 7.8, and 4.4, respectively. Whale Securities
considered liquidation value as a measure of value for U.S. Drug, but determined
that because the main asset of U.S. Drug, its USN technology, would revert to
USAT on liquidation, this value was not relevant and in any case would likely
result in an amount well below that of the USAT offer.
(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 U.S. Drug. As discussed, U.S. Drug does
not expect to generate any meaningful revenues for at least the next two years.
U.S. Drug
46
<PAGE> 51
The management of U.S. Drug has not prepared projections for the business of
U.S. Drug beyond September 30, 1996. Given the facts that U.S. Drug is in the
development stage and there are considerable uncertainties in terms of the
timing and costs of developing the saliva based products, as well as future
revenue and cost projections, Whale Securities' methodology was to compare the
USAT offered value of $27,400,000 (based on 5,200,000 U.S. Drug shares valued at
$5.25 per share) against the present value of future cash flow streams under
varying assumptions. The USAT offer compared favorably to the present value of
future cash flows of those scenarios considered most likely by Whale Securities.
(d) Comparison to similar public companies and similar sale
transactions - Whale Securities identified over 60 publicly traded companies
operating in U.S. Drug' business segment as broadly defined. A group of ten
companies were identified with features somewhat comparable to U.S. Drug in
terms of diagnostic orientation and relatively low revenues compared to market
valuation. As only one company had earnings, the group generally traded on
future profit potential based on products being marketed or under development.
The ratio of price to book value for the comparison group ranged from 2.4 times
to 18.8, with the median price/book ratio of 7 times. This compared to a price/
book ratio of 18.2 times for U.S. Drug based on a $5.25 per share price under
the Merger. Whale Securities similarly reviewed mergers and acquisitions in the
diagnostics, medical supply, biotech and medical laboratory industry segments.
Because of the uniqueness of the U.S. Drug situation in terms of its technology
under development, lack of operations, revenues and earnings, Whale Securities
felt no specific transaction or group of transactions were sufficiently
comparable to the U.S. Drug merger so as to be defining in terms of the
valuation of U.S. Drug. However, the premiums to market price and the multiple
of book value per share under the USAT offer compared favorably with composite
statistics for the industry segments mentioned above.
(e) Analysis of the USAT Common Stock to be given as consideration - In
its review of the consideration to be received by the U.S. Drug Minority
Shareholders, Whale Securities noted that the USAT Common Stock issued in
connection with the Merger will be registered shares, freely tradable. Based on
USAT's average weekly trading volume during February and March 1996 of
approximately 1,500,000 shares, unless conditions changed, the U.S. Drug
Minority Stockholders would hold relatively liquid securities in the USAT
shares. Whale Securities noted that the share price of USAT trended up sharply
from February to April 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 U.S. Drug Board that a decline in USAT share prices
between the Record Date and the
U.S. Drug
47
<PAGE> 52
closing of the Merger would result in the holders of the Minority U.S. Drug
Common Stock receiving less 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 such analyses were based and the factors
considered in connection therewith.
TERMS OF THE MERGER AGREEMENT
The following description of the Merger Agreement is only a summary and
does not purport to be complete. It is qualified in its entirety by reference to
the complete text of the Merger Agreement, which is attached to this Consent
Solicitation Statement/Prospectus as Appendix A and is incorporated herein by
this reference.
(1) CONVERSION OF SHARES
After adoption of the Merger Agreement by the requisite consents of the
U.S. Drug stockholders, U.S. Drug will be merged with and into Acquisition Corp.
and each share of the Minority U.S. Drug Common Stock issued and outstanding on
the Effective Date will be converted into ________ shares of the USAT Common
Stock; each share of the U.S. Drug Common Stock owned by USAT will be canceled;
U.S. Drug Options to purchase 110,000 shares of the U.S. Drug Common Stock will
be cancelled and U.S. Drug Options to purchase 42,000 shares of the U.S. Drug
Common Stock at $7.00 per share will either be exercised into shares of the U.S.
Drug Common Stock on or prior to the Effective Date, in which event the shares
will be converted into shares of the USAT Common Stock on the same basis as the
Minority U.S. Drug Common Stock, or, if not exercised, will expire on the
Effective Date; and all outstanding U.S. Drug Warrants to acquire an aggregate
of 150,000 shares of the U.S. Drug Common Stock at $7.50 per share will be
converted into the Merger Warrants of USAT to acquire ____________ shares of the
USAT Common Stock at an exercise price of $_____ per share. See the section
"U.S. Drug Options and Warrants" under this caption "The Merger and Related
Matters." The number of shares of the USAT Common Stock to be exchanged for each
share of the Minority U.S. Drug Common Stock was determined by dividing $5.25 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 $_________. No fractional shares
of the USAT Common Stock will be issued. Holders of the U.S. Drug 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 closing sales price for a share of
U.S. Drug
48
<PAGE> 53
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 U.S. Drug 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 U.S. Drug 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 U.S. Drug 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 the U.S. Drug Minority Common Stock, (2) the obtaining of a
fairness opinion to the U.S. Drug Minority Stockholders reasonably satisfactory
to USAT and (3) the lack of any material
U.S. Drug
49
<PAGE> 54
adverse change in the business or financial condition of U.S. Drug.
The obligations of U.S. Drug under the Merger Agreement are subject to
the satisfaction of certain conditions (unless such conditions are waived by
U.S. Drug 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 U.S. Drug Common Stock, (2) the
obtaining of a fairness opinion to the U.S. Drug Minority Stockholders
reasonably satisfactory to U.S. Drug and (3) the lack of any material adverse
change in the business or financial condition of the Company (excluding U.S.
Drug).
The conditions that (1) the holders of more than 50% of the outstanding
shares of the Minority U.S. Drug 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 U.S. Drug.
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 U.S. Drug may, by written agreement, amend the Merger Agreement at
any time before or after its adoption by the U.S. Drug 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 U.S. Drug Common Stock pursuant to the Merger Agreement without further
approval by the U.S. Drug Minority Stockholders.
The Merger Agreement, as amended, may be terminated and the Merger
abandoned, whether before or after approval by the U.S. Drug Minority
Stockholders, at any time prior to the Effective Date (1) by mutual written
consent of the Boards of Directors of USAT and U.S. Drug, (2) by either USAT or
U.S. Drug if the respective Board of Directors, based on the opinion of its
outside counsel, determines that making a recommendation to the U.S. Drug
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
U.S. Drug
50
<PAGE> 55
U.S. Drug 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 U.S. Drug 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.
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 after
payment of all accrued and unpaid dividends on the Company'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; and (iv) have no preemptive or
sinking fund provisions. 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.
There are 500,000 shares of the Class A Preferred Stock, $.01 par
value, authorized, of which 41,157 shares were outstanding as of March 31, 1996.
These shares have a liquidation preference of $205,785 and are convertible into
185,207 shares of the USAT Common Stock. As of March 31, 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, 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
U.S. Drug
51
<PAGE> 56
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"
elsewhere in this Prospectus.
(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
USAT's Registration Statement on Form S-1, File No. 33-43337 (the
"January 1992 Registration Statement"), under the Securities Act, which became
effective on January 17, 1992, 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. USAT has 2,032,679 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 967,321 shares of
the Acquisition Shares relating to the acquisitions of USRR's assets and
Alconet.
Notwithstanding the registered status of the Acquisition Shares,
recipients of these shares offering them for public resale may potentially be
deemed statutory underwriters because 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.
DIFFERENCES IN STOCKHOLDERS' RIGHTS
The U.S. Drug Minority Stockholders will become holders of the USAT
Common Stock if the Merger is consummated. Because both U.S. Drug and USAT are
incorporated under the laws of Delaware, there will be no change in the
statutory rights as stockholders of the U.S. Drug 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."
U.S. Drug
52
<PAGE> 57
DIFFERENCES IN BY-LAWS
There are no material differences between the By-Laws of U.S. Drug and
those of USAT.
EXCHANGE OF CERTIFICATES
At the Effective Date, each share of the Minority U.S. Drug Common
Stock outstanding immediately prior to the Effective Date will be converted into
the right to receive ________ shares of the USAT Common Stock. The shares of the
U.S. Drug Common Stock owned by USAT on the Effective Date 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 U.S. Drug Minority
Stockholders. The transmittal form will contain instructions with respect to the
surrender of the certificates for the Minority U.S. Drug Common Stock in
exchange for the certificates for the USAT Common Stock. MINORITY U.S. DRUG
COMMON STOCK CERTIFICATES SHOULD NOT BE FORWARDED TO THE EXCHANGE AGENT UNTIL
AFTER RECEIPT OF THE TRANSMITTAL FORM AND SHOULD NOT BE RETURNED TO U.S. DRUG
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 U.S. Drug Common Stock held by
him, her or it in accordance with the Merger Agreement.
After the Effective Date, a record holder of the Minority U.S. Drug
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 U.S. Drug 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 U.S. Drug
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"
U.S. Drug
53
<PAGE> 58
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 U.S. Drug 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.
U.S. DRUG OPTIONS AND WARRANTS
U.S. Drug Options to purchase an aggregate of 110,000 shares of the
U.S. Drug Common Stock at $7.00 per share are currently held by the directors of
U.S. Drug and will be cancelled with the consent of such persons effective upon
the consummation of the Merger. U.S. Drug Options to purchase an aggregate of
10,000 shares held by Glenn A. Bergenfield and William DiTuro, former directors
of U.S. Drug, expired on February 15, 1996. Douglas G. Allen, the President of
U.S. Drug and Steven Kline, a Vice President of U.S. Drug, hold U.S. Drug
Options to purchase 30,000 and 12,000 shares of the U.S. Drug Common Stock,
respectively. Pursuant to the terms thereof, each such Option will, immediately
prior to the consummation of the Merger, become fully exercisable. Because USAT
has declined to assume these U.S. Drug Options, they will expire if not
exercised on or before the Effective Date. Because of the higher exercise price
(i.e., $7.00 per share) as compared with USAT's offer to the U.S. Drug Minority
Stockholders, (i.e., $5.25 per share) USAT does not anticipate any exercises of
the U.S. Drug Options. If the Merger is consummated, USAT may negotiate
alternative stock arrangements with respect to the USAT Common Stock for either
or both of Messrs. Allen and Kline in connection with their continued
employment.
The only Common Stock purchase warrants to purchase shares of U.S. Drug
Common Stock currently outstanding are the U.S. Drug Warrants owned by Baraban
or its designees. Baraban was the underwriter of U.S. Drug's initial public
offering. The U.S. Drug Warrants evidence the right to purchase 150,000 shares
of the U.S. Drug Common Stock at $7.50 per share. If the Merger is consummated,
as a result of the anti-dilution provisions of the U.S. Drug Warrants, the U.S.
Drug Warrants will be converted into USAT Common Stock purchase warrants
expiring October 13, 1998 (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 U.S. Drug Warrants would have been entitled to
after consummation of the Merger had the U.S. Drug Warrants been exercised
immediately prior to the consummation of the Merger. The exercise price will be
proportionately adjusted to $_____ per share.
U.S. Drug
54
<PAGE> 59
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 Hard-Scott-Rodino Antitrust
Improvement Act of 1976, as amended, and the rules and regulations thereunder.
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 U.S. Drug 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 $_______________. The fees
and expenses of U.S. Drug are expected to be approximately $___________.
CERTAIN TAX CONSEQUENCES
Gold & Wachtel, LLP, general counsel to USAT, and Rosenman & Colin LLP,
special counsel to U.S. Drug, have advised management of the respective
companies that the Merger, pursuant to which the U.S. Drug Minority Stockholders
will receive shares of the USAT Common Stock, meets the statutory requirements
of a tax-free reorganization as a statutory merger within the meaning of
Sections 368(a)(1)(A) and 368(a)(2)(D) of the Internal Revenue Code of 1986, as
amended (the "Code"). Management has also been advised that the right on the
part of the U.S. Drug Minority Stockholders to receive a portion of the Special
Payment, within one year of the Effective Date (see "The Terms of the
Transaction-Special Payment"), as provided in the Merger Agreement, will
constitute "boot". As such, a U.S. Drug Minority Stockholder could recognize
gain in connection with the Merger, but in an amount not in excess of the sum of
money derived from
U.S. Drug
55
<PAGE> 60
such boot. Management has also been advised that the value of the right to
receive the boot is too speculative to permit the value of such right to be
ascertainable at the time the Merger becomes effective so long as no agreement
with a marketing partner has been executed, which agreement provides for an
advance cash payment to U.S. Drug, Acquisition Corp. as its successor or USAT.
There can be no assurance that any such agreement will be executed or, if
executed, that it would provide for a payment that would constitute a Special
Payment. Accordingly, in the opinion of such counsel, the right to receive the
boot will not produce any tax consequences upon the Effective Date, but any
proceeds derived from such right could be a taxable event at such time as any
proceeds may be actually received.
In the event that the payment of the boot has the effect of a dividend,
each U.S. Drug Minority Stockholder who realizes gain on the exchange of stock
will treat as a dividend such an amount of the gain recognized as is not in
excess of his, her or its ratable share of the undistributed earnings and
profits of U.S. Drug, and possibly of USAT, accumulated after February 28, 1913,
and the remainder, if any, of the gain will be treated as a gain from the
exchange of property. If a U.S. Drug Minority Stockholder realizes no gain on
the overall transaction, the boot received by him will not be treated as a
dividend.
At this time, neither U.S. Drug prior to the Merger nor USAT will have
such undistributed earnings and profits through March 31, 1996. However,
although it is unlikely, it is possible that such earnings and profits could be
created in the subsequent period so as to give rise to dividend treatment.
In any event, Management has been further advised that, based on
current judicial and Internal Revenue Service ("IRS") guidelines, the receipt of
boot by non-controlling public stockholders in the situation presented should
not cause such boot to be considered to have the effect of a dividend whether or
not there are earnings and profits present. Accordingly, any cash boot received
should be taxed as a gain on the sale of the U.S. Drug shares and, if there is
no gain on the overall merger transaction, no taxable gain will result. A tax
loss will not be recognized.
In summary, subject to the effect of the receipt of boot as discussed
in the following paragraph, in the transaction governed, as indicated, by
Sections 368(a)(1)(A) and 368(a)(2)(D) of the Code; (a) no gain or loss will be
recognized by the U.S. Drug Minority Stockholders upon the receipt of the USAT
Common Stock in exchange for the Minority U.S. Drug Common Stock; (b) the tax
basis of the USAT Common Stock received by the U.S. Drug Minority Stockholder
will be the same as the tax basis of the Minority U.S. Drug Common Stock
surrendered; (c) the holding period, for federal income tax purposes, of the
USAT Common Stock
U.S. Drug
56
<PAGE> 61
received by the U.S. Drug Minority Stockholders will, in the hands of such
stockholders, include the holding period of the shares of the Minority U.S. Drug
Common Stock exchanged therefor, provided that such Minority U.S. Drug Common
Stock was held as a capital asset in the hands of such stockholders on the
Effective Date; and (d) a U.S. Drug Minority Stockholder receiving cash in lieu
of a fractional share will recognize a gain for federal income tax purposes to
the extent of the cash received in excess of the tax basis of the fractional
share.
If cash boot is received by a Minority U.S. Drug Stockholder, a gain
(but not a loss) will be recognized in an amount equal to the lesser of the
stockholder's gain on the overall merger transaction or the amount of the boot.
As indicated, if there is no overall gain, no tax liability will arise. Also, if
cash boot is received, the tax basis of the USAT Common stock will be the same
as the tax basis of the Minority U.S. Drug Common Stock surrendered, decreased
by the amount of any money (boot) received, and increased by the amount, if any,
which was taxable as a dividend or gain recognized on such exchange.
There should be no federal income tax consequences to existing holders
of the USAT Common Stock or to USAT or U.S. Drug.
No rulings have been, or will be, requested from 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 U.S. Drug Minority Stockholder should consult his,
her or its own tax advisor concerning the foreign, federal, state, local or
other tax consequences of the Merger as they relate to the stockholder's
particular circumstances. There is 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.
No rulings have been, or will be, requested from the IRS with respect
to any of the other matters described above.
THE FOREGOING CONSTITUTES ONLY A GENERAL DESCRIPTION OF CERTAIN OF THE
FEDERAL INCOME TAX CONSEQUENCES OF THE TRANSACTION TO THE U.S. DRUG MINORITY
STOCKHOLDERS, WITHOUT CONSIDERATION OF THE PARTICULAR FACTS AND CIRCUMSTANCES OF
EACH STOCKHOLDER'S SITUATION.
RESALE OF USAT SECURITIES
The shares of the USAT Common Stock to be issued to the U.S. Drug
Minority Stockholders pursuant to the Merger Agreement will
U.S. Drug
57
<PAGE> 62
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 U.S. Drug, i.e., a person who as a result of an
officership, a directorship or the beneficial ownership of 10% or more of the
U.S. Drug Common Stock was deemed to be a controlling person with respect to
U.S. Drug). 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. USAT is the only 10% stockholder of U.S. Drug and its shares
will be cancelled if the Merger is consummated. No person who is currently a
director or an executive officer of U.S. Drug will receive shares of the USAT
Common Stock as a result of the Merger. As indicated under "USAT Principal
Stockholders," Peter M. Mark is the only director or executive officer of USAT
who 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. Mark's shares or any person who may later be deemed
to have been an affiliate of U.S. Drug, of which person USAT currently has no
knowledge.
Under Rule 145(b), an affiliate of U.S. Drug 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., USAT's securities must continue to be
registered under Section 12 of the Exchange Act; 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; 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; 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 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
U.S. Drug
58
<PAGE> 63
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 U.S. DRUG
U.S. DRUG RELATIONSHIP WITH USAT
From January 1992 until January 1993 USAT conducted U.S. Drug's
business operations. Effective as of January 1, 1993, USAT transferred all of
its drug testing assets, including cash amounting to $11,626 and hard assets
valued at their carrying value of $437,060 and intellectual property rights
associated with the drug testing operations, to U.S. Drug for 3,500,000 shares
of the U.S. Drug Common Stock. USAT also granted U.S. Drug a sublicense with
respect to the USN technology.
As of March 31, 1996, 67.0% of the outstanding shares of the U.S. Drug
Common Stock was held by USAT. James C. Witham, Chairman of the Board, Chief
Executive Officer and a director of U.S. Drug, was also 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 U.S. Drug, was an Executive
Vice President and a director of USAT until April 18, 1996. Gary S. Wolff, the
Treasurer, the Chief Financial Officer, the Chief Accounting Officer and a
director of U.S. Drug, is 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
U.S. Drug until November 15, 1995, were directors of USAT prior to September 26,
1995. Michael J. Witham was a director of U.S. Drug and a Vice President of USAT
prior to September 26, 1995. See "Summary-Recent Developments" and "Management."
LOANS FROM U.S. DRUG TO USAT
During fiscal 1995, U.S. Drug made short-term loans to USAT in the
amount of $488,519. At March 31, 1996, the note receivable from USAT to U.S.
Drug was $250,000. The USAT notes were secured by a pledge of USAT's shares of
the U.S. Drug Common Stock. The loans are evidenced by notes which became due on
December 31, 1995, which maturity date was extended to June 30, 1996, and bear
interest at the rate of 8% per annum. The loans carry interest rates in excess
of those available to U.S. Drug on short-term money market investments. If the
Merger is consummated, the note receivable of U.S. Drug will be cancelled and
the pledge released.
U.S. Drug
59
<PAGE> 64
MANAGEMENT SERVICES AGREEMENT
On April 1, 1993, U.S. Drug and USAT entered into a formal Management
Agreement, pursuant to which USAT's fee for management and administrative
services to U.S. Drug was to be computed at ten percent of U.S. Drug's annual
net sales, with a minimum annual fee of $300,000. In July 1993, U.S. Drug and
USAT entered into an amended Management Agreement, effective retroactively to
April 1, 1993, pursuant to which the fee for management and administrative
services provided to U.S. Drug by USAT is a fixed annual fee of $420,000, plus
three percent of U.S. Drug's annual gross sales. Because U.S. Drug has no sales
to date, it has always paid the minimum fee under the Management Agreement. The
term of the amended agreement is five years which commenced April 1, 1993. Given
the related industry experience of USAT management, the immediate availability
of USAT personnel and belief of the management of U.S. Drug that the terms
offered by USAT are fair and reasonable, U.S. Drug did not investigate
alternative management services providers. 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 U.S. Drug, both in terms of employee time and
allocated overhead costs. The arbitrary formula used by USAT to determine the
fee was 50% of the sum of USAT's executive, accounting and clerical salaries,
fringe benefits and related expenses. The services provided to U.S. Drug by USAT
pursuant to the Management Agreement include management, administrative,
accounting and other financial services and advice, including, without
limitation, the services currently performed by Gary S. Wolff as the Treasurer
of U.S. Drug, for which he is not directly compensated by U.S. Drug; services
relating to U.S. Drug's financial and banking relationships; services relating
to the preparation of financial statements, budgets, forecasts and cash flow
projections; cash management advice; and other miscellaneous services and
advice.
Since July 1992, three members of USAT's senior management, James C.
Witham, Gary S. Wolff, Karen B. Laustsen and one former member of USAT's senior
management, Michael J. Witham (until September 26, 1995), have been the primary
persons involved in the provision of services to U.S. Drug under the Management
Agreement. Because of the resignations of Mr. Witham and Ms. Laustsen on April
18, 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 will substitute for Mr. Witham and Ms. Laustsen in performing
these services on behalf of USAT, although the former will assist until May 31,
1996. The management of U.S. Drug believes that the Management Agreement with
USAT is fair and reasonable and that its costs would be greater if it had to
obtain such services from an unaffiliated party with commensurate
U.S. Drug
60
<PAGE> 65
industry experience, if available, or maintain the internal staff required to
provide such services itself.
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. 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. In October and November 1993, U.S. Drug had a public offering of the
U.S. Drug Common Stock. As of February 29, 1996, USAT owned 67.0% of the U.S.
Drug Common Stock.
2. In June 1988, Good Ideas, then a Texas corporation ("Texco"), began
the manufacture and shipment of toys. In May 1992, a subsidiary of USAT acquired
a 55% interest in Texco. In December 1993, Good Ideas reincorporated in Delaware
and acquired Texco, of which USAT thereafter continued to own 86% until Good
Ideas had a public offering of the Good Ideas Common Stock in March and April
1994. As of February 29, 1996, USAT owned 60.8% of the Good Ideas 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, Inc., 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. Effective November 1995, Alconet, Inc. became a wholly-owned
subsidiary of ProActive.
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."
U.S. Drug
61
<PAGE> 66
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.
<TABLE>
<CAPTION>
Percentage of Revenues
USAT's Product Title Areas Derived During Each of the
-------------------------- Last Three Fiscal Year
--------------------------
1993 1994 1995
---- ---- ----
<S> <C> <C> <C>
(1) Evidential Quality Devices 20% 12% 55%
(2) Screening (or "Non-Evidential")
Devices 15% 23% 8%
(3) Drug & Alcohol Testing Services 40% 59% 37%
</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."
U.S. Drug
62
<PAGE> 67
(1) EVIDENTIAL DEVICES
Alco-Analyzer
USAT designed and developed this product as a gas chromatograph alcohol
testing device that determines blood alcohol levels by use of breath samples
with precision and accuracy to be used as evidence in legal proceedings. USAT's
three models have been approved by the DOT as evidential breath alcohol testing
instruments; however, only one-the Model 2100-is currently manufactured by USAT.
Such model is used to analyze blood, breath and urine specimens to determine
levels of ethyl alcohol and is described as follows:
Model 2100 - Enhanced electronics and software create an easy to use
instrument which can be networked to a central location for down loading data.
Testing information and results are displayed on a color computer monitor and
are printed on a multi-part carbonless form.
USAT, to management's knowledge, is the only manufacturer of a gas
chromatograph breath testing device designed specifically for ethyl alcohol
determinations using an inert carrier gas. Management believes that gas
chromatography is recognized as 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
U.S. Drug
63
<PAGE> 68
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.
(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
U.S. Drug
64
<PAGE> 69
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
products, which the DOT had previously approved as evidential breath alcohol
testing instruments. USAT has designed the Alco-Analyzer 2100 to specifically
meet the needs of this market. Its marketing strategy includes sales, leases and
placements of the instrument with a cost per test charge.
USAT, as part of its current business strategy, intends to capitalize
upon the DOT's rules for mandatory alcohol testing within the transportation
industry. The final rule, which became effective in January 1995 as to the
larger transportation companies and, in January 1996, as to the balance,
affected nearly 8,000,000 employees who are engaged in safety-sensitive
positions in the transportation industry by requiring them to be tested for
alcohol on DOT-approved breath testing devices. Mandatory pre-employment
screening, however, is not required by the DOT rule. USAT's Alco-Analyzer series
and, in particular, its Model 2100 meet the DOT's standard. In December 1994,
USAT entered into two agreements with major testing laboratories, Corning
Clinical Laboratories Inc., formerly Metpath Inc., and 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.
U.S. Drug
65
<PAGE> 70
USAT also intends to pursue the non-regulated market for alcohol
testing where approximately 93% of the American work force is employed. Although
management believes that this is a market with great potential, there is no
assurance that USAT will derive significant revenues therefrom.
(3) MEDICAL/CLINICAL FACILITIES
USAT sells its alcohol screening devices to the medical and clinical
markets for testing of patients in alcohol treatment facilities and those who
are brought to hospital emergency rooms under suspected influence of alcohol.
USAT continues to expand its sales of screening devices and the gas
chromatograph into this market to provide instantaneous and accurate on-site
testing procedures for breath alcohol analysis.
(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.
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 action related to injury resulting from product failure, whether such
product is offered by USAT or a subsidiary thereof.
COMPETITION
Alcohol Testing
The substance abuse detection equipment industry is highly competitive.
Although USAT's Alco Analyzer 2100 is, to management's knowledge, the only
DOT-approved evidential alcohol breath testing instrument utilizing gas
chromatography, it still competes with other substance abuse detection
techniques developed by other companies. USAT competes with small companies
which also offer alcohol testing equipment such as CMI Inc., Intoximeters, Inc.
and Lifeloc, Inc. Although all of these competitors are believed currently to
have greater revenues than USAT from sales of alcohol testing devices,
management is of the opinion that only CMI, Inc., which is a subsidiary of
MPD/MPH, may have greater financial resources than USAT. In addition,
U.S. Drug
66
<PAGE> 71
several companies, including Roche and STC, Inc., offer an on-site screening
saliva based alcohol test. Roche has, and several of these companies may have,
greater revenues and financial resources than the Company. Although USAT
believes that its product and service quality, combined with its experienced
personnel, will offer it a competitive edge in marketing its products and
services, there is 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. 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). 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 than does U.S. Drug
available to them 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 may be under development by other companies, which advice
management has not been able to confirm, and, accordingly, there can be no
assurance that such a product will not be developed by a competitor. In
addition, even if no such product is developed, U.S. Drug anticipates, as
indicated above, competition from other substance
U.S. Drug
67
<PAGE> 72
abuse detection methods such as Syva's EMIT, Roche's RIA, Marion's TLC, Abbott's
FPIA methods, and other immunoassay tests provided by Editek, Hycor, Princeton
and Biosite. If U.S. Drug successfully develops both the urine sample and saliva
sample testing methods, as to which there can be no assurance, it is not certain
whether U.S. Drug will have the financial resources to compete successfully with
other companies which have greater financial resources available to them, nor
can there be any assurance that other companies will not develop saliva testing
methods in the future. U.S. Drug is seeking a marketing partner which would have
the financial resources to enable U.S. Drug both to develop a competitive
product and to market the product on a basis similar to its competitors;
however, there can be no assurance that U.S. Drug will secure such a marketing
partner and, if successful, when such will occur. U.S. Drug's management
currently anticipates that U.S. Drug will submit its five-panel screening assay
to the FDA late in 1997 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, 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 it is a provider
of both substance abuse testing services and background screening services. A
single source service provider is a relatively new concept. The competition from
single source providers which ProActive currently encounters is primarily from
small local and regional companies. To management's knowledge, currently there
is no single source provider on a national level, which is what ProActive hopes
to become. 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 ProActive achieves 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 ProActive.
U.S. Drug
68
<PAGE> 73
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 may face competition from a number of smaller toy
companies as well.
RESEARCH AND DEVELOPMENT
During the nine months ended December 31, 1995, the Company spent
approximately $790,000 on research and development, including $683,000 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
monies expended on development of the technology of U.S. Drug. In fiscal 1994,
the Company spent approximately $948,000 on research and development, including
monies expended on development of the technology by U.S. Drug. In fiscal 1993,
the Company spent approximately $1,067,000 on research and development,
primarily to develop the licensed drug technology.
PATENTS AND TRADEMARKS
The Company presently has no patents on its products, but has obtained
tradenames for its major products. The Company believes these tradenames afford
adequate protection.
SUBSIDIARIES
(1) U.S. DRUG TESTING, INC.
In October and November 1993, USAT's then wholly-owned subsidiary U.S.
Drug completed an initial public offering of the U.S. Drug Common Stock, which
security trades on the Pacific Coast Stock Exchange. As of March 31, 1996, USAT
owned 3,500,000
U.S. Drug
69
<PAGE> 74
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. For information relating to this
subsidiary, see "Business of U.S. Drug."
(2) GOOD IDEAS ENTERPRISES, INC.
In February and April 1994, Good Ideas completed an initial public
offering of the common stock, $.001 par value, of Good Ideas (the "Good Ideas
Common Stock"), which security trades on the Pacific Coast Stock Exchange. As of
March 31, 1996, USAT owned 2,400,000 of the 3,948,680 outstanding shares of the
Good Ideas Common Stock or 60.8% thereof.
Good Ideas designs, markets and distributes a variety of traditional
toy products for children of various ages. Its sales historically have been
derived from a line of traditional wooden construction toys. Good Ideas'
strategy had been to design and develop enduring traditional lines of toys and
to create enhancements to, and extensions of, these toy lines which were
intended to maximize product line sales while minimizing development and
advertising expenses for new and enhanced products.
Good Ideas' principal product line, wooden construction toys, includes
classic interlocking log sets marketed under the trademark Paul Bunyan Log
Builders(TM), themed playsets such as General Custer's Fort Apache(TM), building
block sets marketed under the trademark Paul Bunyan Bloc' Builders(TM) and
brightly-painted, multi-colored combination log and block sets marketed under
the trademark Paul Bunyan Wood Builders(TM). In addition to its line of wooden
construction toys, it markets one other line of traditional toys. Since March
1993, it has shipped a line of equestrian toys comprising of various styles and
sizes of flocked plastic horses and related accessories marketed under the
trademark Black Beauty and Friends(TM).
Good Ideas sells its products to over 100 customers, almost all of whom
are located in the United States. Since it first commenced shipping products in
June 1988, its principal customers have been mass merchandisers, such as Toys R
Us, Inc., Wal-Mart Stores, Inc., and J.C. Penney Company, Inc., and wholesale
clubs, such as Costco Wholesale Corporation, Pace Membership Warehouse, Inc. and
BJ's Wholesale Club, Inc. Its current domestic distribution network also
includes high-end specialty retailers, such as F.A.O. Schwartz and Imaginarium.
The major customer of Good Ideas has not been placing orders for Good
Ideas' toy products. The customer has attributed its
U.S. Drug
70
<PAGE> 75
reduction in orders to its large inventories and declining sales and customer
traffic. Management believes that other manufacturers in the toy industry are
currently facing those same problems - their distributors or retailers to which
they sell have large inventories of products and declining sales and customer
traffic. In addition, management believes that many retailers are minimizing
their number of vendors, which has the result of squeezing out the smaller
companies with their limited product lines. See "The Company's Management's
Discussion and Analysis of Financial Condition and Results of Operations-Results
of Operations-Good Ideas Enterprises, Inc."
Since July 1992, USAT has provided, and continues to provide, certain
management and administrative services to Good Ideas. These services included
management and financial advice; maintenance of financial books and records and
preparation of financial statements, budgets, forecasts and cash flow
projections; services relating to banking relationships; payment of accounts
payable and payroll; collection of accounts receivable and credit analysis;
order processing; import processing; cash management; and other miscellaneous
services and advice. From July 1992 through March 1993, the fee payable to USAT
for these services was computed on a fixed monthly charge of $25,000. In April
1993, Good Ideas and USAT entered into a formal Management Agreement, pursuant
to which the fee for such services was computed at ten percent of annual net
sales.
In December 1993, Good Ideas and USAT entered into a Management
Services Agreement, effective retroactively to October 1, 1993, pursuant to
which the fee for management and administrative services provided by USAT is
computed on a fixed monthly fee of $25,000, plus five percent of 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, both in terms of employee time and allocated overhead costs.
Pursuant to the Agreement, the term, which initially was to expire on September
30, 1994, has been automatically renewed so that it is now scheduled to expire
on September 30, 1996. The agreement, however, provides for automatic one-year
renewals unless terminated by Good Ideas upon six months' notice prior to the
commencement of any renewal term or by USAT at least 12 months prior to the
commencement of any renewal term. In view of the USAT Board's decision on
February 26, 1996 to sell or liquidate Good Ideas (see the succeeding
paragraph), the Board suspended management fees to USAT retroactive to January
1, 1996.
USAT has also filed a Registration Statement on Form S-4 under the
Securities Act to register shares of the USAT Common Stock to be issued to the
minority stockholders of Good Ideas upon the consummation of a merger of Good
Ideas with and into a
U.S. Drug
71
<PAGE> 76
wholly-owned subsidiary of USAT. As indicated under "The Merger and Related
Matters-Reasons for the Merger and Approval" 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 segment, the
U.S. Drug testing segment and the related human resource provider business of
ProActive and operated the three as if one corporation. This action would
require 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 the toy business of Good Ideas. In addition, the USAT
directors have concluded that, because of the history of losses in Good Ideas
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 is
no assurance. For both of these reasons, the USAT Board authorized on February
26, 1996 management to seek offers from prospective purchasers. There is no
assurance that an acceptable offer to purchase will be received or as to the
terms of any such offer. If no acceptable offer is received, the USAT Board will
consider liquidation of Good Ideas.
(3) PROACTIVE SYNERGIES, 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 February 15, 1996, ProActive announced that it had entered into
agreements to provide its services to approximately 350 companies.
On December 14, 1995, USAT and ProActive entered into an agreement with
Robert Stutman & Associates, Inc. ("RSA") and
U.S. Drug
72
<PAGE> 77
Robert Stutman pursuant to which (1) USAT and ProActive engaged Mr. Stutman to
be their expert spokesman and a consultant with respect to their drug and
alcohol testing businesses; (2) ProActive agreed to refer customers to RSA for
the purpose of RSA providing its services to such customers, including writing
Drug Testing/Background Screening Policy Manuals; and (3) RSA agreed to refer
customers to ProActive. Prior to forming the Stutman firm, 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. Mr. Stutman received a Common Stock purchase
warrant expiring December 13, 1998 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, as
consideration for his acting as spokesman. RSA may receive Common Stock purchase
warrants based on the drug tests ordered through ProActive. RSA has already
received a Common Stock purchase warrant expiring March 31, 1999 to purchase
200,000 shares of the USAT Common Stock at $2.00 per share based on its meeting
quotas set in the agreement. The agreement, which has a term of ten years
(except three years for the consulting and spokesperson services by Mr.
Stutman), provides for fees to ProActive based on referrals by RSA and an
initial $100,000 payment by ProActive and varying monthly fees thereafter.
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, which acquisition would terminate the agreement described in the
preceding paragraph. However, although there can be no assurance that a
definitive agreement will be executed and the RSA acquisition consummated, the
USAT Board believes this will be effected because of Mr. Stutman's positions
with USAT.
Effective December 28, 1996, 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.
ProActive also entered into a lease for office space in Savannah,
Georgia. See the section "Property" under this caption "Business of the
Company."
U.S. Drug
73
<PAGE> 78
(4) ALCONET, INC.
In March 1995, USAT acquired 100% of the issued and outstanding common
stock of Alconet, Inc. ("Alconet") and all the membership interests of
Dakotanet, L.L.C. As consideration, USAT issued 782,321 of the USAT Common Stock
registered under the Securities Act as Acquisition Shares in the January 1992
Registration Statement valued at $1,564,642. 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 operated as a wholly-owned subsidiary of USAT, but was
assigned in November 1995 to ProActive, and 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. The acquisitions have been accounted for as a purchase in the financial
statements of the Company.
(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 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 $500,000, $200,000 of which was paid at the closing and
the balance by the delivery of a $300,000 promissory note. The purchaser also
paid for up to $80,000 in accounts payable of USRR and assumed certain other
liabilities, including USRR's lease. The promissory note be 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
U.S. Drug
74
<PAGE> 79
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 March 31, 1996, the Company had 69 full time employees other than
its officers, 27 engaged in manufacturing, 7 in sales, 7 technical, 6 scientists
and 22 in clerical administrative jobs. The Company has no collective bargaining
agreement with its employees.
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.
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 assets (see the section
"Subsidiaries-U.S. Rubber Recycling, Inc." under this caption "Business of the
Company"), the purchaser of USRR's assets assumed the foregoing lease, but the
landlord did not release USRR from its obligations. 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. 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 four 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.
U.S. Drug
75
<PAGE> 80
BUSINESS OF U.S. DRUG
GENERAL
U.S. Drug has not produced any revenues 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) (collectively the "Drugs of Abuse"). In January 1992, the USN and
USAT signed a ten-year license agreement (the "License Agreement") covering the
exclusive use by USAT of the USN's technology for the five Drugs of Abuse and
any other drugs that might be added to the National Institute of Drug Abuse
(NDA) list of drugs of abuse. By an amendment dated March 15, 1994, the scope of
the License Agreement was broadened to permit USAT to use the technology for
testing for methadone, benzodiazapines, barbituates, propoxyphene, tricyclic
antidepressants and anabolic steroids. Except as set forth in the two preceding
sentences, USAT under the License Agreement cannot use the USN technology to
test for other substances. By an amendment dated June 16, 1995, the term of the
exclusive right under the License Agreement was extended to terminate ten years
from June 27, 1995 and USAT has a nonexclusive right to use the technology
thereafter for the balance of the patent term, unless the License Agreement is
terminated sooner because of USAT's default. By letter dated May 15, 1995, the
USN notified USAT that, because the expiration date of the USN patent had been
extended to February 23, 2010 under the GATT/WTO treaty, the expiration date of
the License Agreement was extended to February 23, 2010. See the section
"Material Contracts-License Agreement under this caption "Business of U.S.
Drug." U.S. Drug's 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. Because the USN refused to grant a novation to
U.S. Drug of the License Agreement as requested, the USN looks to USAT, not U.S.
Drug, for performance thereunder. In the event of a default under the
sublicense, all rights would revert to USAT. U.S. Drug is developing its own
proprietary "Immunoassay Chemistry" for these five drugs which work with the
USN-developed technology. U.S. Drug has received six approvals from the FDA
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.
U.S. Drug, based on its review of current market conditions, has decided to
defer completion of the calibrators and the other elements required to be
completed in order to market the urine medium testing product until it can
complete the assays for a saliva medium testing product and, as a result, has
produced no revenues through December 31, 1995. Until FDA approval is obtained
of the saliva medium product, no revenues
U.S. Drug
76
<PAGE> 81
are likely to be produced. U.S. Drug has commenced research using saliva as a
testing medium in connection with the flow immunosensor technology and currently
expects to submit its five-panel screening assay to the FDA late in 1997, but
there is no assurance that such submission will occur by such date. Management
anticipates that U.S. Drug will commence marketing its products six months to a
year later. There is no assurance as to when the FDA will give its approval and
as to when marketing will commence.
U.S. Drug's screening tests are to be performed on a non-evidentiary
basis. If a Drug of Abuse is detected in the screening test, the sample will be
forwarded to a laboratory, where an expensive confirmatory analysis will be
performed. Usually gas chromatography/mass spectrometry ("GC/MS") is employed
for the evidentiary test. U.S. Drug's marketing analysis has indicated a greater
market potential for a saliva sample portable testing instrument for Drugs of
Abuse by law enforcement agencies, correctional facilities, hospitals and other
medical facilities than a urine sample instrument. Currently, to U.S. Drug's
knowledge no competitor is currently offering a saliva sample testing product on
an "on site" basis. However, management has been advised that one or more
companies may have such product under development and, although management has
no direct confirmation thereof, there can be no assurance that a competitor will
not begin to offer such a product in the future, whether before or after U.S.
Drug completes its research and development. See "Business of the
Company-Competition-Drug Testing."
DRUG TESTING PRODUCTS
(1) Urine Sample Testing-U.S. Drug's urine drug testing system can be divided
into two parts. The first part is the instrument into which the sample is
placed. The second part consists of the replaceable columns which will test for
the five Drugs of Abuse. The columns are easily replaceable by non-technical
personnel and, depending on a number of factors, are generally expected to have
a life of 50 to 75 tests.
Flow Immunoassay System - U.S. Drug's initial instrument system was the
Model 9000, which received marketing approval from the FDA. See the section
"Government Regulation" under this caption "Business of U.S. Drug." Resembling a
personal computer, the Model 9000 features one button operation which permits
low cost use of the system by non-technical personnel. The Model 9000
incorporates a U.S. Drug developed laser-excited fluorescence system which will
enhance detection of Drugs of Abuse. The Model 9000 will provide an analysis of
Drugs of Abuse present in the urine sample, if any are so present. All five
Drugs of Abuse or any combination thereof can be selected for testing. Testing
on a urine sample by the Model 9000 is
U.S. Drug
77
<PAGE> 82
anticipated to take approximately two minutes per drug selected, or ten minutes
if all five are selected.
Drug Assays for the Flow Immunosensor System - U.S. Drug is designing
disposable drug assay columns to be utilized in connection with the Model 9000.
Each flow through column, approximately one inch long by one-half inch wide,
will test for one drug (the "Target Drug"). The five separate columns each
contain antibodies specific for the Target Drug.
The life of each column is estimated at between 50 to 75 tests. This
will depend specifically on such factors as (i) the number of samples containing
the target drug; (ii) the amount of the Target Drug present, and (iii) the
specific drug targeted for testing. The Model 9000 will inform the operator, who
does not have to be highly skilled, when and which column to replace.
U.S. Drug is working to develop one column containing all five Target
Drugs. U.S. Drug believes this procedure would further reduce the cost of using
its drug screening system. U.S. Drug expects the test to indicate if any of the
Drugs of Abuse are present within several minutes. The full test procedure would
have to be run to determine the specific drug or the sample sent out for
confirmatory analysis. The confirmatory analysis would be used evidentially to
determine which Drugs of Abuse were present. See the section "Research and
Development" under this caption "Business of U.S. Drug."
As indicated above, completion of the urine sample testing product has
been deferred until the saliva sample testing product described below has been
developed.
(2) Saliva Sample Testing - Research is being conducted by U.S. Drug for this
development, using the flow immunosensor technology, of testing for Drugs of
Abuse from saliva samples, and for submission to the FDA for approval to use
saliva as a testing medium. This research utilizes much of the development work
done for the Company's urine drug testing system. The Company expects that a
full premarket approval, instead of the 510(k) procedure, may be required by the
FDA for both the testing system and the drug assays. See the section "Government
Regulation" under this caption "Business of U.S. Drug." U.S. Drug currently
intends to hire ten additional scientists at a cost of approximately $1,000,000
per year to complete the development of the saliva testing system for the Drugs
of Abuse. Assuming such scientists are hired, the Company anticipates that the
earliest that the saliva testing system and drugs assays for all five Drugs of
Abuse will be ready for submission to the FDA is in late 1997. There is no
assurance that U.S. Drug will meet such timetable. U.S. Drug may, as an
alternative to engaging in-house personnel, contract certain assignments to an
outside company to perform; however, there is no assurance that this
U.S. Drug
78
<PAGE> 83
alternative will either be more cost effective or produce the desired results at
an earlier date.
Portable Immunosensor Analyzer - The Company anticipates manufacturing
a small portable device in conjunction with the flow immunosensor technology.
When used with the drug assays described below, the Company expects that this
unit will provide portable and flexible detection capability when used with
saliva samples. It is expected that the assay time will be two minutes per test.
There is, however, no assurance that the Company will be able to develop and
market this product. See the "Research and Development."
Drug Assays for Portable Immunosensor Analyzer - The Company intends to
develop disposable assay cartridges for use with its portable model using saliva
samples. After the sample has been collected, it will be transferred to an assay
cartridge containing five Target Drugs, and then placed into the portable
instrument. The disposable cartridge will be thrown away after use. Assay time
is expected to be the same as using urine samples. U.S. Drug plans to continue
its research and development efforts for the drug assays concurrently with the
portable unit. There is no assurance that the Company will be able to develop
and market the assay cartridges. See "Research and Development."
MANUFACTURING
U.S. Drug currently intends to assemble the saliva and urine instrument
in-house from components manufactured by other companies to its specification
and that systems integration and testing will be performed in-house. Management
believes there are generally multiple sources for the components of the saliva
instrument and that these components will be available in commercial quantities
at competitive prices and that it will soon be able to complete its vendor
selection for components of the saliva instrument.
U.S. Drug may seek to obtain the assistance of a major laboratory
company to assist in the assay development, in which event such company may seek
to be involved in manufacturing and as a marketing partner. There can be no
assurance any such company will be used. In such event, U.S. Drug intends to
produce the chemistry for disposable immunoassay chemistry columns in-house.
U.S. Drug is currently aware of certain vendors with the capabilities required
to assemble the columns and at competitive prices. No contractual arrangements
have yet been concluded for the assembly of the drug assay columns and no
assurance can be given that U.S. Drug will be able to enter into such
contractual arrangements. U.S. Drug has developed its own fluorescently labeled
drug analytes and does not currently intend
U.S. Drug
79
<PAGE> 84
to purchase such fluorescently labeled drug analytes from commercial sources.
U.S. Drug, along with the Naval Research Laboratory ("NRL"), has been
issued U.S. Patent No. 5,354,654 "Lyophilized Ligand- Receptor Complexes for
Assay and Sensors", dated October 11, 1994, covering "freeze-drying" or the
lyophilization process. This process allows for the freeze-drying of
ready-to-use immunoassay chemistry which is then indefinitely preserved. The
manufacturing process of packing the columns with dry immunoassay chemistry
verses the tedious process using wet reagents reduces time in the manufacturing
process and provides for an extended shelf life. U.S. Drug has the right to
practice the patent on a non-exclusive basis in the United States and licensing
rights outside the United States. No entity other than the United States
Government has the right to use this patent. See the section "Research and
Development" under this caption "Business of U.S. Drug."
Until the research and development projects are completed, U.S. Drug
cannot state with any assurance that manufacturing will be conducted on the
basis set forth above.
In manufacturing, the Company will be required in the United States to
follow current Good Manufacturing Practices ("GMP") as prescribed by the FDA.
See the section "Government Regulation" under this caption "Business of U.S.
Drug." There can be no assurance that U.S. Drug will be able to enter into
suitable manufacturing arrangements with third parties which are in compliance
with GMP. U.S. Drug's future dependence on third parties for the manufacture and
supply of products could have a material adverse effect on U.S. Drug's profit
margins and its ability to deliver its products on a timely and competitive
basis.
MARKETING AND DISTRIBUTION
Although U.S. Drug has engaged the services of a consultant to
undertake a marketing survey and is seeking a major company in the industry to
act as its marketing partner, because of the delays in the development of its
products due to the decision to have a test using a saliva sample, a definitive
marketing program has not been finalized or implemented.
GOVERNMENT REGULATION
U.S. Drug's proposed screening and diagnostic products will be subject
to significant government regulation in the United States and other countries.
In order to conduct clinical tests, manufacture and market products for human
diagnostic use, U.S. Drug must comply with mandatory procedures and safety
standards established by the FDA and comparable foreign regulatory
U.S. Drug
80
<PAGE> 85
agencies. Typically, such standards require that products be approved by the FDA
or comparable foreign regulatory agencies, as appropriate, as safe and effective
for their intended use prior to being marketed.
The FDA regulates the introduction, manufacturing, labeling,
recordkeeping and advertising for all medical devices in the United States.
There are two principal methods by which FDA approval may be obtained to market
medical device products, such as the Company's proposed screening and diagnostic
test kits, in the United States. One method is to seek FDA approval through a
pre-market notification filing under Section 510(k) ("510(k)") of the Food, Drug
and Cosmetics Act. Applicants under the 510(k) procedure must prove that the
device for which approval is sought is "substantially equivalent" to devices on
the market prior to the Medical Device Amendments of 1976 or devices approved
thereafter pursuant to the 510(k) procedure. In some cases, data from clinical
studies must be included in the 510(k) application. The review period for a
510(k) application is 90 days from the date of filing the application.
If the 510(k) procedure is not available, then pre-market approval
("PMA") must be obtained from the FDA. Under the PMA procedure, the applicant
must obtain an Investigational Device Exemption ("IDE") before beginning the
substantial clinical testing which is required to determine the safety, efficacy
and potential hazards of the product. Safety and efficacy must be established
through extensive clinical studies, which are conducted after the FDA's
acceptance of an IDE application. On completion of all of the requirements of
the IDE, and once the results are evaluated, a PMA application is submitted to
the FDA. The review period under a PMA application is 180 days from the date of
filing, but the application is not automatically deemed approved if not rejected
during that period. The FDA may grant marketing approval, request additional
data about the product's safety and efficacy or deny the application if it
determines that the product does not meet the regulatory approval criteria. In
addition, the preparation of a PMA application is significantly more complex and
time consuming than the 510(k) procedure and the FDA's review of a PMA is more
extensive than that required for a 510(k) application.
No assurance can be given that any agency will grant approval for the
sale of U.S. Drug's products for routine screening and diagnostic applications
or that the length of time the approval process will require will not be
extensive.
The cost associated with the filing of applications with the FDA and of
research and development activities to support such applications, including
clinical trials, can be significant. There can be no assurance that the cost of
U.S. Drug's research and development activities will not exceed that which is
U.S. Drug
81
<PAGE> 86
budgeted, nor that any of U.S. Drug's proposed products will ever obtain the
necessary FDA or foreign regulatory clearances for commercialization.
Pursuant to applications filed by U.S. Drug, to date, U.S. Drug has
received approval to manufacture and market the Model 9000 and five assays - the
assay which detects the presence of cocaine (and its metabolite
benzoylecgonine), the assay which detects the presence of opiates (including
heroin, codeine and morphine) the assay which detects amphetamines, the assay
which detects phencyclidine hydrochloride (PCP) and the assay which detects
tetrahydrocannabinoids (THC, marijuana) in urine samples. However, as indicated
herein because of the decision to complete development of a saliva based testing
product, no such manufacture or marketing has commenced. See the section
"General" under this caption "Business of U.S. Drug."
In addition, regulations implementing the Clinical Laboratory
Improvement Amendments of 1988 ("CLIA"), promulgated by the United States
Department of Health and Human Services ("HHS") and the Health Care Financing
Administration on February 28, 1992, which were to become effective September 1,
1992, require that all employment drug testing, including on-site testing, be
processed by a federally approved laboratory. On August 28, 1992, HHS announced
that the application of CLIA to workplace testing would not go into effect on
September 1, 1992 because of comments made on the final regulations. The
comments raised questions about, among other things, whether bringing employee
drug testing under CLIA might have an unintended chilling effect on efforts to
encourage drug-free workplace programs. As reported in the January 19, 1993
Federal Register, the final decision on the regulations will be delayed until
further investigation is completed and has not been made as of the date hereof.
U.S. Drug believes that these regulations will not be made effective because (a)
the increased costs and burdensome procedures imposed by CLIA will significantly
reduce the volume of drug tests conducted, which is in direct conflict with the
government's long-standing war on drugs, (b) workplace testing is forensic in
nature (i.e, for the purpose of determining whether an individual is using
illegal drugs) and not for medical purposes (i.e., to make a health assessment
for diagnostic or treatment purposes) as was the original intent of CLIA and (c)
inclusion of employment drug testing may be a direct violation of the Federal
Administrative Procedures Act under Title 5 of the United States Code and the
United States Constitution. If the regulations are not adopted, on-site drug
testing in the workplace will not be subject to CLIA. Although the Company has a
laboratory through Biotex (see "Business of the Company-Alcohol Testing
Marketing-Drug and Alcohol Testing Services"), the U.S. Drug management believes
that the consequences of adoption of the regulations would add to U.S. Drug's
costs and, accordingly, this could have a material adverse
U.S. Drug
82
<PAGE> 87
impact upon its business with respect to employment testing in the private
sector.
RESEARCH AND DEVELOPMENT
During the nine months ended December 31, 1995, U.S. Drug spent
$683,000 on research and development, and, since its inception, has spent
$2,388,000 on research and development, which amount does not reflect the
$678,000 previously spent by USAT before the sublicense of its rights to the USN
technology.
In September 1995, U.S. Drug engaged the services of RELA, Inc., a
Colorado based engineering firm and a wholly-owned subsidiary of Colorado
MedTech Inc., to complete the engineering of the saliva sample test for drugs of
abuse. Management currently estimates that a laboratory prototype may be
developed during the quarter ending December 31, 1996. There is no assurance,
however, that this schedule will be met. In addition, U.S. Drug will have to
engage additional technical personnel at an estimated cost of $1,000,000 per
year in order to develop the saliva tests for Drugs of Abuse other than cocaine
on a timely basis. The U.S. Drug management will also consider as an alternative
engaging an unrelated company to perform part of the research and development
services if such approach appears to be more cost effective. While U.S. Drug
believes such technical personnel will be available, there is no assurance that
they will be engaged on a timely basis or as to when all tests will be made
available for FDA submission. See the section "Government Regulation" under this
caption "Business of U.S. Drug."
PATENTS AND TECHNOLOGY
U.S. Drug has rights under the following patents:
1. U.S. Patent No. 5,183,740," Flow Immunosensor Method and Apparatus,"
issued on February 2, 1993;
2. U.S. Patent No. 5,066,859, "Hematocrit and Oxygen Saturation Blood
Analyzer," issued on November 19, 1992; and
3. U.S. Patent No. 5,354,654, "Lyophilized Ligand-Receptor Complexes
for Assay and Sensors" issued on October 11, 1994.
For additional information, see the sections "Research and Development" and
"Material Contracts" under this caption "Business of U.S. Drug."
The patent position of technology firms is highly uncertain and
involves complex legal and factual questions. Competitors have filed
applications for, and in some instances have been issued, patents and may obtain
additional patents and other proprietary rights relating to products or
processes, such as
U.S. Drug
83
<PAGE> 88
U.S. Drug's proposed immunoassay sensor, which may be competitive with those of
U.S. Drug. The scope and validity of these patents are presently unknown. U.S.
Drug is not aware of any patents covering an immunoassay sensor similar to U.S.
Drug's. Companies which have or may obtain patents relating to products or
processes competitive with those of U.S. Drug could bring legal actions against
U.S. Drug claiming damages and seeking to enjoin it from manufacturing,
licensing and marketing the affected product. To date, no claims have been made
against U.S. Drug for infringement of any patents. However, marketing of U.S.
Drug's products has not begun and claims, if any, would not be asserted until
market introduction of such products. If such a claim were to be made, its
defense would be costly and U.S. Drug's business would be adversely affected,
even if U.S. Drug were to prevail. No assurance can be given that U.S. Drug
would be able to prevail in any such action or that any license required under
any such patent would be made available on acceptable terms.
Process patents have certain disadvantages when compared with product
patents. It is more difficult to detect and prove infringement of process
patents because it is sometimes impossible to ascertain the method by which any
product has been produced. In addition, the value of U.S. Drug of receiving a
process patent may be reduced if products which can be derived from such
processes have been patented by others. The patents owned by, or licensed to,
U.S. Drug include both process patents and product patents.
U.S. Drug maintains a policy of seeking patent protection in the United
States and other countries in connection with certain elements of its technology
when it believes that such protection will benefit U.S. Drug. Lyophilization
patent applications have been filed in Canada, certain European countries and
Japan. The patent laws of foreign countries may differ from those of the United
States as to the patentability of U.S. Drug's products and processes and,
accordingly, the degree of protection afforded by foreign patents, if issued,
may be different from protection afforded under associated United States
patents. There can be no assurance that patents will be obtained either in the
United States or in foreign jurisdictions with respect to U.S. Drug's inventions
or that, if issued, the patents will be of substantial protection or commercial
benefit to U.S. Drug.
Certain inventions of U.S. Drug may prove to be unpatentable or U.S.
Drug may conclude that it would be more advisable to retain a patentable
invention as a trade secret. In either case, U.S. Drug would have to rely on
trade secrets, proprietary know how and continuing technological innovation to
develop and maintain its competitive position. All key employees and consultants
of U.S. Drug have executed, and project sponsors and manufacturers will be
required to execute, agreements to maintain the confidentiality of U.S. Drug's
proprietary information to
U.S. Drug
84
<PAGE> 89
which they have access. There can be no assurance that these confidentiality
agreements will be honored or will be effective. Manufacturers, project sponsors
and consultants may be engaged in competing research projects outside the scope
of their agreements with U.S. Drug. There can be no assurance that such sponsors
and consultants will not develop similar or superior technology independently
and to the extent that such persons apply technical information independently
developed by them to projects undertaken by U.S. Drug, disputes may arise as to
the proprietary rights to such information.
COMPETITION
For information relating to potential competition, see "Business of the
Company-Competition-Drug Testing."
MATERIAL CONTRACTS
(a) License and Sublicense Agreements
Pursuant to an amended sublicense agreement dated as of September 23,
1993, superseding the sublicense agreement dated January 2, 1993, (the
"Sublicense") by and between USAT and U.S. Drug, U.S. Drug is the sole and
exclusive sublicensee of USAT under the License Agreement. In accordance with
the terms and provisions of the Sublicense, U.S. Drug has assumed all of USAT's
rights and undertaken all of USAT's obligations under the License Agreement.
Because the USN refused to recognize a novation to U.S. Drug of the License
Agreement as requested, the USN looks to USAT, not U.S. Drug, for performance
thereunder. In the event of a default under the Sublicense, all rights would
revert to USAT.
The License Agreement initially provided that the USN shall be paid a
royalty equal to six percent of the Net Selling Price (as defined in the License
Agreement) for each Royalty-Bearing Product (as defined in the License
Agreement) made, used or sold by USAT or its sublicensees in the Licensed
Territory with minimum annual royalty payments of $180,000 for 1993, $375,000
for 1994, $600,000 for 1995 and $1,000,000 for 1996 and each calendar year
thereafter throughout the term of the License Agreement. The License Agreement
provides that the USN shall approve all sublicenses and, in accordance with such
provision, the Sublicense was approved by the USN on September 24, 1993. The
aforementioned minimum annual royalties were amended November 28, 1994 as
follows: the minimum annual royalty for 1995 was reduced to $375,000 and for
1996 it was reduced to $600,000. In June 1995, the License Agreement with the
USN 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 letter dated May 15, 1995, the USN notified USAT that, because the
expiration date of the USN
U.S. Drug
85
<PAGE> 90
patent had been extended to February 23, 2010 under the GATT/WTO treaty, the
expiration date of the License Agreement was extended to February 23, 2010.
(b) CRDA
On April 16, 1992, USAT entered into a 12-month cooperative research
agreement ("CRDA") with the Naval Research Laboratory section of the USN (the
"NRL") to further develop the licensing technology of the "Flow Immunosensor".
Pursuant to an agreement dated as of January 1, 1993 by and between
USAT and U.S. Drug, USAT assigned to U.S. Drug all of its rights under the CRDA.
The purpose of the CRDA is to develop the prototype instruments based on the
Flow Immunosensor Method and Apparatus Technology. See the section "Research and
Development" under this caption "Business of U.S. Drug." Pursuant to the CRDA,
each party may retain title to any patent obtained by such party in the
performance of work under the CRDA. The NRL has the right of first election to
file a patent application in the United States on joint inventions made in the
performance of work under the CRDA and U.S. Drug, as assignee, has the right of
first election to file a patent application on such joint inventions in all
other countries. Pursuant to an amendment to the CRDA dated May 1993, the NRL
waived such right of first election with respect to the lyophilization process
for the freeze-drying of immunoassay chemicals, provided that USAT filed an
approved patent application on such process within three months from the date of
execution of the amendment. The approved patent application was filed on July
16, 1993 and issued as U.S. Patent No. 5,354,654 "Lyophilized Ligand-Receptor
Complexes for Assays and Sensors" on October 11, 1994. The Patent has been
assigned to U.S. Drug by USAT.
(c) Assignment of Agreement For Patent No. 5,066,859
Pursuant to an assignment agreement dated January 16, 1992, Messrs.
Maurice N. Karkar and James C. Velnosky (the "Inventors") assigned to USAT all
of their rights, title and interest throughout the world in, to and under
certain improvements relating to blood analyzers and disposable syringes for use
in medical analyzers as more fully described in U.S. Patent No. 5,066,859, U.S.
Patent Application Serial No. 07/789,088 and a Patent and Cooperation Treaty
Patent Application entitled "Hematocrit and Oxygen Saturation Blood Analyzer"
(the "Licensed Inventions"). USAT paid $24,000 for such assignment and has
agreed to pay the Inventors a royalty in the amount of five cents per disposable
syringe device manufactured and sold by USAT, which amount is indexed for
inflation. In addition, USAT also agreed to pay to the Inventors (i) a royalty
in the amount of seven percent of the net sales price of any medical analyzer
device encompassed within the scope of the Licensed Inventions
U.S. Drug
86
<PAGE> 91
which utilize non-disposable syringe devices therein and (ii) a royalty in the
amount of five cents per syringe device or five percent of the net sales price
of such syringe device, together with an additional royalty in the amount of
seven percent of the net sales price of all medical analyzer devices, sold by
approved licensees of USAT, which amounts are also indexed for inflation. USAT
was obligated to use its best efforts to diligently market disposable syringe
devices and medical analyzer devices. If USAT did not begin shipment of such
products by July 16, 1993, the assignment agreement could have been immediately
terminated by the Inventors. Additionally, USAT agreed that, after July 16, 1993
and continuing thereafter, it would manufacture and sell a minimum number of
30,000 disposable syringe devices per month, or alternatively, pay the Inventors
the royalties due on such 30,000 disposable syringe devices per month. A
novation of such assignment agreement has been executed such that U.S. Drug, and
not USAT, is considered the Assignee (as such term is defined therein).
Pursuant to a letter of understanding executed in August 1995, (1) U.S.
Drug agreed to provide four working type prototypes to Mr. Karkar on or about
August 1, 1996; (2) Mr. Karkar agreed to conduct all marketing efforts; (3)
minimum royalty payments by U.S. Drug were to continue for up to one year after
the delivery to Mr. Karkar of the prototypes; and (4) net profits were to be
shared as follows: 25% by each of Messrs. Karkar and Velnosky and 50% by U.S.
Drug.
(d) Management Agreement
For information relating to the Management Agreement between USAT and
U.S. Drug, see "Material Contacts of USAT with U.S. Drug-Management Services
Agreement."
EMPLOYEES
As of March 31, 1996, U.S. Drug employed five persons, excluding
independent contractors and the personnel employed by USAT who provide
management and administrative services to U.S. Drug. U.S. Drug believes it has
good relationships with its employees and independent contractors. U.S. Drug may
hire ten new scientists during the next 12 months. See the section "Research and
Development" under this caption "Business of U.S. Drug."
PROPERTIES
U.S. Drug maintains its principal executive offices, manufacturing
space and laboratory facilities in Rancho Cucamonga, California. The premises,
which consists of approximately 10,000 square feet, are sub-leased from USAT.
U.S. Drug
87
<PAGE> 92
U.S. Drug's operations and space are separated, and where necessary isolated,
from the operations and space of USAT.
LEGAL MATTERS
U.S. Drug is not a party to any material litigation and is not aware of
any pending litigation that could have a material adverse effect on U.S. Drug's
business, results of operations or financial condition.
USAT PRINCIPAL STOCKHOLDERS
The following table sets forth certain information, as of April 19,
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 Chief Executive Officer
as of March 31, 1995) who was paid more than $100,000 in fiscal 1995 and still
was an executive officer on April 19, 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(1)
- ---------------- ------------------ -------------
<S> <C> <C>
Robert Stutman 200,000(3) nil
10410 Trademark Street
Rancho Cucamonga, CA 91730
James C. Witham (4) 1,556,000(5) 4.7%
10410 Trademark Street
Rancho Cucamonga, CA 91730
Karen B. Laustsen (6) 337,000(7) 1.0%
10410 Trademark Street
Rancho Cucamonga, CA 91730
Gary S. Wolff (8) 249,226(9) nil
190 Sylvan Avenue
Englewood Cliffs, NJ 07632
Alan I. Goldman (10) 10,000(11) nil
497 Ridgewood Avenue
Glen Ridge, NJ 07028
</TABLE>
U.S. Drug
88
<PAGE> 93
<TABLE>
<CAPTION>
Number of Shares
Name and Address Beneficially Owned Percentage(1)
- ---------------- ------------------ -------------
<S> <C> <C>
John C. Lawn (10) 10,000(11) nil
c/o The Century Council
550 South Hope Street
Suite 1950
Los Angeles, CA 90071-2604
Peter M. Mark (10) 630,000(11) 1.9%
5531 Sugar Hill
Houston, TX 77056
Linda H. Masterson (12) 10,000(11) nil
c/o Cholestech Corporation
3347 Investment Blvd.
Hayward, CA 94545-3808
Lee S. Rosen (10) 1,178,648(13) 3.6%
Donald & Co. Securities, Inc.
5200 Tower Center Circle
Boca Center, Suite 207
Boca Raton, FL 33486
All directors and 2,287,874(3)(9)(11) 6.8%
executive officers (13)
as a group (seven
persons)
</TABLE>
- ---------------
(1) The percentages computed in this column of the table are based upon
32,508,144 shares of the USAT Common Stock outstanding on April 19,
1996 and effect being given, where appropriate, pursuant to Rule
13d-3(d)(3)(i) under the Exchange Act, to shares issuable upon the
exercise of Common Stock purchase warrants and stock options which are
currently exercisable or exercisable within 60 days of April 19, 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 reflect those issuable upon the
exercise of a Common Stock purchase warrant. The shares reported in the
table do not reflect 200,000 shares of the USAT Common Stock issuable
upon the exercise of a Common Stock purchase warrant issued to RSA, of
which Mr. Stutman is the President, a director and the principal
stockholder.
U.S. Drug
89
<PAGE> 94
Mr. Stutman disclaims beneficial ownership of the RSA warrant except to
the extent of his share ownership in RSA.
(4) Mr. Witham was the Chairman, the President, the Chief Executive Officer
and a director of USAT until April 18, 1996.
(5) The shares reported in the table include 497,500 shares issuable upon
the exercise of a Common Stock purchase warrant and 180,000 shares
issuable upon the exercise of a stock option.
(6) Ms. Laustsen was an Executive Vice President and a director of USAT
until April 18, 1996.
(7) The shares reported in the table include 135,000 shares issuable upon
the exercise of a Common Stock purchase warrant and 100,000 shares
issuable upon the exercise of a stock option.
(8) Mr. Wolff is the Treasurer, Chief Financial Officer and Chief
Accounting Officer of USAT.
(9) The shares reported in the table include 25,000 shares issuable upon
the exercise of Common Stock purchase warrants and 80,000 shares
issuable upon the exercise of stock options.
(10) A director of USAT.
(11) The shares reported in the table include or reflect a Common Stock
purchase warrant to purchase 10,000 shares of the USAT Common Stock
issued to the holder as a director of USAT who is not employed by USAT
or any subsidiary thereof.
(12) Ms. Masterson, a director of USAT, effective May 13, 1996 becomes its
President and Chief Operating Officer.
(13) The shares reported in the table include a Common Stock purchase
warrant to purchase 10,000 shares of the USAT issued to Mr. Rosen on
the same basis as those described in note (9) to this table and three
other Common Stock purchase warrants to purchase an aggregate of
700,000 shares of the USAT Common Stock issued to Mr. Rosen as
consideration for his services, including those relating to a private
placement. Two of these warrants as to an aggregate of 100,000 shares
of the USAT Common Stock may be forfeited if none of the warrants
issued to the purchasers in such private placement are exercised and
which may be reduced in number of shares pro rata to such exercises.
U.S. Drug
90
<PAGE> 95
As indicated elsewhere in this Consent Solicitation Statement
/Prospectus (see "Business of the Company-General"), U.S. Drug and Good Ideas
are the only subsidiaries of USAT which are not wholly-owned.
The following table reports, as of April 19, 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>
James C. Witham 50,000 (2) nil
Karen B. Laustsen 30,000 (2) nil
Gary S. Wolff 30,000 (2) nil
Peter M. Mark 15,500 nil
</TABLE>
- ---------------
(1) The percentages computed in this column of the table are based upon
5,221,900 shares of the U.S. Drug Common Stock outstanding on March 31,
1996 and effect being given where appropriate, pursuant to Rule
13d-3(d)(i) under the Exchange Act, to shares issuable upon the
exercise of U.S. Drug Options and common stock purchase warrants which
are currently exercisable or exercisable within 60 days of March 31,
1996. No person named in the table owns a U.S. Drug Warrant.
(2) The shares reported in the table reflect those issuable upon the
exercise of a stock option; however, the option is currently
exercisable or exercisable within 60 days of March 31, 1996 only as to
one fourth of the shares shown in the table. If the Merger is
consummated, the holder has agreed to cancel the option.
The following table reports, as of April 19, 1996, the number of shares
of the Good Ideas Common Stock beneficially owned by a director or executive
officer of USAT as of such date:
<TABLE>
<CAPTION>
Number of Shares
Name Beneficially Owned Percentage(1)
- ---- ------------------ -------------
<S> <C> <C>
James C. Witham 7,500 (2) nil
Karen B. Laustsen 7,500 (2) nil
Gary S. Wolff 7,500 (2) nil
</TABLE>
U.S. Drug
91
<PAGE> 96
- ---------------
(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 March
31, 1996 and effect being given where appropriate, pursuant to Rule
13d-3(d)(i) under the Exchange Act, to shares issuable upon the
exercise of the Good Ideas stock options which are currently
exercisable or exercisable within 60 days of March 31, 1996. No person
named in the table owns a Good Ideas Common Stock purchase warrant.
(2) The shares reported in the table reflect those issuable upon the
exercise of a Good Ideas stock option which is currently exercisable.
If the merger of Good Ideas is consummated, the holder has agreed to
cancel the option.
U.S. DRUG PRINCIPAL STOCKHOLDERS
The following table sets forth, as of April 19, 1996, certain
information with respect to (1) any person who beneficially owned more than 5%
of the U.S. Drug Common Stock, (2) each director of U.S. Drug, (3) the then
Chief Executive Officer of U.S. Drug; (4) the only other executive officer of
U.S. Drug whose total annual salary and bonus exceeded $100,000 in fiscal 1995
and who was still serving as of April 19, 1996; and (5) all directors and
executive officers as a group. Each beneficial owner who is a natural person has
advised U.S. Drug that he or she has sole voting and investment power as to the
shares of the U.S. Drug Common Stock reported in the table, except that the U.S.
Drug 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. 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.
<TABLE>
<CAPTION>
Number of Shares Percentage of
Name and Address of Common Stock Common Stock
of Beneficial Owner Beneficially Owned Beneficially Owned
- ------------------- ------------------ ------------------
<S> <C> <C>
U.S. Alcohol Testing 3,500,000 67.0%
of America, Inc.
10410 Trademark Street
Rancho Cucamonga, CA 91730
James C. Witham (2) 12,500(3) nil
10410 Trademark Street
Rancho Cucamonga, CA 91730
</TABLE>
U.S. Drug
92
<PAGE> 97
<TABLE>
<CAPTION>
Number of Shares Percentage of
Name and Address of Common Stock Common Stock
of Beneficial Owner Beneficially Owned Beneficially Owned
- ------------------- ------------------ ------------------
<S> <C> <C>
Karen B. Laustsen (4) 7,500(3) nil
10410 Trademark Street
Rancho Cucamonga, CA 91730
Gary S. Wolff (5) 7,500(3) nil
190 Sylvan Avenue
Englewood Cliffs, NJ 07632
Douglas G. Allen (6) 7,500(3) nil
10410 Trademark Street
Rancho Cucamonga, CA 91730
All directors and executive 27,500(3) nil
officers as a group
(4 persons)(4)
</TABLE>
- ---------------
(1) The percentages computed in this column of the table are based upon
5,221,900 shares of the U.S. Drug Common Stock outstanding on April 19,
1996 and effect being given, where appropriate, pursuant to Rule
13(d)(i) under the Exchange Act, to shares issuable upon the exercise
of U.S. Drug Options, which were exercisable as of April 19, 1996 or
within 60 days thereof as to 25% of the shares subject thereto. There
are no U.S. Drug Warrants held by any person named in the table.
(2) Chairman of the Board, Chief Executive Officer and a director of U.S.
Drug, as well as an executive officer and director of USAT until April
18, 1996.
(3) The shares reported in the table for this person represent only shares
issuable upon exercise of a U.S. Drug Option to the extent currently
exercisable or exercisable within 60 days of April 19, 1996.
(4) A director of U.S. Drug and, until April 18, 1996, a director and an
executive officer of USAT.
(5) Treasurer, Chief Financial Officer, Chief Accounting Officer and a
director of U.S. Drug and an executive officer of USAT (formerly also a
director).
(6) President of U.S. Drug.
U.S. Drug
93
<PAGE> 98
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>
High Low
---- ---
<S> <C> <C>
FISCAL 1994
Quarter Ended
June 30, 1993 $3.00 $1.25
September 30, 1993 $3.00 $2.125
December 31, 1993 $3.125 $1.75
March 31, 1994 $3.00 $1.9375
FISCAL 1995
Quarter Ended
June 30, 1994 $2.5625 $1.75
September 30, 1994 $4.25 $3.1875
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 $1.75
December 31, 1995 $2.25 $1.875
March 31, 1996 $3.375 $1.8125
</TABLE>
On May __, 1996, the closing sales price of the USAT Common Stock was
$___ per share.
HOLDERS
The holders of record of the USAT Common Stock on March 31, 1996 were
1,123 and USAT estimates, based on the number of proxies mailed in connection
with the 1996 Annual Meeting of Stockholders, that it has approximately 8,200
stockholders, including holders in street name.
DIVIDENDS
No dividends on the USAT Common Stock have been declared by USAT's
Board of Directors through December 31, 1995 and, in view of the Company's cash
requirements and history of operational losses, USAT's Board of Directors has no
current intention to
U.S. Drug
94
<PAGE> 99
declare or pay dividends on the Common Stock in the foreseeable future.
Dividends on the Class A Preferred Stock were payable semi-annually cumulative
from December 17, 1990 and all dividends have been paid timely.
RECENT QUOTATIONS
The following table sets forth the closing sales prices per share for
the USAT Common Stock and the U.S. Drug Common Stock, as reported by the
American Stock Exchange and Pacific Coast 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 May __, 1996, the latest available date. See the section "Market Data"
under this caption "USAT Market Information" and "U.S. Drug Market
Information-Market Data" for a historical comparison of market prices of the
USAT Common Stock and the U.S. Drug Common Stock, respectively.
<TABLE>
<CAPTION>
USAT U.S. Drug
Common Stock Common Stock
------------ ------------
<S> <C> <C>
February 5, 1996 $2.375 $3.75
May __, 1996
</TABLE>
U.S DRUG MARKET INFORMATION
MARKET DATA
The U.S. Drug Common Stock is traded on the Pacific Coast Stock
Exchange under the symbol "U.S.D.P." The quarterly high and low sales prices
since U.S. Drug's initial public offering on October 12, 1993 as reported by the
Pacific Coast Stock Exchange are set forth below for the periods indicated.
<TABLE>
<CAPTION>
FISCAL 1994 High Low
---- ---
<S> <C> <C>
Quarter Ended
December 31, 1993 $9.00 $5.00
March 31, 1994 $7.75 $5.50
FISCAL 1995
Quarter Ended
June 30, 1994 $7.375 $5.125
September 30, 1994 $8.50 $5.50
December 31, 1994 $9.00 $5.25
March 31, 1995 $6.625 $2.875
</TABLE>
U.S. Drug
95
<PAGE> 100
<TABLE>
<CAPTION>
FISCAL 1996 High Low
---- ---
<S> <C> <C>
Quarter Ended
June 30, 1995 $5.50 $2.50
September 30, 1995 $4.75 $2.50
December 31, 1995 $4.50 $2.625
March 31, 1996
</TABLE>
On May __, 1996, the closing sales price of the U.S. Drug Common Stock
was $___________ per share.
HOLDERS
As of March 31, 1996, there were 77 holders of record (including USAT)
and approximately 1,100 beneficial holders of the U.S. Drug Common Stock.
DIVIDENDS
U.S. Drug's Board of Directors has not declared any dividends on the
U.S. Drug Common Stock through March 31, 1996 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 April 18, 1996:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Robert Stutman 52 Chairman, Chief Executive
Officer and a director
Gary S. Wolff 57 Treasurer, Chief Financial
Officer and Chief Accounting
Officer
Alan I. Goldman 58 Director
John C. Lawn 60 Director
Peter M. Mark 50 Director
Linda H. Masterson 44 Director (President and Chief
Operating Officer effective
May 13, 1996)
</TABLE>
U.S. Drug
96
<PAGE> 101
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
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 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. Mr. Wolff has an employment agreement which expires December 31, 1996
(see the section "Employment Agreements" under this caption "USAT Management").
There can be no assurance that this agreement will be renewed.
BUSINESS HISTORY
Robert Stutman was elected Chairman of the Board and a director of USAT
on April 18, 1996 and designated as its Chief Executive Officer. For more than
five years prior thereto, he has been serving as the President of Robert Stutman
& Associates, Inc. ("RSA"), a provider of corporate "Drug-Free Workplace"
programs. Prior to forming RSA, he was Special Agent in charge of the United
States Drug Enforcement Administration's New York office. He also currently
serves as a special consultant in substance abuse for the CBS News Division.
USAT has agreed in principal to acquire RSA. After such acquisition is
completed, Mr. Stutman will devote all of his time to the affairs of the
Company.
Gary S. Wolff was USAT's controller and a director from its inception
through December 1988. He became USAT's Chief Financial Officer, Chief
Accounting Officer and a director in September 1990 and became its Treasurer in
March 1991. He has been a director, Chief Financial Officer and Chief Accounting
Officer of U.S. Drug since October 1992 and a director, Treasurer, Chief
Financial Officer and Chief Accounting Officer of Good Ideas since June 1992. He
resigned as a director of USAT on September 26, 1995. He is licensed as a
Certified Public Accountant in the States of New York and New Jersey and
maintains an office in New Jersey as a self-employed sole practitioner. He
devotes about 75% of his time to the affairs of the Company.
U.S. Drug
97
<PAGE> 102
The following persons were all initially elected as directors of USAT
on September 26, 1995:
Alan I. Goldman has had over 30 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 seeking to enter the production
systems business by acquisition.
From December 8, 1994 to date, John C. Lawn has been serving as the
Chairman and Chief Executive Officer of The Century Council ("Century"), which
is a national not-for-profit organization dedicated to fighting alcohol abuse
which is supported by more than 800 concerned brewers, vintners, distillers and
wholesalers. From 1990 to 1994, Mr. Lawn served as Vice President and Chief of
Operations of the New York Yankees. From 1985 to 1990 he served as Chief
Administrator at the Drug Enforcement Administration ("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
U.S. Drug
98
<PAGE> 103
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.
Linda H. Masterson has had substantial experience in marketing, sales
and business development in the medical diagnostics, healthcare and
biotechnology fields. Effective May 13, 1996, she will become the President and
Chief Operating Officer of USAT. Until such date, she is employed as the
Executive Vice President of Cholestech, Inc., a start-up diagnostic company, for
which she developed and restructured the company business strategy. In 1994, Ms.
Masterson founded Masterson & Associates, a company of which she is the
President and owner, engaged in the business of providing advice to start-up
companies including the preparation of technology and market assessments and the
preparation of strategic and five-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.
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,
U.S. Drug
99
<PAGE> 104
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.
SUMMARY COMPENSATION TABLE
The following Summary Compensation 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 three other executive officers of USAT who received
compensation in excess of $100,000 in fiscal 1995:
<TABLE>
<CAPTION>
Other Long All
Name and Annual Term Other
Principal Compen- Compen- Compen-
Position Year Salary Bonus sation sation sation
- --------- ---- ------ ----- ------- ------- ------
<S> <C> <C> <C> <C> <C>
James C. Witham (1) 1995 $301,154 $50,000 - 180,000 (2) $ - 0 -
Chairman, President and 1994 $244,327 $50,000 - - $ - 0 -
Chief Executive Officer 1993 $236,154 $10,000 - - $ - 0 -
Gary S. Wolff (1) 1995 $160,615 $25,000 - 80,000 (2) $ - 0 -
Treasurer and Chief 1994 $112,769 $25,000 - - $ - 0 -
Financial Officer 1993 $ 80,590 $ 5,000 $12,000 25,000 (3) $ - 0 -
Karen B. Laustsen (1) 1995 $120,461 $25,000 - 100,000 (2) $ - 0 -
Executive Vice 1994 $ 89,396 $25,000 - - $ - 0 -
President 1993 $ 79,405 $ 5,000 - - $ - 0 -
Michael J. Witham (1) 1995 $103,396 $15,000 - 60,000 (2) $ - 0 -
Vice President 1994 $ 80,665 $25,000 - - $ - 0 -
Manufacturing 1993 $ 73,374 $ 5,000 - - $ - 0 -
</TABLE>
(1) USAT has three-year employment agreements with these officers which
terminate on December 31, 1996 and which provide minimum aggregate
salaries for the four officers amounting to $685,000 per year plus
reimbursement for related business expenses. However, the employment
agreement with Michael J. Witham was terminated effective September 26,
1995 and, accordingly, he no longer serves the Company in any capacity.
In addition, on April 18, 1996, James C. Witham and Karen B. Laustsen
resigned their officerships and directorships in USAT; however, they
will continue to serve USAT as employees until May 31, 1996. See the
section "Employment Agreements" under this caption "USAT Management."
(2) In August 1994, USAT granted non-qualified stock options (the "USAT
Options") under the 1990 Option Plan to purchase
U.S. Drug
100
<PAGE> 105
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. All of the USAT Options are exercisable at $2.375
per share. Thereafter USAT terminated the 1990 Option Plan.
(3) Common Stock purchase warrants to purchase an aggregate of 25,000
shares were granted to Mr. Wolff in fiscal 1993.
AGGREGATE OPTION EXERCISES IN FISCAL YEAR 1995
AND OPTION VALUES AT MARCH 31, 1995
The following table sets forth certain information concerning stock
option exercises by the four individuals named in the Summary Compensation Table
during fiscal 1995. In addition, this table includes the number of shares
covered by exercisable options as of March 31, 1995. 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, 1995.
<TABLE>
<CAPTION>
=================================================================================================================================
Number of Unexercised
Shares Acquired On Options Value of Unexercised In-The-Money
Exercise Value Realized March 31, 1995 Options
Name At March 31, 1995
<S> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------------
James C. Witham - 0 - - 0 - 677,500 $333,325
- ---------------------------------------------------------------------------------------------------------------------------------
Gary S. Wolff - 0 - - 0 - 105,000 $ 14,100
- ---------------------------------------------------------------------------------------------------------------------------------
Karen B. Laustsen - 0 - - 0 - 235,000 $ 90,450
- ---------------------------------------------------------------------------------------------------------------------------------
Michael J. Witham - 0 - - 0 - 375,000 $211,050
=================================================================================================================================
</TABLE>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
The following table sets forth certain information concerning stock
option/stock appreciation right grants to the four individuals named in the
Summary Compensation Table during fiscal 1995.
U.S. Drug
101
<PAGE> 106
<TABLE>
<CAPTION>
========================================================================================================
Individual Grants
- --------------------------------------------------------------------------------------------------------
Percent
Number of of Total
Securities Options
underlying SARs Exercise
option/SARs Employees of Base
Granted in Fiscal Price Expiration
Name (#)(1) Year ($/Sh)(2) Date
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------
James C. Witham 180,000 40% $2.375 8/1/2004
- --------------------------------------------------------------------------------------------------------
Gary S. Wolff 80,000 18% $2.375 8/1/2004
- --------------------------------------------------------------------------------------------------------
Karen B. Laustsen 100,000 22% $2.375 8/1/2004
- --------------------------------------------------------------------------------------------------------
Michael J. Witham 60,000 13% $2.375 8/1/2004
========================================================================================================
</TABLE>
<TABLE>
<CAPTION>
============================================================
Potential Realized
Value of Assumed
Annual Rates of
Stock Price
Appreciation for
Option Term (2)
--------------------------
Name 5%($) 10%($)
<S> <C> <C>
- ------------------------------------------------------------
James C. Witham $270,000 682,200
- ------------------------------------------------------------
Gary S. Wolff 120,000 303,200
- ------------------------------------------------------------
Karen B. Laustsen 150,000 379,000
- ------------------------------------------------------------
Michael J. Witham 90,000 227,400
============================================================
</TABLE>
(1) The options are all currently exercisable.
(2) The amounts shown as the potential realizable value illustrate what
might be realized upon exercise immediately prior to expiration using
the 5% and 10% appreciation rates established by the Commission,
compounded annually. The potential realizable value is not intended to
predict future appreciation of the price of the USAT Common Stock.
EMPLOYMENT AGREEMENTS
USAT has entered into employment agreements (the "Employment
Agreements") with each of James C. Witham, Karen B. Laustsen and Gary S. Wolff
providing for a three-year term commencing January 1, 1994 and terminating
December 31, 1996. On April 18, 1996, Mr. Witham and Ms. Laustsen resigned their
directorships and officerships, but agreed to continue to serve USAT until May
31, 1996.
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 is employed as the Treasurer and Chief Financial
Officer at an annual base salary of $176,000 per year. Each of such salaries
reflects a 10% increase effective July 1, 1995, which increase was the first in
18 months. Mr. Witham and Ms. Laustsen were each required to devote
substantially all of his or her time to the business of USAT, while Mr. Wolff is
only required to devote a majority of his time.
U.S. Drug
102
<PAGE> 107
The Employment Agreements contain standard provisions for participation
by the executive in USAT's benefit programs, whether relating to the USAT Common
Stock, bonuses or medical, life and disability insurance or otherwise. Mr.
Witham and Ms. Laustsen are each provided with a company car. The Employment
Agreements also provide for termination in the event of disability for six or
more consecutive months and termination "for cause" which means conviction for
embezzlement, theft or other criminal act constituting a felony or failure to
comply with the terms and conditions of the Agreement if such breach is not
cured within seven days after written notice is given to the executive by the
Board of Directors.
Michael J. Witham, who is the son of James C. Witham and who was the
Vice President of Manufacturing of USAT, had a similar Employment Agreement
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 of RSA, has
been employed as the Chief Executive Officer of USAT. Mr. Stutman's annual base
salary is $225,000. He will receive a cash bonus of $100,000 if the Company
breaks even in fiscal 1997 and an additional $150,000 if the Company earns at
least $.06 per share in fiscal 1997. Cash bonuses will be discretionary in
subsequent years. He will also receive a one-time cash bonus of $50,000 upon
ProActive satisfying certain performance standards. In the event that Mr.
Stutman is terminated without cause (to be defined) during the first three years
that he is employed by USAT, he shall receive severance pay in an amount equal
to the base salary that would have been paid to him after the date of
termination had Mr. Stutman not been terminated and had he been employed by USAT
for a period of three years.
Effective May 13, 1996, Linda H. Masterson, a member of USAT's Board of
Directors, will be employed as the President and Chief Operating Officer of
USAT. Ms. Masterson's annual base salary will be $175,000. Ms. Masterson will be
granted either stock options to purchase 600,000 shares of the USAT Common Stock
if USAT adopts an employee stock option plan or, if no such plan is adopted, a
warrant to purchase 600,000 shares of the USAT Common Stock. In either case, the
exercise price will be $3.50 per share and the option or warrant will become
exercisable over a four-year period as follows: 50,000 shares upon commencement
of the term of employment, 100,000 shares at the end of the first year, 150,000
shares at the end of the second year, 150,000 shares at the end of the third
year and 150,000 shares at the end of the fourth year. The expiration dates of
the stock option will be in accordance with the terms of the stock option plan
U.S. Drug
103
<PAGE> 108
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 $0.06 earnings per share for fiscal 1997. In the event that Ms.
Masterson is terminated without cause (to be 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 will be prepared evidencing the severance
provisions.
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 Common Stock in the
current fiscal year, in addition to be reimbursed for their travel and other
expenses. 10,000 shares of the Common Stock were allocated to each of Glenn
Bergenfield and William DiTuro, then directors, on September 26, 1995.
On November 16, 1995, as modified on December 11, 1995, the Board
approved the following compensation arrangements for directors who are not
employees of USAT or any subsidiary thereof: (1) each year the director will
receive a 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 (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 (the first payment to be made after
January 1, 1996) 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
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 operation for the fiscal
U.S. Drug
104
<PAGE> 109
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.
CERTAIN TRANSACTIONS
In August 1994, USAT issued stock options to purchase an aggregate of
450,000 shares of the USAT Common Stock to its executive officers and directors
pursuant to the 1990 Option Plan exercisable at $2.375 per share. Thereafter,
USAT terminated the 1990 Option Plan. See the section "Option/SAR Grants in Last
Fiscal Year" under this caption "USAT Management" for information as to the
grants to the then officers and directors. In September 1995, an aggregate of
20,000 shares were allocated to the two then directors who were not employees of
USAT (i.e., Glenn A. Bergenfield and William DiTuro). See the section
"Directors" under this caption "USAT Management."
George Berger served as the Secretary of USAT from its inception until
October 12, 1995. Berger & Paul, of which firm he is a partner, served as
general counsel to the Company until the same date. Since March 1, 1993, Mr.
Berger received a stock Option to purchase 5,000 shares as described in the
preceding paragraph.
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.
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, 1995 and the nine-month periods ended
December 31, 1995 and 1994. 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.
U.S. Drug
105
<PAGE> 110
<TABLE>
<CAPTION>
For the Nine Months
Ended December 31, For the Year Ended March 31,
------------------------------ ----------------------------------------------------------------------------
1995 1994 1995 1994 1993 1992 1991
---- ---- ---- ---- ---- ---- ----
(Consolidated) (Consolidated) (Consolidated) (Consolidated) (Consolidated) (Consolidated)
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Selected Income
Statement Data:
Sales - Net $ 3,015,006 $ 7,467,137 $ 8,437,150 $ 7,182,417 $ 4,166,104 $ 688,412 $ 445,244
----------- ----------- ----------- ------------ ----------- ----------- -----------
Costs and Expenses:
Cost of Sales
(Exclusive of
Depreciation
Shown Below) 2,268,587 4,850,977 6,234,263 5,181,632 2,923,795 545,594 327,624
Selling, General &
Administrative Exp.
(Exclusive of
Depreciation
Shown Below) 5,820,490 5,952,316 7,980,055 5,883,839 5,897,108 2,549,367 1,061,957
Research &
Development 789,506 794,166 1,248,962 947,811 1,067,381 156,817 25,990
Interest 75,864 15,092 50,139 7,215 24,132 73,311 129,741
Depreciation and
Amortization 959,795 393,853 799,858 447,717 210,687 61,907 48,565
Loss from
Settlement
of Class Action
Litigation - - - 4,600,000 - - -
Loss from
Settlement
of Litigation - - - 50,000 652,625 582,338 -
Payment of
Consulting
Agreement - - - - - 400,000 -
----------- ----------- ----------- ------------ ----------- ---------- -----------
Total Cost
and Expenses 9,914,242 12,006,404 16,313,277 17,118,214 10,775,728 4,369,334 1,593,877
----------- ----------- ----------- ------------ ----------- ---------- -----------
Loss From Operations (6,899,236) (4,539,267) (7,876,127) (9,935,797) (6,609,624) (3,680,922) (1,148,633)
----------- ----------- ----------- ------------ ----------- ---------- -----------
Other Income
(Expense) - Net 290,792 ( 618,913) ( 457,207) ( 466,876) (1,187,109) 137,770 45,386
----------- ----------- ----------- ------------ ----------- ---------- -----------
Loss Before Minority
Interest in Net
Loss (Income) of
Subsidiaries (6,608,444) (5,158,180) (8,333,334) (10,402,673) (7,796,733) (3,543,152) (1,103,247)
Minority Interest
in Net Loss
(Income) of
Subsidiaries, Net
of Subsidiary
Preferred Stock
Dividends Paid 757,729 748,394 1,096,938 336,638 (200,520) 53,128 -
----------- ----------- ----------- ------------ ----------- ----------- ----------
Net Loss ($5,850,715) ($4,409,786) ($7,236,396) ($10,066,035) ($7,997,253) ($3,490,024) ($1,103,247)
========== ========== =========== ============ =========== ========== ==========
Weighted Average
Common Shares
Outstanding 29,248,777 25,340,817 25,691,674 22,027,068 12,317,743 5,938,747 3,261,285
========== ========== =========== ========== =========== ========== ==========
</TABLE>
U.S. Drug
106
<PAGE> 111
<TABLE>
<CAPTION>
For the Nine Months
Ended December 31, For the Year Ended March 31,
------------------------------ ----------------------------------------------------------------------------
1995 1994 1995 1994 1993 1992 1991
---- ---- ---- ---- ---- ---- ----
(Consolidated) (Consolidated) (Consolidated) (Consolidated) (Consolidated) (Consolidated)
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Loss Applicable to
Common Stock:
Net Loss ($5,850,715) ($4,409,786) ($7,236,396) (10,066,035) (7,997,253) ($3,490,024) ($1,103,247)
Preferred Stock
Dividend-Class "A" (14,405) (31,977) (39,179) (26,358) (39,992) (199,362) (76,307)
Preferred Stock
Dividend-Class "B" - ( 2,425) ( 2,425) ( 13,826) ( 331,767) ( 227,083) -
---------- ---------- ---------- --------------- ----------- ---------- ----------
Loss Applicable to
Common Stock ($5,865,120) ($4,444,188) ($7,278,000) ($10,106,219) ($8,369,012) ($3,916,469) ($1,179,554)
---------- ---------- ---------- ----------- ---------- ---------- ----------
Net Loss Per
Common Share ($ .20) ($ .18) ($ .28) ($ .46) ($ .68) ($ .66) ($ .36)
---------- ---------- ---------- ----------- ---------- ---------- ----------
</TABLE>
(1) Adjusted to reflect all common stock splits.
<TABLE>
<CAPTION>
For the Nine Months
Ended December 31, For the Year Ended March 31,
------------------------------ ----------------------------------------------------------------------------
1995 1994 1995 1994 1993 1992 1991
---- ---- ---- ---- ---- ---- ----
(Consolidated) (Consolidated) (Consolidated) (Consolidated) (Consolidated) (Consolidated)
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Selected Balance
Sheet Data:
Working Capital $ 2,204,198 $ 5,457,833 $ 4,634,665 $ 7,489,655 $2,204,198 $ 5,457,833 $1,355,401
=========== =========== =========== =========== ========== =========== ==========
Total Assets $ 8,987,126 $14,867,439 $14,097,548 $16,848,773 $6,300,602 $12,904,801 $2,770,244
=========== =========== =========== =========== ========== =========== ==========
Long-Term Debt -
Less Current
Portion $ 66,365 $ 75,778 $ 79,008 $ 81,521 $ 2,886 $ - $3,323,346
=========== =========== =========== =========== ========== =========== ==========
Minority Interest $ 1,873,099 $ 3,064,947 $ 2,723,502 $ 3,705,120 $3,676,068 $ 4,090,109 $ -
=========== =========== =========== =========== ========== =========== ==========
Shareholders' Equity $ 5,320,299 $ 7,321,483 $ 7,693,942 $ 6,844,375 $1,482,943 $ 8,301,977 $1,306,988
=========== =========== =========== =========== ========== =========== ==========
</TABLE>
U.S. Drug
107
<PAGE> 112
THE COMPANY'S MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
EFFECT OF MERGER
Although consummation of the Merger will result in the cancellation of
the indebtedness from USAT to U.S. Drug ($200,000 outstanding as of March 31,
1996 and due June 30, 1996), USAT will still have to invest at least $4,000,000
to $6,000,000 in the drug testing operations during the next two years in order
to complete the development of the drug testing products. Because no revenues
from sales are currently expected from the drug testing operations for 20 to 30
months, assuming 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
ProActive human resource provider business and from its alcohol testing segment,
assuming that the sale of its toy operation is effected. Although USAT
management is optimistic about the Company achieving a significant amount of
revenues from the alcohol testing and the human resource provider segments,
particularly from the ProActive operations, as supplemental by the expected
acquisition of RSA (as to which there can be assurance it will close), there can
be no assurance that management's expectations will be achieved and in the time
frame that management contemplates. Management believes that ProActive can,
through its operations, also increase the revenues of the alcohol testing
segment and, when its products are 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 70.1% in the nine months ended December
31, 1995). Accordingly, in order to meet the Company's cash requirements,
particularly those relating to its drug testing segment, the Company must
develop new sources of revenues - as to which the combined ProActive/RSA
operation is the most likely source, seek additional financing and/or secure
exercises of outstanding USAT Common Stock purchase warrants and stock options.
There can be no assurance that any of these sources of cash will produce
sufficient amounts required for the Company's operations, including U.S. Drug's,
although USAT management believes, as discussed below under "Liquidity and
Capital Resources," that, as the result of the recently completed private
placement and other potential sources of funds, the
U.S. Drug
108
<PAGE> 113
Company expects to meet its cash requirements for at least the next 12 months.
If the Merger is consummated and if Good Ideas is sold, management believes that
the Company can begin to operate at a profit in fiscal 1997 despite the
substantial operating losses anticipated from the drug testing operations and
the loss of revenues from Good Ideas and USRR. There is, of course, no assurance
that management's expectations will be realized or, if realized, when.
If the Merger is not effected, then U.S. Drug will have to seek
financing which, if obtained in the form of an offering of the U.S. Drug Common
Stock, will further dilute the stock interests and voting rights of the U.S.
Drug Minority Stockholders and USAT. Although a rights offering to the U.S. Drug
stockholders would minimize additional dilution to such persons, there can be no
assurance that the U.S. Drug Minority Stockholders will respond favorably to a
rights offering because many of such persons had purchased their shares at $5.00
per share in the initial public offering of U.S. Drug or at higher prices in the
subsequent market, while the closing sales prices of the U.S. Drug Common Stock
have been well below $5.00 during the last six months (see "U.S. Drug Market
Information-Market Data"). In addition, in order to preserve USAT's ownership
percentage in U.S. Drug by exercising its rights, USAT may have to obtain its
own financing, thereby competing against U.S. Drug for financing and also
thereby taking away funds that might otherwise have been used for the Company's
other operations, such as its alcohol testing and human resource provider
operations, both of which are 100% owned by USAT. Because the USN license for
the drug testing technology is with USAT, U.S. Drug's failure to raise
sufficient financing to complete the product development would result in the
termination of the sublicense from USAT and the reversion of the technology
licensing rights to USAT. Accordingly, there are considerations negating against
USAT desiring to be the sole source of U.S. Drug's financing so long as U.S.
Drug is not 100% owned. Nevertheless, because of its substantial investment in
U.S. Drug, USAT would seek to obtain financing; however, despite USAT's
successes in the past, there can be no assurance that USAT will raise these
funds on a timely and favorable basis. U.S. Drug's Board will also consider
seeking a major company to act as marketing partner and/or assist in the
development of the drug products. U.S. Drug would seek to have any such partner
make available funding for completion of the development work. There can be no
assurance that such a partner can be obtained and, if obtained, that it would
make funds available on a timely basis. See "The Terms of the
Transaction-Special Payment."
If the 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
December 31, 1995, did not meet
U.S. Drug
109
<PAGE> 114
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.
LIQUIDITY AND CAPITAL RESOURCES
Because of the Company's history of operating losses through the
nine-month period ended December 31, 1995 and the projected continuance of
operational losses through at least March 31, 1996, the fiscal year end, if not
later, management believed that it would be necessary, in addition to attempting
to maximize cash flow from operations, to secure additional equity, either
through the private placement of its securities, the possible exercise of the
USAT Common Stock purchase warrants and the stock options as indicated in the
succeeding paragraph and the possible sale of certain business segments as
indicated in the fourth succeeding paragraph. Management continues to believe
that the Company will continue to have the cash resources available to meet all
of its operating requirements for the ensuing 12 months. Management bases this
belief on the Company's internally generated funds, its past ability to
successfully underwrite its equity securities, to generate USAT Common Stock
purchase warrant exercises from existing holders and to privately place its
equity securities. During August 1995, USAT completed a private placement in the
offshore market in which it realized gross proceeds of $3,038,505. 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 in the amount necessary to
meet the Company's cash requirements should any such financing be required.
Outstanding unexercised USAT Common Stock purchase warrants as of
December 31, 1995 could generate approximately $12,700,000 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. Outstanding ten-year stock options granted to
officers and directors of USAT in August 1994, at an exercise price of $2.375,
could generate proceeds of approximately $1,070,000 if exercised. These stock
options expire in August 2004. However, even though since January 31,
U.S. Drug
110
<PAGE> 115
1996 and through March 31, 1996 USAT Common Stock purchase warrants have been
exercised to purchase 116,500 shares of the USAT Common Stock for an aggregate
exercise price of $166,605, there can be no assurance that any of these stock
options or any other USAT Common Stock purchase warrants will be exercised and,
accordingly, that the Company will receive any additional proceeds.
In September 1995, the Company entered the human resource provider
business through its ProActive subsidiary which was incorporated in June 1995. A
human resource provider provides a turn-key solution to a client's drug and
alcohol free workplace initiative, resulting in enhanced services along with
substantial reductions in program costs. Such services include, but are not
limited to, drug and alcohol testing programs (including policy writing and
review), training and educational programs, random selections, specimen
collections, and medical review officer (MRO) services, physicals, background
investigative services, program audits to ensure regulatory compliance and
employee assistance programs. The Company's strategy is to penetrate this market
through business alliances and acquisitions.
Management believes that ProActive's operations will be enhanced by the
contemplated acquisition of RSA,a provider of corporate drug-free work place
programs and which, since January 1996, has been designing policies and programs
for ProActive. Although there can be no assurance that this acquisition will be
effected, management believes that the addition to USAT of Robert Stutman, the
President, a director and the principal shareholder of RSA, as USAT's Chairman
and Chief Executive Officer will facilitate the signing of a definitive
agreement and the consummation of the acquisition.
Management is of the opinion that the Company will continue to meet its
operating requirements, not only for the ensuing 12 months, but on a long-term
basis as well. For the fiscal year which began April 1, 1995, the Company
initiated actions which, in management's opinion, will reduce its projected
selling, general and administrative expenses by an amount in excess of
$1,500,000 through the elimination of payroll and related costs, legal expenses
and consulting expenses. For the nine-month period ended December 31, 1995, such
reductions have amounted to $1,341,000 after adjusting for the $903,000
nonrecurring charge in connection with USAT's settlement with the Committee (see
"Prospectus Summary-Recent Developments") and $306,000 of expenses of a newly
acquired subsidiary, not included in the overhead for the same period of the
prior year. U.S. Drug continues its development of a saliva sample drug test and
management of U.S. Drug hopes to reach an agreement with a marketing partner
during the next 12 to 24 months. The Company expects to realize increasing
operating profits from ProActive. As the human resource provider business
expands, it is anticipated that ProActive's contribution to the Company's
U.S. Drug
111
<PAGE> 116
operating profits and cash resources will increase. As indicated elsewhere in
this Prospectus (see the subsections "Good Ideas Enterprises, Inc." and "U.S.
Rubber Recycling, Inc." in the section "Subsidiaries" under the caption
"Business of the Company"), since February 1996 management has been seeking the
sale of the Company's toy and rubber recycling subsidiaries (the latter sale
being effected on April 30, 1996) in order to concentrate on alcohol and drug
testing and human resource provider operations as its core businesses. There is
no assurance that any of management's plans for improving future operations will
be realized and, if realized, when.
In the event that the Company is unable to generate sufficient cash
flow from operations or from sources other than operations as described above
(which event, in management's opinion, is not likely to occur based upon past
experience; however, there is no assurance that management will be successful in
any future financing efforts), then the Company may have to reduce operations in
order to 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 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 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.
CHANGES IN FINANCIAL CONDITION
During the quarter ended September 30, 1995, the Company's trading
securities were sold and the Company realized proceeds of $3,530,000. The REMIC
bonds were sold for $3,286,000 and a brokerage loan payable in the amount of
$2,545,000 was repaid. The Company recognized an additional loss of $173,000
during the quarter ended September 30, 1995 over the carrying value of the bonds
on the June 30, 1995 balance sheet. In addition, the Company sold 208,400 shares
of its investment in the common stock of Marquest Medical Products, Inc.
("Marquest"), realizing proceeds of $244,000 and an additional profit of
$153,000 over the carrying value on the June 30, 1995 balance sheet. The Company
believes that the reason for the decline during prior
U.S. Drug
112
<PAGE> 117
fiscal years in the value of its investment in Marquest occurred for the
following reasons: Marquest experienced problems (a violation of good
manufacturing procedures) with the FDA and was closed down for five months.
Marquest's sales fell from $80,000,000 to $5,000,000. On September 30, 1995, the
only trading security held by the Company was 80,000 shares of Marquest. During
the quarter ended December 31, 1995, the Company recognized an additional loss
of $26,000 over the carrying value of the common stock of Marquest on the
September 30, 1995 balance sheet. In addition, the Company sold 5,000 shares of
the Marquest common stock, realizing proceeds of $6,000 and an additional loss
of $21,000 over the carrying value on the September 30, 1995 balance sheet. The
remaining 75,000 shares of the Marquest common stock were sold subsequent to
December 31, 1995. 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 and government securities where the principal will be
protected from market fluctuations.
A discussion of cash flow for the nine months ended December 31, 1995
is as follows:
OPERATING CASH FLOWS
Cash used for operations was $6,122,000 for the nine months ended
December 31, 1995. The net loss for the period was $5,851,000 and the adjustment
required to reconcile the net loss to the net cash used by operating activities
was $271,000. Significant components of this adjustment included decreases in
accounts receivable and inventories of $76,000 and $117,000, respectively, a
minority share of the net loss of subsidiaries in the amount of $758,000, a
decrease in accounts payable of $565,000 and a net unrealized gain over realized
losses on securities in the amount of $270,000 reduced by depreciation and
amortization of $960,000 and an increase in accrued expenses of $268,000.
INVESTING CASH FLOWS
Cash provided from investing activities was $3,372,000 for the nine
months ended December 31, 1995. $3,536,000 was generated from the sales of
trading securities as described above and $212,000 was used for the purchase of
property and equipment.
U.S. Drug
113
<PAGE> 118
FINANCING CASH FLOWS
Cash provided from financing activities was $1,753,000 during the nine
months ended December 31, 1995. The Company provided cash from the sale of
securities in two private placements in the aggregate amount of $3,600,500 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 $2,545,000.
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
NINE MONTHS ENDED DECEMBER 31, 1995 VS. DECEMBER 31, 1994
Revenues for the nine months ended December 31, 1995 were $3,015,000, a
decrease of $4,452,000 or 59.6% from revenues of $7,467,000 reported for the
nine months ended December 31, 1994. Revenues generated from the alcohol testing
segment were $901,000, a decrease of $331,000 from the $1,232,000 in revenues
reported for the nine months ended December 31, 1994, which decrease was
attributable to an unusually high volume of alcohol breath analyzing machines
sold in the third quarter of the prior year. Revenues generated from the toy
segment (i.e., Good Ideas) were $1,473,000 for the nine months ended December
31, 1995, representing a decrease of $2,814,000 or 65.6% from the $4,287,000 in
revenues reported for the comparable period in 1994. Of this decrease,
$2,393,000 or 85.1% was attributable to a decline in sales to the toy company's
major 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. Revenues
generated from the recycled rubber products segment (i.e., USRR) were $640,000,
a decrease of $1,308,000 or 67.2% as compared with the $1,948,000 in revenues
reported for the nine months ended December 31, 1994 and was attributable to the
cancellation of a distributor agreement by the subsidiary 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. The subsidiary does not intend to
institute any litigation in connection with the cancellation of the agreement
U.S. Drug
114
<PAGE> 119
because USRR does not want to incur the protracted legal expenses involved in
litigation.
Cost of sales for the nine months ended December 31, 1995 on a
consolidated basis was 75.3% of revenues as compared to 65.0% of revenues for
the comparable period of the prior year, reflecting the disposal of obsolete
inventory by Good Ideas in the amount of $127,000.
Selling, general and administrative expenses were $5,820,000 for the
nine months ended December 31, 1995, representing a decrease of $132,000 or 2.2%
from the $5,952,000 of such expenses incurred for the comparable period of the
prior year. Nonrecurring legal and other expenses in the amount of $903,000 were
incurred by the Company during the nine months ended December 31, 1995 in
connection with the settlement with the Committee of the consent solicitation
litigation. Also included in the expenses for December 31, 1995 were $306,000 of
expenses incurred by a newly acquired subsidiary not included in the comparable
numbers for the nine months ended December 31, 1994. The major contributing
factors to this reduction in expenses was a reduction in the royalties paid by
U.S. Drug to the USN in the amount of $260,000, reductions in commission and
freight expenses in USRR of $160,000 and $188,000, respectively, and a reduction
of $390,000 in Good Ideas' payroll and related costs also resulting from reduced
sales.
Research and development expenses were $790,000 for the nine months
ended December 31, 1995, representing a decrease of $5,000 or less than 1% from
the expenses in the comparable 1994 period. Research and development expenses in
connection with USAT's alcohol testing machine decreased by $154,000 during the
nine months ended December 31, 1995 from such expenses in the comparable period
in 1994, which decrease was attributable to the fact that the machines were
placed in service. This decrease was offset by an increase in the U.S. Drug
research and development expenses of $148,000 over the expenses in the
comparable nine-month period ended December 31, 1994.
Depreciation and amortization was $960,000 for the nine months ended
December 31, 1995, representing an increase of $566,000 or 143.7% over
depreciation and amortization in the nine months ended December 31, 1994, 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. These machines represented an increase in depreciation
expense of $264,000 for the nine months ended December 31, 1995 as compared to
the expense in the same nine-month period of the prior year.
The Company's operating losses of $6,899,000 for the nine months ended
December 31, 1995 increased by $2,360,000 over its
U.S. Drug
115
<PAGE> 120
operating losses of $4,539,000 for the nine months ended December 31, 1994.
Revenues generated from the alcohol testing segment were $901,000, a decrease of
$331,000 from the $1,232,000 in revenues reported for the nine months ended
December 31, 1994, which decrease was attributable to an unusually high volume
of alcohol breath analyzing machines sold in the third quarter of the prior
year. Gross margin for the nine months ended December 31, 1995 was $226,000 or
25.1% of revenues as compared to $387,000 or 31.4% of revenues for the
comparable period of the prior year, which decrease was attributable to a
decline in machines sold. Research and development expenses were $107,000 for
the nine months ended December 31, 1995, representing a decrease of $154,000
from the $261,000 in expenses reported for the nine months ended December 31,
1994, which decrease was attributable to the alcohol testing machines being
placed into service. Selling, general and administrative expenses were
$3,687,000 for the nine months ended December 31, 1995, representing an increase
of $581,000 over the $3,106,000 in expenses reported for the nine months ended
December 31, 1994. This increase was primarily due to nonrecurring legal and
other expenses in the amount of $903,000 which were incurred by the Company in
connection with the settlement of the consent solicitation litigation with the
Committee and $306,000 of expenses incurred by a newly acquired subsidiary not
included in the comparable number for the nine months ended December 31, 1994.
Depreciation and amortization increased by $332,000 for the nine months ended
December 31, 1995 as compared to the depreciation and amortization in the same
period of the prior year and the increase was attributable primarily to the
depreciation of $264,000 on the alcohol testing machines placed in service at
testing sites in connection with the cost protect agreements with major
laboratories. As a result of the foregoing, the operating loss for the alcohol
testing segment increased by $1,617,000. The contributions to operating losses
by subsidiaries, representing segments other than alcohol testing, are detailed
below.
Other income for the nine months ended December 31, 1995 was $291,000
as compared to other expense of $619,000 reported for the same period in 1994.
The value of trading securities sold or held by the Company increased by
$270,000 during the nine months ended December 31, 1995 as compared to a
decrease of $838,000 for the same period in 1994. Interest income decreased by
$111,000 for the nine months ended December 31, 1995 as compared to the interest
income in the nine months ended December 31, 1994.
Because of the Company's history of operational losses, the delay in
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 was in its early marketing stages and the continuing problems
in the toy industry, management was of the opinion, as of February 15, 1996
U.S. Drug
116
<PAGE> 121
when USAT filed its Quarterly Report on Form 10-Q for the quarter ended December
31, 1995, that it was highly unlikely that the Company would turn profitable in
fiscal 1996 and that it was too speculative to project at that time when the
Company would turn profitable.
U.S. DRUG TESTING, INC. (SUBSTANCE ABUSE TESTING)
During the nine months ended December 31, 1995, U.S. Drug, a
development stage enterprise with no revenues, spent $683,000 on research and
development and $267,000 on selling, general and administrative expenses.
Management fees of $315,000, interest on brokerage loans of $71,000 and
depreciation of $110,000 comprised the balance of the loss from operations of
$1,445,000 for the nine months ended December 31, 1995. For the comparable
nine-month period ended December 31, 1994, U.S. Drug spent $534,000 on research
and development and $639,000 on selling, general and administrative expenses;
management fees were $315,000; interest expense was $2,800; and depreciation was
$102,000. The loss from operations for the nine months ended December 31, 1994
was $1,593,000. The loss from operations decreased to $1,445,000 in the nine
months ended December 31, 1995 as compared with $1,593,000 for the same period
of the prior year, which decrease of $148,000 was primarily attributable to the
renegotiation of the USAT license agreement with the USN resulting in a
reduction in royalties paid from $285,000 during the nine months ended December
31, 1994 to $25,000 for the nine months ended December 31, 1995.
Since inception U.S. Drug has spent $2,388,000 on research and
development and $1,868,000 on selling, general and administrative expenses. USAT
had spent $678,000 on research and development and $485,000 on selling, general
and administrative expenses for the period from January 24, 1992 through
December 31, 1992, when the technology was sublicensed to U.S. Drug.
As of December 31, 1995, U.S. Drug did not anticipate generating
revenues from sales during the balance of fiscal 1996 nor during fiscal 1997
and, accordingly, anticipated that operating losses would continue for at least
that 15-month period, if not for a longer period. Management currently has that
same opinion absent an advance payment from a marketing partner, as to which
payment or the securing of a marketing partner there can be no assurance.
GOOD IDEAS ENTERPRISES, INC. (TOY)
Net sales for the nine months ended December 31, 1995 were $1,473,000,
a decrease of $2,814,000 or 65.6% from the net sales in the comparable period of
the prior year. Of this decrease, $2,393,000 or 85.1% was attributable to the
major customer of Good Ideas not placing orders for Good Ideas' toy products.
U.S. Drug
117
<PAGE> 122
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 the
wooden construction toy category for the nine months ended December 31, 1995
were $933,000, a decrease of $1,732,000 or 65.0% from the net sales in the
comparable period in 1994. Net sales from the equestrian line of toys,
consisting of horses, saddles and accessories, for the nine months ended
December 31, 1995 were $530,000, representing a decrease of $590,000 or 43.8%
from the net sales in the nine months ended December 31, 1994. Net sales of Good
Ideas' other product lines for the nine months ended December 31, 1995 were
$11,000, a decrease of $492,000 or 97.9% from the net sales in the same period
in 1994. The decrease was attributable to the discontinuance of Good Ideas' line
of corrugated construction toys because of significant increases in the costs of
materials.
Gross profit for the nine months ended December 31, 1995 was $331,000
or 22.5% of net sales as compared to $1,288,000 or 30.0% of net sales for the
nine months ended December 31, 1994. The decrease in gross profit as a
percentage of net sales was primarily due to a disposal of obsolete inventory in
the amount of $127,000, partially offset by Good Ideas' effort to increase its
gross margins on products sold by either raising selling prices or adjusting the
quantity of parts in its playsets.
Selling, general and administrative expenses for the nine months ended
December 31, 1995 decreased to $1,097,000 from $1,487,000 for the comparable
period in 1994, which decrease was attributable to reductions in payroll and
related costs during the nine months ended December 31, 1995.
Management fees paid to USAT were $225,000 for the nine months ended
December 31, 1995, representing a decrease of $8,000 from the $233,000 of fees
paid for the nine months ended December 31, 1994.
Good Ideas recognized interest income of $118,000 from its loans to
related parties during the nine months ended December 31, 1995. Good Ideas also
recognized a loss of $20,000 on the sales of fixed assets during the same
period.
The loss from operations for Good Ideas was $1,033,000 for the nine
months ended December 31, 1995, representing an increase of $601,000 from the
operating loss of $432,000 reported for the
U.S. Drug
118
<PAGE> 123
comparable period ended December 31, 1994. The increase in the operating 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.
Unless Good Ideas were to add new products to its line, as to which
there is no assurance, or there were a stronger demand for toy products in the
industry generally, management did not believe, as of December 31, 1995, 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, as of December 31, 1995, to implement
these plans absent a change in the industry conditions described above. It was,
accordingly, as of such date, considering all of its options, including that of
seeking buyers for the assets or stock of Good Ideas. On February 26, 1996, the
USAT Board determined to sell or liquidate Good Ideas. See "The Merger and
Related Matters-Sale of Good Ideas."
U.S. RUBBER RECYCLING, INC. (RECYCLED RUBBER PRODUCTS)
Net sales of USRR for the nine months ended December 31, 1995 were
$640,000, a decrease of $1,308,000 or 61.7% as compared with sales of $1,948,000
in the period ended December 31, 1994. This decrease was attributable to the
cancellation of an agreement with a distributor 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
proceedings against the distributor because USRR does not want to incur the
protracted legal expenses involved in litigation.
Gross margin for the nine months ended December 31, 1995 was $345,000
or 53.9% of net sales up from $941,000 or 48.3% of net sales for the nine months
ended December 31, 1994. 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. During the six months ended September 30, 1995, these
tiles were repaired except for approximately $30,000 of inventory which was
written off.
U.S. Drug
119
<PAGE> 124
Selling, general and administrative expenses were $435,000 for the nine
months ended December 31, 1995, representing a decrease of $464,000 from such
expenses in the comparable period of 1994. Of this amount, $160,000 represented
a decrease in commissions and freight and $188,000 represented a decrease in
factory overhead expenses, all related to the decline in sales revenue.
Management fees paid to USAT were $65,000 for the nine months ended
December 31, 1995, representing a decrease of $129,000 from such fees in the
nine months ended December 31, 1994, which decrease was directly related to the
decline in sales.
Depreciation expense was $74,000 for the nine months ended December 31,
1995, representing an increase of $30,000 over such expense in the comparable
1994 period, 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 the nine months ended December 31,
1995 as compared with no such expense in the comparable period in 1994.
The operating loss of $368,000 for the nine months ended December 31,
1995 represented an increase of approximately $283,000 from an operating loss of
$85,000 for the period ended December 31, 1994. The increase was primarily
attributable to the decreased amount of revenues.
Despite the decrease in sales and the increase in loss during the
nine-month period ended December 31, 1995, USAT management believed, as of such
date, that costs in USRR could be controlled at, and revenues increased to, a
level at which USRR could operate on a profitable basis by the end of fiscal
1997; however, there can be no assurance that management's expectation will be
realized. In addition, 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, accordingly, authorized
seeking a purchaser for USRR. A sale of substantially all of the assets of USRR
was consummated on April 30, 1996.
FISCAL 1995 VS. FISCAL 1994
Revenues for fiscal 1995 increased by $1,255,000 or 17.5% over the
revenues of $7,182,000 reported for fiscal 1994.
U.S. Drug
120
<PAGE> 125
Revenues generated from the alcohol testing segment were $1,695,000, an increase
of $1,252,000 or 282.6% over the $443,000 in revenues reported for fiscal 1994,
which increase was attributable to sales of USAT's Alco Analyzer 2100. Revenues
generated from the toy segment were $4,606,000 for fiscal 1995, representing a
decrease of $938,000 or 16.9% from the $5,544,000 in revenues reported for
fiscal 1994, which decrease was primarily attributable to a decrease in sales of
Good Ideas' wooden construction toy category. Revenues generated from the
recycled rubber products segment were $2,136,000, an increase of $941,000 or
62.0% as compared to the $1,195,000 in revenues reported for the previous year.
The increase was attributable to an arrangement with a distributor (Matworks,
Inc.) to supply significant amounts of the product to a major retail customer.
The Company canceled the agreement in October 1994 because of significant
breaches by the distributor of the contract relating to its use of competitors'
flooring products in violation of a contractual requirement to use only USRR's
products. Accordingly, revenues for the fourth quarter decreased. The subsidiary
does not intend to institute any litigation in connection with the cancellation
of the agreement because USRR does not want to incur the protracted legal
expenses involved in litigation.
Cost of sales for fiscal 1995 on a consolidated basis was 73.9% of
revenues compared to 72.1% of revenues for the prior year, reflecting an overall
stability in gross profit margins. Cost of sales as a percentage of revenues
decreased in Good Ideas from 73.2% in fiscal 1994 to 71.3% in fiscal 1995. Cost
of sales as a percentage of revenues in USRR increased in fiscal 1995 to 72.8%
from 61.5% in fiscal 1994. For an explanation of the reasons for these changes,
see the subsidiary discussions which follow. Cost of sales as a percentage of
revenues in the alcohol testing segment of USAT increased from 78.3% in fiscal
1994 to 82.0% in fiscal 1995, which 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 $7,980,000 for fiscal
1995, representing an increase of $2,096,000 over the $5,884,000 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 from the USN for
drugs of abuse, representing an increase of $158,000 over the fiscal 1994
expenditures. The Company incurred research and development
U.S. Drug
121
<PAGE> 126
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 $800,000 for the year ended fiscal
1995, representing an increase of $352,000 over the $448,000 in depreciation and
amortization reported for fiscal 1994, of which $242,000 was attributable to
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 $7,876,000 for fiscal 1995 decreased by $2,060,000
from the losses of $9,936,000 reported for fiscal 1994. The operating loss for
the alcohol testing segment decreased by $3,169,000, which decrease was
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.
Other income (expense) for fiscal 1995 and 1994 included charges for
unrealized loss in marketable securities of $580,000 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 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 transaction 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 unrealized
losses, and recognized the realized losses. Since December 1993, no additional
investments of this type have been made and none are contemplated in the future.
Interest income was $292,000 for fiscal 1995, representing an increase of
$191,000 over the $101,000 in interest income reported for fiscal 1994, which
increase was attributable to increases in interest earned for fiscal 1995 by
U.S. Drug of $159,000 and Good Ideas of $36,000 by virtue of having the excess
proceeds from their 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
U.S. Drug
122
<PAGE> 127
development as compared with $728,000 in such expenses in the prior year and
$91,000 in the period January 1 to March 31, 1993. 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 and $146,000 in the period January 1 to March
31, 1993. Since inception U.S. Drug has spent $1,705,000 on research and
development and an additional $1,601,000 on selling, general and administrative
expenses. USAT spent $678,000 on research and development and $485,000 on
selling, general administrative expenses for the period from January 24, 1992
through December 31, 1992, when the technology was transferred to U.S. Drug.
U.S. Drug paid management fees to U.S. Drug of $420,000 in both fiscal
1995 and fiscal 1994 and no management fee in the period from January 1 to March
31, 1993. 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 and, during the period January 1 to March
31, 1993, the loss from operations of $257,000 also reflected interest and
depreciation of $20,000.
U.S. Drug's operating loss was $2,363,000 in fiscal 1995 as compared to
operating losses of $1,876,000 and $257,000 in fiscal 1994 and the period
January 1 to March 31, 1993, respectively. 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.
GOOD IDEAS ENTERPRISES, INC. (TOY)
Net sales of Good Ideas for fiscal 1995 were $4,606,000, a decrease of
$938,000 or 16.9% from the sales in the prior year. Net sales from Good Ideas'
wooden construction toy category for fiscal 1995 were $2,841,000, a decrease of
$733,000 or 20.5% from the sales in fiscal 1994, which decrease was attributable
to a decline in this category sales by 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 $1,213,000, 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
U.S. Drug
123
<PAGE> 128
cardboard construction toy category for fiscal 1995 were $344,000, a decrease of
$69,000 or 16.7% from the sales in the year earlier. 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 the current fiscal year. The
remaining decrease in net sales for fiscal 1995 as compared to 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 $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 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.
As of March 31, 1995, management was reviewing the possibilities to add
additional toy products, whether through
U.S. Drug
124
<PAGE> 129
licensing or otherwise; however, in view of the slow-down in customer demand as
described above, Good Ideas was delaying implementation thereof. Absent the
addition to Good Ideas of new products and a pick-up in orders in the toy
industry generally, management believed, as of March 31, 1995, that revenues in
Good Ideas would continue to decline and, accordingly, the operational losses
would continue.
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. As a result of the double
shift, an increase in the number of tires was required to supply the second
shift, resulting in additional costs to USRR to purchase tires to maintain an
adequate inventory, to remove waste from the increased volume of tires processed
and an increase in the number of irregular tiles produced causing additional
repair labor cost because of the training required for the new labor force to
staff the second shift.
Selling, general and administrative expenses were $819,000 for fiscal
1995, representing an increase of $151,000 over the $668,000 of expenses for
fiscal 1994. Of this amount, $131,000 represented additional payroll and
consulting fees resulting from an expansion of the business.
Management fees paid to USAT were $213,000 for fiscal 1995,
representing an increase of $94,000 over the $119,000 reported for fiscal 1994,
which increase was related to the increase in sales.
Depreciation expense was $59,000 for fiscal 1995, representing an
increase of $18,000 over such expense in the fiscal 1994, which increase was
attributable to the commencement of depreciation on additional manufacturing
equipment built in contemplation of potential expansion.
U.S. Drug
125
<PAGE> 130
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.
FISCAL 1994 VS. FISCAL 1993
Revenues for fiscal 1994 were $7,182,000 as compared with $4,166,000 in
the previous year, representing an increase of $3,016,000 or 72.4%. This
increase in revenues was primarily attributable to the revenue growth by
subsidiaries acquired during fiscal 1993. Fiscal 1994 included full year
operations for these acquired subsidiaries, while fiscal 1993 included only five
months of operations for USRR and nine months of operations for Good Ideas.
Cost of sales for fiscal 1994 on a consolidated basis was 72.1% of
revenues as compared to 70.2% of revenues for fiscal 1993, reflecting an overall
stability in gross margins. Cost of sales as a percentage of revenues decreased
in Good Ideas from 75.2% in fiscal 1993 to 73.2% in fiscal 1994. Cost of sales
as a percentage of revenues in USRR increased from 59.8% in fiscal 1993 to 61.5%
in fiscal 1994. For an explanation of the reasons for these changes, see the
subsidiary discussions which follow. Cost of sales as a percentage of revenues
in the alcohol testing segment of USAT decreased from 79.3% in fiscal 1993 to
78.3% in fiscal 1994, which decrease was attributable to more effective
purchasing of raw materials.
Selling, general and administrative expenses for fiscal 1994 were
$5,884,000 as compared with $5,897,000 in such expenses for the prior year,
resulting in a decrease of $13,000. Included in selling, general and
administrative expenses for fiscal 1994 were $668,000 attributable to USRR and
$1,456,000 attributable to Good Ideas, two subsidiaries acquired during the
previous fiscal year. Accordingly, the Statement of Operations for fiscal 1993
included $207,000 of expenses incurred by USRR for a five-month period and
$1,128,000 of expenses incurred by Good Ideas for a nine-month period. In
addition, the selling, general and administrative expenses for fiscal 1993
included $388,000 of expenses incurred by USAT's international subsidiary that
was discontinued during fiscal 1994. The Company incurred in fiscal 1994
non-recurring costs of $528,000, primarily comprised of legal fees in connection
with the settlement of the class actions described below, which have been
included in selling, general and administrative expenses, as compared to legal
fees of $445,000 incurred during fiscal 1993 in connection, primarily, with the
settlement of litigation. Marketing expenses, including payroll,
U.S. Drug
126
<PAGE> 131
consulting fees, travel and advertising expenses, decreased by over $700,000
during fiscal 1994 as compared to such expenses during fiscal 1993 in connection
with USAT's decision to refocus its efforts away from consumer alcohol testing
products toward development of the Alco Analyzer 2100.
Research and development expenses were $948,000 for fiscal 1994,
representing a decrease of $119,000 from the prior year's expenditures.
Other income (expense) in fiscal 1994 and 1993 included a loss on the
write down of a note receivable in the amount of $177,600. On October 25, 1991,
the Company purchased a $320,000 principal amount convertible note of The
Thunder Group, Inc., formerly Hemodynamics, Incorporated, a publicly owned
Delaware corporation. The note, with interest at 22% per annum, was convertible
into 1,523,809 shares of the common stock of Hemodynamics, Incorporated and was
due on January 31, 1993.
At December 31, 1992, accrued interest on the note amounted to $35,000.
The note was not paid at its due date and, in February 1993, the Company
participated in the filing of an involuntary bankruptcy petition against The
Thunder Group, Inc. At March 31, 1993, the Company recorded a reserve against
the collectability of the note in the amount of $177,600 and reported such loss
in that year. This reserve was deemed to be adequate at that time based upon the
then available information.
The loss from operations for fiscal 1994 was $9,936,000 as compared
with a loss of $6,610,000 in the prior year. The primary reason for the
$3,326,000 increased loss was the $4,650,000 charge resulting from the
settlement of two consolidated class actions and another lawsuit in fiscal 1994
as compared with a $653,000 charge resulting from the settlement of three
lawsuits in the prior year. The class actions were instituted in 1992 against
USAT, three officers and other unrelated defendants. The complaints alleged
violations of the federal securities laws through the dissemination of allegedly
false and misleading statements relating to USAT's operations, finances and
business prospects. Pursuant to a settlement agreed to in November 1993 and
approved by the federal district court in April 1994, USAT paid $1,600,000 in
cash to the class (which payment was funded through the exercise of warrants and
options) and issued to the class 1,333,333 shares of the USAT Common Stock
(issued in August 1995) based on a $2.25 closing price at March 31, 1994. The
other lawsuit by a former employee was settled for a $50,000 payment in cash.
During fiscal 1993, the Company settled three outstanding lawsuits instituted by
a former distributor (by payment of $250,000 in cash) and by two former
consultants (by (1) the payment of $110,125 in cash and the issuance of Common
Stock purchase warrants to purchase 180,000 shares of the USAT Common Stock with
an excess of market value
U.S. Drug
127
<PAGE> 132
over exercise price aggregating $292,500 and (2) the issuance of Common Stock
purchase warrants to purchase 146,250 shares of the USAT Common Stock).
U.S. DRUG TESTING, INC. (SUBSTANCE ABUSE TESTING)
U.S. Drug is a development stage enterprise with no revenues.
For fiscal 1994, the development of drug technology resulted in a
contribution to the operating loss of $1,876,000 as compared with a contribution
to the operating loss of $257,000 in the prior year. Of such amounts, research
and development expenditures represented $728,000 in fiscal 1994 as compared
with $91,000 in the prior year. Selling, general and administrative expenses
were $604,000 for fiscal 1994 as compared with $146,000 in the prior year. The
balance of the operating loss in fiscal 1994 was comprised of a management fee
of $420,000 to USAT, depreciation of $92,000 and interest expense of $32,000.
The balance of the operating loss in fiscal 1993 was comprised of depreciation
of $17,000 and interest expense of $3,200.
GOOD IDEAS ENTERPRISES, INC. (TOY)
For fiscal 1994, net sales of the toy subsidiary were $5,544,000,
representing an increase of $2,220,000 or 66.8% over the net sales of $3,324,000
in fiscal 1993. These increased sales were primarily the result of the addition
of the equestrian line of toys, consisting of horses, saddles and accessories
and other products, and the inclusion of 12 months of operations in fiscal 1994
as compared with nine months of operations in fiscal 1993. Gross profit for
fiscal 1994 was $1,487,000 or 26.8% of net sales as compared with $1,160,000 or
24.8% of net sales for fiscal 1993 as a result of manufacturing efficiencies
achieved through greater production volumes. Selling, general and administrative
expenses were $1,488,000 or 26.8% of net sales in fiscal 1994, an increase of
$328,000 over the $1,160,000 or 27.6% of net sales for the comparable period in
1993. The increase was primarily due to increased warehouse and office staff
salaries and bonuses aggregating $40,000 paid to the two operating officers in
December 1993. Management fees were $425,000 for fiscal 1994, representing an
increase of $200,000 over the $225,000 in fees for fiscal 1993. This increase
was the result of two factors. First, results of operations for fiscal 1993
included only nine months of management fees at $25,000 per month. Second,
effective for the first six months of fiscal 1994, the management fee was
computed at ten percent of net sales before being adjusted back to $25,000 per
month for the second six months of fiscal 1994, which accounted for $125,000 of
the increase. The loss from operations for fiscal 1994 was $426,000 as compared
with a loss of $355,000 in its prior year, an increase of $71,000 or 20.0%,
because of the increased selling,
U.S. Drug
128
<PAGE> 133
general and administrative expenses and increased management fees which were
offset by the additional gross profit.
U.S. RUBBER RECYCLING, INC. (RECYCLED RUBBER PRODUCTS)
For fiscal 1994, revenues of the recycled rubber products subsidiary
were $1,195,000 as compared with $230,000 in revenues in the prior year. Gross
margin for fiscal 1994 was $461,000 or 38.6% of net sales as compared with
$92,000 or 40.2% of net sales for fiscal 1993. The decrease was attributable,
primarily, to the higher costs paid for raw materials and decreased productivity
because of the required training period for the expanded labor force. Selling,
general and administrative expenses were $668,000 in fiscal 1994 as compared
with $207,000 of such expenses for fiscal 1993. The loss from operations was
$368,000 in fiscal 1994 as compared with a loss of $179,000 for fiscal 1993. The
differences in revenues, gross profit, selling, general and administrative
expenses and loss from operations between fiscal 1994 and fiscal 1993 were
principally due to the reported amounts for fiscal 1994 reflecting 12 months of
operations as compared to the reported amounts for fiscal 1993 only reflecting
five months of operations. Increased revenues in fiscal 1994, notwithstanding
the lack of comparability based upon the number of months reported in each
fiscal year, resulted from an expansion of sales and marketing activities and
increased production capabilities as the result of capital made available from
USAT. Related sales and marketing expenses increased during fiscal 1994 because
of increases in payroll and related expenses, trade shows and advertising and
commissions and freight costs resulting from higher sales.
FISCAL 1993 VS. FISCAL 1992
Revenues for fiscal 1993 of $4,166,000 increased by $3,478,000 or
505.5% over the revenues of $688,000 for the fiscal year ended March 31, 1992
("fiscal 1992"), which increase was attributable primarily to the revenues
generated by the subsidiaries acquired during the year. Selling, general and
administrative expenses increased by $3,348,000 over those in fiscal 1992. Of
this amount, $1,580,000 represented the overhead incurred by the subsidiaries
acquired during fiscal 1993. The balance consisted of additional overhead spent
by the Company on its drug testing operation, including license and royalty fees
and marketing expenses in connection with its alcohol products.
Research and development costs for fiscal 1993 were $1,067,000,
representing an increase of $911,000 in funds spent on developing the licensed
drug technology.
Revenues of the toy subsidiary for the nine months of ownership during
fiscal 1993 were $3,324,000 and gross profit was $1,002,000 or 30.2% of sales.
U.S. Drug
129
<PAGE> 134
Revenues of the recycled rubber products subsidiary for the five months
of ownership during fiscal 1993 were $230,000 and gross profit was $92,000 or
40.0% of sales.
During fiscal 1993, the Company incurred a one-time charge to
operations in the amount of $653,000 resulting from the settlement of three law
suits. The terms of the settlement consisted of a payment of $360,000 in cash
and the issuance of Common Stock purchase warrants to purchase 180,000 shares of
the USAT Common Stock with an excess of market value over exercise price
aggregating $293,000. These warrants were exercised during fiscal 1993. These
settlements have been charged to operations during fiscal 1993. In addition,
non-cash losses in connection with the valuation of certain of the Company's
assets were provided in the amount of $1,368,000 comprised of a provision for an
unrealized loss resulting from a $1,191,000 decline in the market value of the
Company's investment in Marquest and a $177,600 write-off of a portion of an
investment note receivable.
The net loss of $7,997,000 in fiscal 1993 represented an increase of
$4,507,000 or 129.1% over the net loss of $3,490,000 in fiscal 1992. The
increase was attributable to the reasons described above.
U.S. DRUG'S SELECTED FINANCIAL DATA
The following tables set forth selected financial data of U.S. Drug for
the two fiscal years ended March 31, 1995 and 1994, and the period October 8,
1992 (inception) to March 31, 1993 and the nine-month periods ended December 31,
1995 and 1994. This selected financial data should be read in conjunction with
"U.S. Drug's Management's Discussion and Analysis of Financial Condition and
Results of Operations" and the U.S. Drug Financial Statements and related notes
thereto included elsewhere in this Consent Solicitation Statement/Prospectus.
<TABLE>
<CAPTION>
Cumulative
from
October 8,
1992
Nine Months Ended Year Ended Period (Inception)
December 31 March 31, October 8, 1992 to
----------------- ----------------- (Inception) to December 31,
1995 1994 1995 1994 March 31, 1993 1995
---- ---- ---- ---- --------------- ------------
(unaudited)
<S> <C> <C> <C> <C> <C> <C>
Selected Income Statement Data:
Revenues: $ - $ - $ - $ - $ - $ -
-------- ------- ------- ------- -------- ----------
Costs and Expenses:
Selling, General and
Administrative 266,623 639,194 850,400 604,185 146,316 1,761,820
Research & Development 682,551 533,576 886,219 728,272 90,960 2,113,646
Depreciation and Amortization 110,276 102,118 162,871 92,245 16,939 344,952
</TABLE>
U.S. Drug
130
<PAGE> 135
<TABLE>
<CAPTION>
Cumulative
from
October 8,
1992
Nine Months Ended Year Ended Period (Inception)
December 31 March 31, October 8, 1992 to
------------------------- --------------------------- (Inception) to December 31,
1995 1994 1995 1994 March 31, 1993 1995
---- ---- ---- ---- -------------- ------------
(unaudited)
<S> <C> <C> <C> <C> <C> <C>
Interest Expense - Parent - 2,805 3,319 31,639 3,207 38,165
Management Fees - Parent 315,000 315,000 420,000 420,000 - 1,050,000
Interest Expense 70,786 - 40,640 - - 108,976
---------- ---------- ---------- ---------- --------- ----------
Total Costs and Expenses 1,445,236 1,592,693 2,363,449 1,876,341 257,422 5,417,559
---------- ---------- ---------- ---------- --------- ----------
Loss from Operations (1,445,236) (1,592,693) (2,363,449) (1,876,341) (257,422) (5,417,559)
Other Income (Expense) 250,847 (214,868) 31,232 (383,951) - (123,976)
---------- ---------- ---------- ---------- --------- ----------
Net Loss ($1,194,389) ($1,807,561) ($2,332,217) ($2,260,292) ($257,422) ($5,541,535)
========== ========== ========== ========== ========= ==========
Weighted Average Common
Shares Outstanding 5,221,900 5,221,900 5,221,900 4,342,458 3,500,000
========== ========== ========== ========== =========
Net Loss Per Common Share ($ .23) ($ .35) ($ .45) ($ .52) ($ .07)
========== ========== ========== ========== =========
</TABLE>
<TABLE>
<CAPTION>
December 31, March 31,
------------------------- -------------------------
1995 1994 1995 1994
---- ---- ---- ----
(unaudited)
<S> <C> <C> <C> <C>
Selected Balance Sheet Data:
Working Capital $ 945,996 $2,406,182 $2,089,323 $4,360,362
========== ========== ========== ==========
Total Assets $1,683,656 $4,547,880 $4,444,105 $5,268,820
========== ========== ========== ==========
Stockholders' Equity $1,503,303 $3,222,348 $2,697,692 $5,029,909
========== ========== ========== ==========
</TABLE>
U.S. DRUG'S MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
U.S Drug is a development stage enterprise with a no earnings history
and which initially derived its capital resources from unsecured advances
provided by USAT. During October and November, 1993, U.S. Drug sold 1,721,900
shares of the U.S. Drug Common Stock to the public at $5.00 per share and netted
approximately $7,099,000. From the net proceeds of the offering, U.S. Drug
repaid the advances made by USAT. During the nine-month period ended December
31, 1995, U.S. Drug made net loans to USAT for working capital purposes in the
amount of $917,057. These advances are evidenced by notes due December 31, 1995,
bearing interest at the rate of eight percent per annum at December 31, 1995 and
secured by USAT's shares of the U.S. Drug Common Stock. The maturity date was
U.S. Drug
131
<PAGE> 136
subsequently extended to June 30, 1996. In June 1995, U.S. Drug completed
renegotiation of the USAT License Agreement with the USN. The amended agreement
reduces minimum royalty guarantees to $100,000 per year, representing a savings
of $4,881,000 over the term of the agreement from the minimum guaranty provision
of the original agreement. Additional royalties will be paid only in conjunction
with actual product sales. U.S. Drug will require additional capital to continue
the research, development and ultimate marketing of its products and to fund its
working capital requirements for the next 12 months and expects to derive these
funds from unsecured advances to be made by USAT. USAT intends to make such
funds available to U.S. Drug from the net proceeds from the private placement
completed by USAT in February 1996, from the anticipated exercise of its USAT
Common Stock purchase warrants and stock options, from the revenues of its
ProActive subsidiary and, if necessary, from additional debt or equity
financings. There is no assurance that any of these additional sources of
financing will be available and, in such event, U.S. Drug will not be able to
complete its research and development on a timely basis. If the Merger is not
consummated, the U.S. Drug Board will have to consider a rights offering of the
U.S. Drug Common Stock or other offerings of U.S. Drug securities, as to which
there is no assurance that any of these offerings will be consummated in the
amounts necessary to meet U.S. Drug's cash requirements. There are currently no
unfunded commitments for capital expenditures.
RESULTS OF OPERATIONS
NINE MONTHS ENDED DECEMBER 31, 1995 VS. DECEMBER 31, 1994
During the nine months ended December 31, 1995, U.S. Drug, a
development stage enterprise with no revenues, spent $683,000 on research and
development and $267,000 on selling, general and administrative expenses.
Management fees of $315,000, interest on brokerage loans of $71,000 and
depreciation of $110,000 comprised the balance of the loss from operations of
$1,445,000 for the nine months ended December 31, 1995. For the comparable
nine-month period ended December 31, 1994, U.S. Drug spent $534,000 on research
and development and $639,000 on selling, general and administrative expenses;
management fees were $315,000; interest expense was $2,800; and depreciation was
$102,000. The loss from operations for the nine months ended December 31, 1994
was $1,593,000. The loss from operations decreased to $1,445,000 in the nine
months ended December 31, 1995 as compared with $1,593,000 for the same period
of the prior year, which decrease of $148,000 was primarily attributable to the
renegotiation of the USAT license agreement with the USN resulting in a
reduction in royalties paid from $285,000 during the nine months ended December
31, 1994 to $25,000 for the nine months ended December 31, 1995.
U.S. Drug
132
<PAGE> 137
Since inception U.S. Drug has spent $2,388,000 on research and
development and $1,868,000 on selling, general and administrative expenses. USAT
had spent $678,000 on research and development and $485,000 on selling, general
and administrative expenses for the period from January 24, 1992 through
December 31, 1992, when the technology was sublicensed to U.S. Drug.
U.S. Drug does not anticipate generating revenues from sales during the
balance of fiscal 1996 nor during fiscal 1997, so operating losses will continue
for at least that 15-month period, if not for a longer period.
FISCAL 1995 VS. FISCAL 1994
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 and $91,000 in the period January 1 to March
31, 1993. During fiscal 1995, U.S. Drug also spent $850,000 on selling, general
and administrative expenses as compared with $604,000 of such expenses in the
prior year and $146,000 in the period January 1 to March 31, 1993. Since
inception, U.S. Drug has spent $1,705,000 on research and development and an
additional $1,601,000 on selling, general and administrative expenses. USAT
spent $678,000 on research and development and $485,000 on selling, general
administrative expenses for the period from January 24, 1992 through December
31, 1992, when the technology was transferred to U.S. Drug.
U.S. Drug paid management fees to USAT of $420,000 in both fiscal 1995
and fiscal 1994 and no management fee in the period from January 1 to March 31,
1993. 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 and, during the period of January 1 to March 31, 1993,
the loss from operations of $257,000 also reflected interest and depreciation of
$20,000.
U.S. Drug's operating loss was $2,363,000 in fiscal 1995 as compared to
operating losses of $1,876,000 and $257,000 in fiscal 1994 and the period
January 1 to March 31, 1993, respectively. These operating losses are
attributable to the fact that U.S. Drug is 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.
U.S. Drug
133
<PAGE> 138
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.
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
U.S. Drug
134
<PAGE> 139
to action in his or her 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 U.S. Drug relating to the Merger and the tax consequences thereof to
the U.S. Drug Minority Stockholders.
EXPERTS
The audited financial statements as of March 31, 1995 and 1994 and for
the years ended March 31, 1995, 1994 and 1993 have been included herein in
reliance on the report of Wolinetz, Gottlieb & Lafazan, P.C., independent
certified public accountants, given on the authority of that firm as experts in
accounting and auditing.
CHANGE IN ACCOUNTANTS
On November 3, 1995, USAT named Ernst & Young LLP ("E&Y") as USAT's new
independent auditors for fiscal 1996 instead of Wolinetz, Gottlieb & Lafazan,
P.C. ("Wolinetz"), which firm had served as USAT's independent auditors since
USAT's inception. The 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
U.S. Drug
135
<PAGE> 140
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 to an accounting, auditing or financial reporting issue.
U.S. Drug
136
<PAGE> 141
INDEX TO FINANCIAL STATEMENTS
U.S. ALCOHOL TESTING OF AMERICA, INC. AND SUBSIDIARIES
Audited
<TABLE>
<CAPTION>
Item Page
- ---- ----
<S> <C>
1. Report of Independent Certified Public Accountants....... F-1
2. Consolidated Balance Sheet as of March 31, 1995
and 1994................................................. F-2
3. Consolidated Statement of Operations for the
Years Ended March 31, 1995, 1994 and 1993................ F-4
4. Consolidated Statement of Stockholders' Equity
for the Years Ended March 31, 1995, 1994 and 1993........ F-5
5. Consolidated Statements of Cash Flows for the
Years Ended March 31, 1995, 1994 and 1993................ F-8
6. Notes to Consolidated Financial Statements -
March 31, 1995........................................... F-12
</TABLE>
Unaudited
<TABLE>
<CAPTION>
Item Page
- ---- ----
<S> <C>
1. Consolidated Balance Sheet as of December 31, 1995....... F-42
2. Consolidated Statement of Operations for the Nine
Months Ended December 31, 1995 and 1994.................. F-44
3. Consolidated Statement of Stockholders' Equity for
the Nine Months Ended December 31, 1995.................. F-45
4. Consolidated Statement of Cash Flows for the Nine
Months Ended December 31, 1995 and 1994.................. F-46
5. Notes to Consolidated Financial Statements -
December 31, 1995........................................ F-48
</TABLE>
U.S. Drug
137
<PAGE> 142
U.S. DRUG TESTING, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
Audited
<TABLE>
<CAPTION>
Item Page
- ---- ----
<S> <C>
1. Report of Independent Certified Public Accountants....... F-53
2. Balance Sheet as of March 31, 1995 and 1994.............. F-54
3. Statement of Operations for the Years Ended
March 31, 1995, and 1994, for the Period October 8, 1992
(Inception) to March 31, 1993 and Cumulative from
October 8, 1992 (Inception) to March 31, 1995............ F-55
4. Statement of Stockholders' Equity for the Period
October 8, 1992 (Inception) to March 31, 1995............ F-56
5. Statement of Cash Flows for the Years Ended
March 31, 1995 and 1994, for the Period October 8, 1992
(Inception) to March 31, 1993 and Cumulative from
October 8, 1992 (Inception) to March 31, 1995............ F-57
6. Notes to Financial Statements - March 31, 1995........... F-59
</TABLE>
Unaudited
<TABLE>
<CAPTION>
Item Page
- ---- ----
<S> <C>
1. Balance Sheet as of December 31, 1995.................... F-70
2. Statement of Operations for the Nine Months Ended
December 31, 1995 and 1994............................... F-71
3. Statement of Stockholders' Equity for the Nine Months
Ended December 31, 1995.................................. F-72
4. Statement of Cash Flows for the Nine Months Ended
December 31, 1995 and 1994............................... F-73
5. Notes to Financial Statements - December 31, 1995........ F-75
</TABLE>
U.S. Drug
138
<PAGE> 143
[WG&L LETTERHEAD]
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 sheets of U.S.
Alcohol Testing of America, Inc. and subsidiaries as of March 31, 1995 and 1994,
and the related consolidated statements of operations, stockholders' equity and
cash flows for each of the three 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 1994, and the
results of their operations and their cash flows for each of the three years in
the period ended March 31, 1995 in conformity with generally accepted accounting
principles.
We have also audited Schedule I of U.S. Alcohol Testing of America, Inc.
and subsidiaries as of March 31, 1995 and 1994, and Schedules V and VI for the
years ended March 31, 1995, 1994 and 1993. These schedules are presented for
purposes of complying with the rules of the Securities and Exchange Commission
and are not part of the basic financial statements. In our opinion, these
schedules present fairly, in all material respects, the information required to
be set forth therein.
WOLINETZ, GOTTLIEB & LAFAZAN, P.C.
Rockville Centre, New York
May 26, 1995
F-1
<PAGE> 144
U.S. ALCOHOL TESTING OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
MARCH 31,
---------------------------
1995 1994
------------ ------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and Cash Equivalents $ 1,633,098 $ 5,146,969
Funds in Escrow -- Restricted -- 1,578,671
Trading Securities 3,307,543 4,052,445
Accounts Receivable (Net of Allowance For Bad Debts of $125,149 at March 31, 1995
and $61,465 at March 31, 1994) 771,107 1,429,756
Other Receivables 69,378 35,266
Inventories 2,212,566 1,267,978
Prepaid Expenses 242,069 196,327
------------ ------------
Total Current Assets 8,235,761 13,707,412
------------ ------------
Property and Equipment (Net of Accumulated Depreciation of $1,081,606 at March 31,
1995 and $530,088 at March 31, 1994) 3,742,986 1,640,405
------------ ------------
Other Assets:
Covenants Not to Compete (Net of Accumulated Amortization of $255,375 at March 31,
1995 and $216,875 at March 31, 1994) 47,125 85,625
Goodwill (Net of Accumulated Amortization of $229,216 at March 31, 1995 and $94,521
at March 31, 1994) 2,008,592 1,324,812
Patents (Net of Accumulated Amortization of $40,811 at March 31, 1995 and $5,199 at
March 31, 1994) 20,830 46,809
Other Non-Current Assets 42,254 43,710
------------ ------------
Total Other Assets 2,118,801 1,500,956
------------ ------------
Total Assets $ 14,097,548 $ 16,848,773
============= =============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-2
<PAGE> 145
U.S. ALCOHOL TESTING OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(CONTINUED)
<TABLE>
<CAPTION>
MARCH 31,
---------------------------
1995 1994
------------ ------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts Payable $ 1,498,322 $ 1,174,787
Accrued Expenses and Taxes 472,253 420,652
Accrued Class Action Settlement -- 4,578,671
Current Portion of Long-Term Debt 53,727 43,647
Brokerage Loan Payable 1,569,592 --
Preferred Stock Dividend Payable 7,202 --
------------ ------------
Total Current Liabilities 3,601,096 6,217,757
Long-Term Debt -- Net of Current Portion 79,008 81,521
Commitments and Contingencies (See Note 13)
------------ ------------
Total Liabilities 3,680,104 6,299,278
------------ ------------
Minority Interest 2,723,502 3,705,120
------------ ------------
Stockholders' Equity:
Preferred Stock, Class "A", $.01 Par Value; 500,000 Shares Authorized, Issued and
Outstanding 41,157 Shares at March 31, 1995 and 50,207 Shares at March 31, 1994
(Liquidation Preference of $205,785 at March 31, 1995 and $251,035 at March 31,
1994) 412 502
Preferred Stock, Class "B", $.01 Par Value; 1,500,000 Shares Authorized, Issued and
Outstanding -0- Shares at March 31, 1995 and 8,750 Shares at March 31, 1994
(Liquidation Preference of $35,000 at March 31, 1994) -- 88
Common Stock, $.0l Par Value; 50,000,000 Shares Authorized, Issued and Outstanding
28,141,041 Shares at March 31, 1995 and 24,052,225 Shares at March 31, 1994 281,411 240,522
Additional Paid-In Capital 38,421,034 30,375,782
Accumulated Deficit (31,008,915) (23,772,519)
------------ ------------
Total Stockholders' Equity 7,693,942 6,844,375
------------ ------------
Total Liabilities and Stockholders' Equity $ 14,097,548 $ 16,848,773
============= =============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-3
<PAGE> 146
U.S. ALCOHOL TESTING OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
MARCH 31,
--------------------------------------------
1995 1994 1993
----------- ------------ -----------
<S> <C> <C> <C>
Sales -- Net $ 8,437,150 $ 7,182,417 $ 4,166,104
------------ ------------- ------------
Costs and Expenses:
Cost of Sales
(Exclusive of Depreciation Shown Below) 6,234,263 5,181,632 2,923,795
Selling, General and Administrative Expenses
(Exclusive of Depreciation Shown Below) 7,980,055 5,883,839 5,897,108
Research and Development 1,248,962 947,811 1,067,381
Interest 50,139 7,215 24,132
Depreciation and Amortization 799,858 447,717 210,687
Loss From Settlement of Class Action
Litigation -- 4,600,000 --
Loss From Settlement of Litigation -- 50,000 652,625
------------ ------------- ------------
Total Costs and Expenses 16,313,277 17,118,214 10,775,728
------------ ------------- ------------
Loss From Operations (7,876,127) (9,935,797) (6,609,624)
------------ ------------- ------------
Other Income (Expense):
Interest Income 292,416 100,808 218,201
Dividend Income -- -- 14,612
Gain on Sale of Marketable Securities -- -- 72,619
Loss on Sale of Marketable Securities (154,707) -- (117,456)
Unrealized Loss on Marketable Securities (579,991) (387,746) (1,190,605)
Loss on Write-Down of Note Receivable -- (177,600) (177,600)
Other Losses (14,925) (2,338) (6,880)
------------ ------------- ------------
Total Other Income (Expense) (457,207) (466,876) (1,187,109)
------------ ------------- ------------
Loss Before Minority Interest in Net Loss (Income)
of Subsidiaries (8,333,334) (10,402,673) (7,796,733)
Minority Interest in Net Loss (Income) of
Subsidiaries, Net of Subsidiary Preferred Stock
Dividends Paid 1,096,938 336,638 (200,520)
------------ ------------- ------------
Net Loss $(7,236,396) $(10,066,035) $(7,997,253)
============ ============= ============
Weighted Average Common Shares Outstanding 25,691,674 22,027,068 12,317,743
============ ============= ============
Loss Applicable to Common Stock:
Net Loss $(7,236,396) $(10,066,035) $(7,997,253)
Preferred Stock Dividend -- Class "A" (39,179) (26,358) (39,992)
Preferred Stock Dividend -- Class "B" (2,425) (13,826) (331,767)
------------ ------------- ------------
Loss Applicable to Common Stock $(7,278,000) $(10,106,219) $(8,369,012)
============ ============= ============
Net Loss Per Common Share $ (.28) $ (.46) $ (.68)
============ ============= ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-4
<PAGE> 147
U.S. ALCOHOL TESTING OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED MARCH 31, 1995, 1994 AND 1993
<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, 1992 $ 843 $ 13,625 $ 98,818 $13,897,922 $ (5,709,231) $ 8,301,977
Issuance of 473,000 Shares of Common
Stock Upon Exercising of Warrants, Net
of Related Costs -- -- 4,730 469,118 -- 473,848
Issuance of 153,225 Shares of Common
Stock Upon Conversion of 34,050 Shares
Class "A" Preferred Stock (341) -- 1,532 (1,191) -- --
Dividend on Class "A" Preferred Stock -- -- -- (39,992) -- (39,992)
Dividend on Class "B" Preferred Stock -- -- -- (331,767) -- (331,767)
Issuance of 8,521 Shares of Common Stock
in Payment of Class "B" Preferred
Stock Dividend -- -- 86 13,764 -- 13,850
Issuance of 185,000 Shares of Common
Stock in Connection With
Acquisition -- -- 1,850 194,713 -- 196,563
Issuance of 137,500 Shares of Class "B"
Preferred Stock Upon Exercising of
Placement Agent's Option -- 1,375 -- 603,625 -- 605,000
Issuance of 6,139,125 Shares of Common
Stock Upon Conversion of 1,364,250
Shares of Class "B" Preferred Stock -- (13,642) 61,391 (47,749) -- --
Expense of Stock Offerings -- -- -- (31,783) -- (31,783)
Issuance of Warrants in Settlement of
Litigation -- -- -- 292,500 -- 292,500
Net Loss For The Year Ended
March 31, 1993 -- -- -- -- (7,997,253) (7,997,253)
----- -------- -------- ----------- ------------ -----------
Balance -- March 31, 1993
(Carried Forward) 502 1,358 168,407 15,019,160 (13,706,484) 1,482,943
----- -------- -------- ----------- ------------ -----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-5
<PAGE> 148
U.S. ALCOHOL TESTING OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED MARCH 31, 1995, 1994 AND 1993
(CONTINUED)
<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, 1993 (Brought Forward) $ 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 (Carried Forward) 502 88 240,522 30,375,782 (23,772,519) 6,844,375
---- ------- -------- ----------- ------------ ------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-6
<PAGE> 149
U.S. ALCOHOL TESTING OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED MARCH 31, 1995, 1994 AND 1993
(CONTINUED)
<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 (Brought Forward) $ 502 $ 88 $240,522 $30,375,782 $(23,772,519) $ 6,844,375
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
==== === ======== =========== ============ ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-7
<PAGE> 150
U.S. ALCOHOL TESTING OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
MARCH 31,
--------------------------------------------
1995 1994 1993
----------- ------------ -----------
<S> <C> <C> <C>
Cash Flow From Operating Activities:
Net Loss $(7,236,396) $(10,066,035) $(7,997,253)
Adjustments to Reconcile Net Loss To Net Cash
Used By Operating Activities:
Provision For Bad Debts 50,675 59,029 (17,601)
Depreciation and Amortization 799,858 447,717 210,687
Loss on Disposal of Property and Equipment 25,475 -- --
Minority Interest in Net (Loss) Income of
Subsidiary, Net of Subsidiary Preferred
Stock Dividends Paid (1,096,938) (336,638) 200,520
Value of Common Stock Issued To Directors For
Services 54,375 21,250 --
Value of Warrants Granted -- -- 292,500
Unrealized Loss on Marketable Securities 579,991 387,746 1,190,605
Amortization of Bond Discount (3,116) (960) --
Unrealized Loss on Note Receivable -- -- 177,600
Loss on Note Receivable -- 177,600 --
Net Loss on Sales of Marketable Securities 154,707 -- 44,837
Loss on Disposition of Property and
Equipment 14,925 2,338 6,880
Changes in Operating Assets and Liabilities:
(Increase) Decrease in Accounts
Receivable 711,044 (897,187) 184,775
(Increase) Decrease in Other Receivables (34,112) 155,143 (70,591)
(Increase) Decrease in Inventories (833,681) 425,816 (656,151)
(Increase) Decrease in Prepaid Expenses (45,742) (106,836) 108,836
(Increase) Decrease in Funds in Escrow-
Restricted 1,578,671 (1,578,671) --
Increase in Accounts Payable 135,794 482,460 170,476
Increase (Decrease) in Accrued Expenses and
Taxes 24,492 14,504 (172,661)
Increase (Decrease) in Accrued Class Action
Settlement (1,578,671) 4,578,671 --
----------- ------------ -----------
Net Cash Used By Operating Activities (6,698,649) (6,234,053) (6,326,541)
----------- ------------ -----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-8
<PAGE> 151
U.S. ALCOHOL TESTING OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(CONTINUED)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
--------------------------------------------
MARCH 31,
--------------------------------------------
1995 1994 1993
----------- ------------ -----------
<S> <C> <C> <C>
Cash Flow From Investing Activities:
Sale of Marketable Securities $ 13,320 $ -- $ 4,868,263
Purchase of Marketable Securities -- (3,908,281) (6,026,685)
Purchase of Property and Equipment (2,555,133) (667,536) (954,160)
Purchase of Patents and Related Costs (9,633) (12,514) (120)
Other 1,456 (33,408) (158,901)
Decrease in Cash and Cash Equivalents Restricted
for Preferred Stock Dividends -- -- 1,132,500
Payments Received on Note Receivable -- -- 150,000
Cost of Covenant Not to Compete -- -- (2,500)
Dispositions of Property and Equipment -- 10,000 7,000
Preacquisition Advances -- -- (810,068)
Loan to Officer -- -- (50,000)
Repayment of Loan to Officer -- 50,000 --
Cash Acquired in Business Acquisitions 593,261 -- --
Costs of Business Acquisitions (5,120) -- --
----------- ------------ -----------
Net Cash Used By Investing Activities (1,961,849) (4,561,739) (1,844,671)
----------- ------------ -----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-9
<PAGE> 152
U.S. ALCOHOL TESTING OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(CONTINUED)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
--------------------------------------------
MARCH 31,
--------------------------------------------
1995 1994 1993
----------- ------------ -----------
<S> <C> <C> <C>
Cash Flow From Financing Activities:
Sales and Issuances of Common and Preferred
Stock 1,694,063 -- --
Proceeds of Long-Term Debt 81,151 141,511 24,046
Payments of Long-Term Debt (93,584) (32,941) (7,448)
Payments of Notes Payable -- (26,518) (20,000)
Proceeds of Brokerage Loans Payable 1,674,683 -- 1,255,958
Payments of Brokerage Loans Payable (105,091) -- (1,255,958)
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 (124,433) (38,157) (31,783)
Payment of Dividend on Class "A" Preferred
Stock (31,977) (26,358) (55,594)
Payment of Dividend on Class "B" Preferred
Stock -- -- (408,750)
Payment of Dividend to Minority Interest -- -- (780,000)
Issuance of Common Stock Upon Exercise of
Warrants 1,770,518 2,348,637 549,773
Net Proceeds From Sale of Stock by N.V.
Subsidiary -- -- 272,359
Proceeds From Exercising of Placement Agent's
Option in Connection with Acquisition of 22
Units in Preferred "B" Private Placement -- -- 605,000
Guaranteed Payments on Warrant Exercise -- -- (75,925)
----------- ------------ -----------
Net Cash Provided By Financing Activities 5,146,627 14,777,482 71,678
----------- ------------ -----------
Increase (Decrease) in Cash and Cash Equivalents $(3,513,871) $ 3,981,690 $(8,099,534)
Cash and Cash Equivalents -- Beginning 5,146,969 1,165,279 9,264,813
----------- ------------ -----------
Cash and Cash Equivalents -- Ending $ 1,633,098 $ 5,146,969 $ 1,165,279
=========== ============ ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-10
<PAGE> 153
U.S. ALCOHOL TESTING OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(CONTINUED)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
--------------------------------------------
MARCH 31,
--------------------------------------------
1995 1994 1993
----------- ------------ -----------
<S> <C> <C> <C>
Supplemental Disclosure of Cash Information:
Cash Paid For Interest $ 50,139 $ 7,215 $ 24,132
=========== ============ ===========
Income Taxes Paid $ -- $ -- $ --
=========== ============ ===========
Non-Cash Investing Activities:
Conversion of Preacquisition Advances into
Receivable From Subsidiary $ -- $ -- $ 810,068
=========== ============ ===========
Non-Cash Financing Activities:
Preferred Stock Dividends Accrued $ 7,202 $ -- $ --
=========== ============ ===========
Issuance of Common Stock for Businesses
Acquired -- Net of Cash Received $ 976,501 $ -- $ 327,243
=========== ============ ===========
Issuance of Common Stock as Payment for Preferred
"B" Dividend $ 2,465 $ 13,826 $ 13,850
=========== ============ ===========
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 $ -- $ 1,532
=========== ============ ===========
Issuance of Common Stock Upon Conversion of Class
"B" Preferred Stock $ 394 $ 5,715 $ 61,391
=========== ============ ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-11
<PAGE> 154
U.S. ALCOHOL TESTING OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1995
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.
Cash and Cash Equivalents
The Company considers all highly liquid cash investments with a maturity of
three months or less when purchased to be cash equivalents.
Trading Securities
Trading securities at March 31, 1995 consist 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 classifies
all of its debt and marketable equity securities as trading securities.
Management determines the appropriate classification of all securities at the
time of purchase and re-evaluates such designation as of each balance sheet
date. The Company's trading securities are recorded at fair value. Unrealized
holding gains and losses, net of the related tax effect, are included in
earnings.
F-12
<PAGE> 155
U.S. ALCOHOL TESTING OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1995
NOTE 1 -- Summary of Significant Accounting Policies -- (Continued)
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:
<TABLE>
<CAPTION>
Life
-------------
<S> <C>
Furniture and Fixtures 5 - 7 Years
Equipment 5 - 7 Years
Equipment -- Network/Per Test 3 - 5 Years
Test Equipment 5 Years
Leasehold Improvements 13 - 15 Years
Vehicles 5 Years
</TABLE>
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 40 years.
F-13
<PAGE> 156
U.S. ALCOHOL TESTING OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1995
NOTE 1 -- Summary of Significant Accounting Policies -- (Continued)
Goodwill (Continued)
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
goowill many not be recoverable, the Company assesses the recoverability of
goodwill by determining whether the carrying value of such goodwill will be
recovered through undiscounted expected future cash flows after interest charges
associated with the business acquired. No impairment losses were recorded by the
Company in 1995 and 1994.
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 fiscal 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
is currently evaluating the impact, if any, of SFAS 121.
Patents
The costs 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 will be
recognized in the period that such tests are performed.
F-14
<PAGE> 157
U.S. ALCOHOL TESTING OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1995
NOTE 1 -- Summary of Significant Accounting Policies -- (Continued)
Research and Development Costs
Research and development costs are expensed currently.
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.
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.
NOTE 2 -- Cash and Cash Equivalents
Cash and cash equivalents are summarized as follows:
<TABLE>
<CAPTION>
March, 31,
-------------------------
1995 1994
---------- ----------
<S> <C> <C>
Cash in Banks $ 160,939 $ 292,781
Money Market Funds 1,472,159 4,854,188
---------- ----------
$1,633,098 $5,146,969
========== ==========
</TABLE>
NOTE 3 -- Funds in Escrow -- Restricted
At March 31, 1994 restricted escrow funds represented funds escrowed in
connection with the cash portion of the class action settlement (see Note 12).
F-15
<PAGE> 158
U.S. ALCOHOL TESTING OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1995
NOTE 4 -- Trading Securities
Trading securities are summarized as follows:
<TABLE>
<CAPTION>
March 31,
-------------------------
1995 1994
---------- ----------
<S> <C> <C>
Marketable Equity Securities $1,585,906 $1,753,934
Federal Home Loan Mortgage Corporation REMIC Bonds 3,428,998 3,426,488
Federal National Mortgage Association REMIC Bonds 483,360 482,753
---------- ----------
5,498,264 5,663,175
Less: Unrealized Losses 2,190,721 1,610,730
---------- ----------
Trading Securities at Aggregate Market Value $3,307,543 $4,052,445
========== ==========
</TABLE>
At March 31, 1995 the REMIC Bonds were collateral for the brokerage loan
payable (see Note 7).
NOTE 5 -- Inventories
Inventories are summarized as follows:
<TABLE>
<CAPTION>
March 31,
-------------------------
1995 1994
---------- ----------
<S> <C> <C>
Finished Goods $ 538,677 $ 203,250
Work in Process 497,583 491,889
Raw Materials 1,176,306 572,839
---------- ----------
$2,212,566 $1,267,978
========== ==========
</TABLE>
F-16
<PAGE> 159
U.S. ALCOHOL TESTING OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1995
NOTE 6 -- Property and Equipment
Property and equipment is summarized as follows:
<TABLE>
<CAPTION>
March 31,
-------------------------
1995 1994
---------- ----------
<S> <C> <C>
Furniture and Fixtures $ 411,965 $ 182,784
Equipment 1,339,602 1,058,359
Equipment -- Network/Per Test 2,030,918 --
Test Equipment 460,978 408,764
Leasehold Improvements 397,567 300,995
Vehicles 183,562 219,591
---------- ----------
4,824,592 2,170,493
Less: Accumulated Depreciation 1,081,606 530,088
---------- ----------
$3,742,986 $1,640,405
========== ==========
</TABLE>
NOTE 7 -- 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 cannot exceed 75% of the
current market value of the REMIC Bonds (see Note 4).
Based upon market and interest fluctuations, the Company could be required
at any time, to sell the REMIC Bonds to repay the demand loans and realize a
material loss on the sale of such Bonds. If this were to occur, the Company's
unrealized losses would have to be recognized.
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 transaction
to mitigate these losses and held the bonds, after experiencing material losses,
in an effort to partially mitigate such losses through anticipated increases in
their market value. Upon such increases in market value the Company sold the
bonds, partially recovering its unrealized losses, and recognized the realized
losses. No investments of this type are anticipated in the future.
F-17
<PAGE> 160
U.S. ALCOHOL TESTING OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1995
NOTE 8 -- Long-Term Debt
Long-term debt is summarized as follows:
<TABLE>
<CAPTION>
March 31,
---------------------
1995 1994
-------- --------
<S> <C> <C>
Capitalized lease obligations, secured by certain equipment, payable in
various monthly installments due from July, 1995 to January,
1999. $112,735 $125,168
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 --
-------- --------
132,735 125,168
Less: Current Portion 53,727 43,647
-------- --------
$ 79,008 $ 81,521
======== ========
</TABLE>
Long-term debt matures as follows:
<TABLE>
<CAPTION>
March 31,
<S> <C>
1996 $ 53,727
1997 38,655
1998 20,679
1999 12,676
2000 and Thereafter 6,998
--------
$132,735
========
</TABLE>
F-18
<PAGE> 161
U.S. ALCOHOL TESTING OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1995
NOTE 9 -- Minority Interest
The Company's consolidated financial statements at March 31, 1994 include
100% of the assets, liabilities and losses of U.S. Drug Testing, Inc., a 67%
owned publicly traded subsidiary and 100% of the assets, liabilities and losses
of Good Ideas Enterprises, Inc., a 60% owned publicly traded subsidiary. The
$3,705,120 minority interest reported on the balance sheet represents the
minority shareholders' interest in the equity of these subsidiaries.
The Company's consolidated financial statements at March 31, 1995 include
100% of the assets, liabilities and losses of U.S. Drug Testing, Inc., a 67%
owned publicly traded subsidiary and 100% of the assets, liabilities and losses
of Good Ideas Enterprises, Inc., 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 shareholders' interest in the equity of these
subsidiaries.
NOTE 10 -- Stockholders' Equity
Recapitalization
During May 1992 the Company amended its Certificate of Incorporation by
increasing its authorized common shares, $.01 par value, from 25,000,000 to
50,000,000.
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 value of these shares were
charged to operations in the respective periods.
F-19
<PAGE> 162
U.S. ALCOHOL TESTING OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1995
NOTE 10 -- Stockholders' Equity -- (Continued)
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.
During the year ended March 31, 1993, 34,050 shares of Class "A" Preferred
Stock were converted into 153,225 shares of Common Stock.
During the year ended March 31, 1995 9,050 shares of Class "A" Preferred
Stock were converted into 40,725 shares of common stock.
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.
During the year ended March 31, 1993, the Placement Agent's option to
acquire 22 Units in connection with the private offering of the Class "B"
Preferred Stock was exercised and 137,500 shares of the stock was issued for
total proceeds of $605,000 to the Company. Also during the year ended March 31,
1993, 1,364,250 shares of Class "B" Preferred Stock were converted into
6,139,125 shares of common stock.
During the year ended March 31, 1994, 127,000 shares of Class "B" Preferred
Stock were converted into 571,500 shares of common stock.
During the year ended March 31, 1995, the remaining outstanding 8,750
shares of Class "B" Preferred Stock were converted into 39,375 shares of common
stock.
F-20
<PAGE> 163
U.S. ALCOHOL TESTING OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1995
NOTE 10 -- Stockholders' Equity -- (Continued)
Registration of Warrants
The Company's Registration Statement filed with the Securities and Exchange
Commission was declared effective during September 1992. The filing registered
3,375,000 shares of common stock underlying an equal amount of warrants in
connection with the Company's October 1991 private placement of the Class "B"
Preferred Stock. The warrants are exercisable at $2.22 per share.
The Company's Registration Statement filed with the Securities and Exchange
Commission was declared effective during May, 1994. The filing registered 81,250
shares of common stock underlying an equal amount of warrants at exercise prices
ranging from $1.06 to $4.00.
During the year ended March 31, 1993 a total of 293,000 of the registered
warrants were exercised for proceeds of approximately $415,000. In addition,
180,000 warrants issued in settlement of a lawsuit (see Note 12) were exercised
for proceeds of $135,000 which represented gross proceeds from warrant exercise
of approximately $550,000. Total expenses in connection with the warrants
exercised amounted to approximately $108,000 consisting of guaranteed payments
on warrant exercise of approximately $76,000 and expense of warrant exercise of
approximately $32,000.
During the year ended March 31, 1994, a total of 1,210,421 of the
registered warrants were exercised 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 of the registered
warrants were exercised for proceeds of approximately $1,770,000.
F-21
<PAGE> 164
U.S. ALCOHOL TESTING OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1995
NOTE 10 -- Stockholders' Equity -- (Continued)
Formation of European Subsidiary
In December 1991 the Company organized U.S. Alcohol & Drug Testing
International, P.L.C. ("PLC"), a United Kingdom Corporation of which the Company
owned 65% upon organization, to market, distribute and handle European sales of
the Company's instruments and products. During January and February 1992
approximately $4,825,000 was raised through a private placement for the Capital
Stock of the European Company with net proceeds amounting to $4,127,592. During
the year ended March 31, 1993 an additional $272,359 of net proceeds was raised
from the private placement.
F-22
<PAGE> 165
U.S. ALCOHOL TESTING OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1995
NOTE 10 -- Stockholders' Equity -- (Continued)
Formation of European Subsidiary -- (Continued)
In May 1992 the Company organized U.S. Alcohol & Drug Testing International
N.V. ("NV"), a Netherlands corporation, to perform essentially the same
functions as the PLC. In the event NV does not attain public status, the
preferred "A" shareholders are entitled to exchange their shares for common
stock of the Company. During March, 1993 the Company extended to the preferred
"A" shareholders the right to exchange their shares for common stock of the
Company, such exchange to be based on the common stock price of $1.17 per share
(4,444,469 shares). European headquarters had been moved to the Netherlands and
the Company's sixty-five (65%) percent equity interest in the PLC was assigned
to the NV thereby constituting the NV as a majority owned subsidiary. The PLC is
dormant and non-operational. In June 1992 the Company converted its preferred
Class B shares of NV to 32,890,000 common shares.
During the period from April through June 1993 all of the preferred "A"
shareholders of the NV subsidiary elected to convert their shares into common
stock of the Company. The conversion resulted in the issuance of 4,444,469
unregistered common shares of the Company which was the subject of a
registration filed by the Company which became effective in May 1994. The
balance of minority interest was transferred to consolidated stockholders'
equity.
F-23
<PAGE> 166
U.S. ALCOHOL TESTING OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1995
NOTE 10 -- Stockholders' Equity -- (Continued)
Good Ideas Acquisition
On June 29, 1992 the Company's 65% owned subsidiary U.S. Alcohol & Drug
Testing International N.V., a Netherlands corporation ("NV"), acquired 55% of
the outstanding capital stock of Good Ideas Enterprises, Inc., then a privately
held Texas corporation ("Good Ideas") which is engaged in the manufacture and
sale of toys, in exchange for 1.5% of the capital stock of NV. The 55% interest
in Good Ideas has been transferred to a wholly-owned subsidiary of NV recently
formed in the Netherlands.
The transaction provided for the issuance of 1,000,000 shares of NV capital
stock valued at $5,844. The purchase price exceeded the net book value of Good
Ideas by $136,524 and this was assigned as goodwill. The acquisition has been
accounted for as a purchase, and accordingly, the consolidated balance sheet of
the Company includes the assets and liabilities of Good Ideas at March 31, 1994
and 1995, and the consolidated statement of operations includes the results of
operations of Good Ideas from June 29, 1992.
In August, 1993 the Company issued 400,000 shares of common stock to two
officers of Good Ideas in exchange for their holdings of 1,000,000 shares in the
Company's N.V. subsidiary. The per share value of the Company's stock at date of
issuance was $2.4375 and as a result of this transaction the Company recorded
additional goodwill in the amount of $969,156.
In November, 1993, as part of a dispute resolution with its former
consultant, David Brooks, the Company received all Mr. Brooks' 25% equity
interests in both NV and Good Ideas for nominal consideration. As a result, the
Company's interests became one hundred (100%) percent of NV and sixty (60%)
percent of Good Ideas.
F-24
<PAGE> 167
U.S. ALCOHOL TESTING OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1995
NOTE 10 -- Stockholders' Equity -- (Continued)
Initial Public Offering of Good Ideas
In March 1994 the initial public offering of Good Ideas Enterprises, Inc.,
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
Enterprises, Inc. 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
$2.8 Million was added to the additional paid-in-capital of the Company. After
completion of the overallotment the Company's ownership of the subsidiary was
reduced to 59%.
Formation of U.S. Rubber Recycling, Inc.
During November, 1992 the Company acquired the assets of Adflo
International, Inc., a privately owned corporation, and immediately transferred
them to U.S. Rubber Recycling, Inc., a wholly owned subsidiary incorporated in
Delaware on October 13, 1992. U.S. Rubber recycles used tires from which they
manufacture commercial flooring products.
F-25
<PAGE> 168
U.S. ALCOHOL TESTING OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1995
NOTE 10 -- Stockholders' Equity -- (Continued)
Formation of U.S. Rubber Recycling, Inc. -- (Continued)
The transaction provided for the issuance of 185,000 shares of common stock
of the Company valued at $196,563. The transaction was accounted for as a
purchase, and accordingly, the consolidated balance sheet of the Company
includes the assets and liabilities of U.S. Rubber at March 31, 1994 and 1995
and the consolidated statement of operations includes the results of operations
of U.S. Rubber from November 1, 1992.
Formation of Breath Taking Break Through, Inc.
During December, 1992 the Company sold its finished inventory of coin
operated alcohol testing machines to Breath Taking Break Through, Inc., a wholly
owned subsidiary incorporated in Delaware on October 8, 1992. Breath Taking
Break Through is in the business of placing the machines in bars and restaurants
for the collection of vending revenues.
Formation of U.S. Drug Testing, Inc.
On January 1, 1993 the Company transferred all of its assets and
intellectual property rights utilized in its drug testing operations to U.S.
Drug Testing, Inc. a wholly owned subsidiary incorporated in Delaware on October
8, 1992.
Initial Public Offering of U.S. Drug Testing, Inc.
U.S. Drug Testing, Inc. 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. The subsidiary 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.
F-26
<PAGE> 169
U.S. ALCOHOL TESTING OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1995
NOTE 10 -- Stockholders' Equity -- (Continued)
Initial Public Offering of U.S. Drug Testing, Inc. -- (Continued)
As a result of the initial public offering and overallotment, approximately
$4.8 Million was added to the additional paid-in-capital of the Company. After
completion of the transaction, the Company holds a 67% interest in the
subsidiary.
Private Placement
In March, 1995 the Company sold 1,050,000 shares of its common stock in a
private placement for gross proceeds of approximately $1,694,000. Expenses of
the private placement were approximately $124,000.
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 Company's common stock valued at $1,564,642.
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 $593,261, by $818,475 and this has been assigned to
goodwill. The acquisitions have been accounted for as a purchase, and
accordingly, the consolidated balance sheet of the Company includes the assets
and liabilities of Alconet at March 31, 1995, and the consolidated statement of
operations includes the operations of Alconet from March 30, 1995, which were
immaterial.
F-27
<PAGE> 170
U.S. ALCOHOL TESTING OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1995
NOTE 10 -- Stockholders' Equity -- (Continued)
Alconet and Dakotanet Acquisitions -- (Continued)
The following unaudited proforma combined results of operations for the
years ended March 31, 1995 and 1994 assumes the acquisition of 100% of the
issued and outstanding common stock of Alconet, Inc. and 100% of the net equity
of Dakotanet, LLC occurred as of April 1, 1993.
<TABLE>
<CAPTION>
Year Ended March 31,
----------------------------
1995 1994
----------- ------------
(Unaudited)
<S> <C> <C>
Net Revenues $ 8,963,635 $ 7,183,417
---------- -----------
Net Loss $(7,490,097) $(10,091,689)
---------- -----------
Loss Applicable to Common Stock $(7,531,701) $(10,131,873)
---------- -----------
Net Loss Per Common Stock $ (.28) $ (.44)
========== ===========
</TABLE>
NOTE 11 -- 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 all of the 450,000 shares of common
stock reserved for issuance under the Plan were granted as stock options 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 date of grant. The options expire after ten
years.
F-28
<PAGE> 171
U.S. ALCOHOL TESTING OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1995
NOTE 11 -- Incentive Compensation Plan and Outstanding Common Stock Purchase
Warrants -- (Continued)
Common shares reserved for stock options and for outstanding stock purchase
warrants is 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, 1992 -0- $ -0- -0- $ -0- 5,134,359 $ .44-2.67
Granted -0- -0- -0- -0- 763,266 1.06-4.00
Cancelled -0- -0- -0- -0- (78,750) 1.33
Exercised -0- -0- -0- -0- (473,000) 1.33
------- ----- ------ ----- --------- ----------
Outstanding -- March 31, 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
------- ----- ------ ----- --------- ----------
-0-
Outstanding -- March 31, 1994 -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
Cancelled -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 $2.38 30,000 $2.38 4,240,415 $1.06-4.00
======= ===== ====== ===== ========= ==========
</TABLE>
During May, 1994 the Company issued a three year warrant for the purchase
of 50,000 shares of common stock at $1.81 per share to a consultant for services
rendered to the Company.
During May, 1994 the Board of Directors authorized the issuance of five
year warrants, which were issued in August, 1994, for the purchase of 750,000
shares of common stock at $1.81 to three consultants for services to be rendered
to the Company. The warrants are unregistered and cannot be exercised before one
year from the date of issuance.
During the year ended March 31, 1995 the Company granted three year
warrants to employees to acquire a net of 69,750 shares of common stock at
prices ranging from $2.19 -- $2.50.
F-29
<PAGE> 172
U.S. ALCOHOL TESTING OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1995
NOTE 12 -- Settlement of Litigation
During the year ended March 31, 1993 the Company settled three outstanding
lawsuits. Terms of the settlements consisted of $360,125 in cash and the
issuance of 180,000 common stock purchase warrants with an excess of market
value over exercise price aggregating $292,500. The warrants were exercised
during the year ended March 31, 1993. These settlements have been charged to
operations during the year ended March 31, 1993. A litigation commenced by a
former consultant was settled during the year ended March 31, 1993 for 146,250
warrants. These warrants were the subject of the litigation for which such
settlement was made and carried the same terms as those original warrants that
were granted in January 1991 with an exercise price of $1.33 per share, which
represented market value at the date of original grant.
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 NV for $577,500 and
thereafter convert those shares to the Company's common stock at the same
conversion price of $1.17. As a result, Brooks was issued 493,590 shares of the
Company's common stock.
In November, 1993 the Company executed a stipulation of settlement in the
securities class action litigation which was subject to Court approval (see Note
19). The Company agreed to pay $1,600,000 cash to the class and $3,000,000 worth
of its common stock, or a total consideration of $4,600,000
F-30
<PAGE> 173
U.S. ALCOHOL TESTING OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1995
NOTE 12 -- Settlement of Litigation -- (Continued)
to completely settle both class actions now pending against the Company and all
defendants. This amount has been charged to operations during the year ended
March 31, 1994. The Company funded the $1,600,000 cash portion (see Note 3)
through exercised warrants and options of certain co-defendants in the class
action. As of March 31, 1994 expenditures from the escrow funds amounted to
$21,329.
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 the Company's common stock was 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,
since 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 Mr. Brooks' 25% equity
interests in both NV and Good Ideas for nominal consideration. As a result, the
Company's interests became one hundred (100%) percent of NV and sixty (60%)
percent of Good Ideas (see Note 10).
F-31
<PAGE> 174
U.S. ALCOHOL TESTING OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1995
NOTE 13 -- Loss on Write-Down of Note Receivable
On October 25, 1991 the Company purchased a $320,000 principal amount
convertible note of The Thunder Group, Inc., formerly Hemodynamics,
Incorporated, a publicly owned Delaware Corporation. The note, with interest at
22% per annum, was convertible into 1,523,809 shares of the common stock of
Hemodynamics, Incorporated and was due January 31, 1993.
At December 31, 1992 accrued interest on the note amounted to $35,200. The
note was not paid at its due date and in February 1993 the Company participated
in the filing of an involuntary bankruptcy petition against The Thunder Group,
Inc. At March 31, 1993 the Company recorded a reserve against the collectability
of the note in the amount of $177,600 and reported such loss in that year. This
reserve was deemed to be adequate at that time based upon available information.
At March 31, 1994 the remaining balance of this note was written-off as it was
deemed to be uncollectible.
The entire balance of the Note Receivable was not written down at the time
of the filing of the involuntary bankruptcy because the Company was aware of a
significant asset of The Thunder Group that had been sold just prior to the
filing. The Company petitioned to have such sale overturned and the asset
returned. If successful, the Company was of the opinion that there would have
been sufficient net assets to realize 50% of the value of the Note Receivable.
When such asset sale was upheld, the Company wrote off the balance of the Note
Receivable.
NOTE 14 -- 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 and marketable securities. At
times, such amounts are in excess of the FDIC and SIPC insurance limits.
F-32
<PAGE> 175
U.S. ALCOHOL TESTING OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1995
NOTE 14 -- Commitments and Contingencies -- (Continued)
Concentration of Credit Risk (Continued)
The concentration of REMIC Bonds are subject to both market and interest
rate fluctuations. The Company has borrowed against the REMIC Bonds and such
borrowings can be subject to margin calls. The Company has no hedging
transactions to offset such risks.
The Company's customer base is comprised primarily of major national
retailers. The financial strength of these customers are routinely reviewed and
evaluated.
Employment and Consulting Agreements
The Company entered into new Employment Agreements with its four 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 $685,000, as well as for reimbursement of related business expenses incurred.
The Company and its subsidiaries have entered into three year employment
agreements with certain of its officers and employees which will terminate at
various dates through the end of July, 1997. The agreements provide for
aggregate annual minimum salaries of approximately $1,102,000 as well as
reimbursement of related business expenses incurred.
F-33
<PAGE> 176
U.S. ALCOHOL TESTING OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1995
NOTE 16 -- Industry Segments
Certain information concerning the Company's operations in its different
industry segments is presented below:
<TABLE>
<CAPTION>
Year Ended March 31
---------------------------------------
1995 1994 1992
----------- ----------- -----------
<S> <C> <C> <C>
Sales:
Substance Abuse Testing -- Alcohol $ 1,695,215 $ 442,728 $ 611,739
Substance Abuse Testing -- Drug -- -- --
Toys 4,606,039 5,544,221 3,324,402
Recycled Rubber Products 2,135,896 1,195,468 229,963
----------- ----------- -----------
$ 8,437,150 $ 7,182,417 $ 4,166,104
=========== =========== ===========
Loss From Operations:
Substance Abuse Testing -- Alcohol $(4,096,348) $(7,265,417) $(5,818,062)
Substance Abuse Testing -- Drug (2,363,449) (1,876,341) (257,422)
Toys (905,159) (425,999) (355,459)
Recycled Rubber Products (511,171) (368,040) (178,681)
----------- ----------- -----------
$(7,876,127) $(9,935,797) $(6,609,624)
=========== =========== ===========
Identifiable Assets:
Substance Abuse Testing -- Alcohol $ 4,891,262 $ 5,369,263 $ 3,436,957
Substance Abuse Testing -- Drug 4,444,105 5,268,820 462,732
Toys 3,950,982 5,604,295 1,908,633
Recycled Rubber Products 811,199 606,395 492,280
----------- ----------- -----------
$14,097,548 $16,848,773 $ 6,300,602
=========== =========== ===========
Capital Expenditures:
Substance Abuse Testing -- Alcohol $ 2,159,716 $ 178,865 $ 841,961
Substance Abuse Testing -- Drug 99,262 325,046 39,035
Toys 54,715 126,310 66,421
Recycled Rubber Products 241,440 37,315 6,743
----------- ----------- -----------
$ 2,555,133 $ 667,536 $ 954,160
=========== =========== ===========
Depreciation and Amortization:
Substance Abuse Testing -- Alcohol $ 532,496 $ 288,431 $ 174,333
Substance Abuse Testing -- Drug 162,871 92,245 16,939
Toys 45,038 26,146 5,856
Recycled Rubber Products 59,453 40,895 13,559
----------- ----------- -----------
$ 799,858 $ 447,717 $ 210,687
=========== =========== ===========
</TABLE>
F-39
<PAGE> 177
U.S. ALCOHOL TESTING OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1995
NOTE 16 -- Industry Segments -- (Continued)
Major Customers and Suppliers
During the years ended March 31, 1995, 1994 and 1993, a small group of
customers accounted for a major share of the Company's consolidated net sales
for such periods. The following is a summary of customers comprising 10% or
greater of the Company's consolidated net sales:
<TABLE>
<CAPTION>
Percentage of
Number of Consolidated
Period Customers Net Sales
------------------------------------------------------ --------- -----------------
<S> <C> <C>
Year Ended March 31, 1995 Three 32%, 21% and 11%
Year Ended March 31, 1994 One 44%
Year Ended March 31, 1993 Three 24%, 17% and 12%
</TABLE>
No other customers accounted for 10% or more of consolidated net sales.
Included in accounts receivable as of March 31, 1995, 1994 and 1993 are
amounts due from its major customers totaling $267,873, $978,442, and $339,598,
respectively.
During the year ended March 31, 1995 the Company contracted for the
manufacture of approximately 38% of its products from three suppliers.
F-40
<PAGE> 178
U.S. ALCOHOL TESTING OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1995
NOTE 17 -- Subsequent Events
On April 1, 1995 the Company entered into employment agreements with two
officers of its recently acquired Alconet subsidiary. The agreements commenced
April 1, 1995 and terminate on March 31, 1998 and provide for annual aggregate
minimum salaries in the amount of $140,000, as well as for reimbursement of
related business expenses incurred.
On May 5, 1995, Keith Parten resigned as director, Chief Operating Officer,
and President of Good Ideas Enterprises, Inc.. Mr. Parten's employment contract
was terminated with no further financial obligation on the part of Good Ideas.
Mr. Parten returned to Good Ideas 126,520 shares of his common stock. Such
shares were cancelled by Good Ideas. The cancellation of these shares increased
the Company's ownership interest in Good Ideas from 59% to 61%.
On May 12, 1995 Good Ideas hired a new Chief Operating Officer and
President, and appointed him to the Board of Directors. Good Ideas and the new
officer entered into a two (2) year contract to commence June 1, 1995. The
agreement provides for an aggregate minimum annual salary of $110,000 as well as
reimbursement of related business expenses incurred. In addition, the officer
will receive 10,000 shares of the Common Stock of Good Ideas.
F-41
<PAGE> 179
U.S. ALCOHOL TESTING OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1995
(Unaudited)
<TABLE>
<S> <C>
ASSETS
Current Assets:
Cash and Cash Equivalents $ 635,558
Trading Securities 42,188
Accounts Receivable (Net of Allowance For Bad Debts of $112,812) 707,055
Other Receivables 47,958
Inventories 2,095,248
Prepaid Expenses 403,944
------------
Total Current Assets 3,931,561
Property and Equipment (Net of Accumulated Depreciation of $1,835,089) 3,111,714
Other Assets 1,943,851
------------
Total Assets $ 8,987,126
===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-42
<PAGE> 180
U.S. ALCOHOL TESTING OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1995
(Unaudited)
<TABLE>
<S> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts Payable $ 933,634
Accrued Expenses and Taxes 739,834
Current Portion of Long-Term Debt 39,490
Brokerage Loan Payable --
Preferred Stock Dividend Payable 14,405
------------
Total Current Liabilities 1,727,363
Long-Term Debt -- Net of Current Portion 66,365
Commitments and Contingencies (See Note 10) --
------------
Total Liabilities 1,793,728
------------
Minority Interest 1,873,099
------------
Stockholders' Equity:
Preferred Stock, Class "A", $.01 Par Value, 500,000 Shares Authorized, Issued
and Outstanding 41,157 Shares (Liquidation Preference of $205,785)........ 412
Preferred Stock, Class "B", $.01 Par Value, 1,500,000 Shares Authorized,
Issued and Outstanding -0- Shares......................................... --
Common Stock, $.0l Par Value, 50,000,000 Shares Authorized, Issued and
Outstanding 30,613,510 Shares............................................. 306,135
Additional Paid-In Capital................................................... 41,873,384
Accumulated Deficit.......................................................... (36,859,632)
------------
Total Stockholders' Equity 5,320,299
------------
Total Liabilities and Stockholders' Equity..................................... $ 8,987,126
===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-43
<PAGE> 181
U.S. ALCOHOL TESTING OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
For the
Nine Months Ended
December 31,
---------------------------
1995 1994
----------- -----------
<S> <C> <C>
Sales $ 3,015,006 $ 7,467,137
----------- -----------
Costs and Expenses:
Cost of Sales (Exclusive of Depreciation Shown Below) 2,268,587 4,850,977
Selling, General and Administrative Expenses (Expenses of
Depreciation Shown Below) 5,820,490 5,952,316
Research and Development 789,506 794,166
Interest 75,864 15,092
Depreciation and Amortization 959,795 393,853
----------- -----------
Total Costs and Expenses 9,914,242 12,006,404
----------- -----------
Loss From Operations (6,899,236) (4,539,267)
Other Income (Expense) 290,792 (618,913)
----------- -----------
Loss Before Minority Interest in Net Loss of Subsidiaries (6,608,444) (5,158,180)
Minority Interest in Net Loss of Subsidiaries, Net of Subsidiary
Preferred Stock Dividends Paid 757,729 748,394
----------- -----------
Net Loss $(5,850,715) $(4,409,786)
========== ==========
Weighted Average Common Shares Outstanding 29,248,777 25,304,817
========== ==========
Loss Applicable to Common Stock
Net Loss $(5,850,715) $(4,409,786)
Preferred Stock Dividend -- Class "A" (14,405) (31,977)
Preferred Stock Dividend -- Class "B" -- (2,425)
----------- -----------
Loss Applicable to Common Stock $(5,865,120) $(4,444,188)
========== ==========
Net Loss Per Common Share $ (.20) $ (.18)
========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-44
<PAGE> 182
U.S. ALCOHOL TESTING OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED DECEMBER 31, 1995
(Unaudited)
<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
Dividend on Class "A" Preferred
Stock -- -- -- (21,607) -- (21,607)
Additional Paid-In Capital Arising
From Surrender of Capital in Good
Ideas Enterprises, Inc. by Minority
Shareholder -- -- -- 97,674 -- 97,674
Issuance of 2,152,469 Shares of Common
Stock in Connection With a Private
Placement -- -- 21,524 3,016,981 -- 3,038,505
Issuance of 20,000 Shares of Common
Stock to Directors for Directors
fees -- -- 200 37,300 -- 37,500
Issuance of 300,000 Shares of Common
Stock in a Connection with a Private
Placement Under Regulation D -- -- 3,000 559,500 -- 562,500
Expenses of Stock Offerings -- -- -- (237,500) -- (237,500)
Other -- -- -- 2 (2) --
Net Loss For Nine Months Ended
December 31, 1995 -- -- -- -- (5,850,715) (5,850,715)
--
---- -------- ----------- ------------ -----------
Balance -- December 31, 1995 $ 412 $-- $306,135 $41,873,384 $(36,859,632) $ 5,320,299
==== == ======== =========== ============ ===========
</TABLE>
- ---------------
(a) Includes 242,469 Shares of Common Stock issued in connection with the price
protection provision.
The accompanying notes are an integral part of the financial statements.
F-45
<PAGE> 183
U.S. ALCOHOL TESTING OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For The
Nine Months Ended
December 31,
-----------------------------
1995 1994
----------- -----------
<S> <C> <C>
Cash Flow From Operating Activities:
Net Loss $(5,850,715) $(4,409,786)
Adjustments to Reconcile Net Loss To Net Cash Used By
Operating Activities:
Provision For Bad Debts (12,337) 40,096
Loss on Disposition of Fixed Assets 28,635 11,653
Gain on Disposition of Fixed Assets -- (2,194)
Depreciation and Amortization 959,795 393,853
Minority Interest in Net Loss of Subsidiary, Net of Subsidiary
Preferred Stock Dividends Paid (757,729) (748,394)
Unrealized Loss (Gain) on Marketable Securities (1,820,703) 837,673
Realized Loss on Marketable Securities 1,550,792 --
Amortization of Bond Discount (779) (2,337)
Value of Common Stock Issued to Directors for Services 37,500 54,375
Value of Common Stock of Subsidiary issued to Officer for
Services 5,000 --
Changes in Operating Assets and Liabilities:
(Increase) Decrease in Accounts Receivable 76,389 (807,760)
(Increase) Decrease in Inventories 117,318 (829,920)
Increase in Prepaid Expenses (161,877) (59,660)
Decrease in Funds in Escrow-Restricted -- 586,941
(Increase) Decrease in Other Receivables 21,810 (174,942)
Increase in Other Assets (18,022) --
Increase (Decrease) in Accounts Payable (564,688) 722,512
Increase (Decrease) in Accrued Expenses and Taxes 267,581 (82,981)
Decrease in Accrued Class Action Settlement -- (586,941)
------------ ------------
Net Cash Used By Operating Activities (6,122,030) (5,057,812)
------------ ------------
</TABLE>
F-46
<PAGE> 184
U.S. ALCOHOL TESTING OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For The
Nine Months Ended
December 31,
-----------------------------
1995 1994
----------- -----------
<S> <C> <C>
Cash Flow From Investing Activities:
Purchase of Property and Equipment (212,373) (2,251,342)
Proceeds from Sales of Fixed Assets 48,188 --
Proceeds From Sales of Trading Securities 3,536,045 --
Other -- Net -- (28,732)
------------ ------------
Net Cash Provided (Used) By Investing Activities 3,371,860 (2,280,074)
------------ ------------
Cash Flow From Financing Activities:
Sales and Issuance of Common Stock 3,601,005 --
Proceeds From Long-Term Debt 17,843 39,077
Payments of Long-Term Debt (44,721) (37,040)
Payment of Dividend on Class "A" Preferred Stock (14,405) (17,572)
Proceeds From Sale of Common Stock By Good Ideas Enterprises,
Inc. -- 326,000
Expenses of Stock Offering of Subsidiary -- (62,046)
Expense of Stock Offerings (237,500) (25,213)
Proceeds of Brokerage Loans Payable 1,000,000 1,127,104
Payments of Brokerage Loans Payable (2,569,592) --
Issuance of Common Stock Upon Exercise of Warrants -- 1,733,318
------------ ------------
Net Cash Provided By Financing Activities 1,752,630 3,083,628
------------ ------------
Increase (Decrease) in Cash and Cash Equivalents (997,540) (4,254,258)
Cash and Cash Equivalents -- Beginning 1,633,098 5,146,969
------------ ------------
Cash and Cash Equivalents -- Ending $ 635,558 $ 892,711
------------ ------------
Supplemental Disclosure of Cash Information:
Cash Paid for Interest $ 75,864 $ 15,092
------------ ------------
Income Taxes Paid -- --
------------ ------------
Non-Cash Financing Activities:
Preferred Stock Dividends Accrued $ 21,606 $ 14,505
------------ ------------
Issuance of Common Stock as Payment of Class Action
Settlement $ -- $ 3,000,000
------------ ------------
Issuance of Common Stock as Payment of Preferred "B"
Dividend $ -- $ 2,425
------------ ------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-47
<PAGE> 185
U.S. ALCOHOL TESTING OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995
(Unaudited)
NOTE 1 -- Basis of Presentation
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.
Trading Securities
Trading securities at December 31, 1995 consist of 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 classifies all of its debt
and marketable equity securities as trading securities. Management determines
the appropriate classification of all securities at the time of purchase and
re-evaluates such designation as of each balance sheet date. The Company's
trading securities are recorded at fair value. Unrealized holding gains and
losses, net of the related tax effect, are included in earnings.
In the opinion of the Company, the accompanying unaudited consolidated
financial statements reflect all adjustments (which include only normal
recurring adjustments) necessary to present fairly the financial position,
results of operations and cash flows for the periods presented.
Results of operations for interim periods are not necessarily indicative of
the results of operations for a full year due to external factors which are
beyond the control of the Company.
F-48
<PAGE> 186
U.S. ALCOHOL TESTING OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995
(Unaudited)
NOTE 2 -- Cash and Cash Equivalents
Cash and cash equivalents are summarized as follows:
<TABLE>
<S> <C>
Cash in Banks $ 484,295
Money Market Funds 151,263
----------
$ 635,558
==========
</TABLE>
NOTE 3 -- Trading Securities
Trading securities are summarized as follows:
<TABLE>
<S> <C>
Marketable Equity Securities $412,206
Federal Home Loan Mortgage Corporation REMIC Bonds --
Federal National Mortgage Association REMIC Bonds --
--------
Marketable Securites at Aggregate Cost 412,206
Less: Unrealized Losses 370,018
--------
Trading Securities at Aggregate Market Value $ 42,188
========
</TABLE>
NOTE 4 -- Inventories
Inventories are summarized as follows:
<TABLE>
<S> <C>
Finished Goods $ 384,079
Work in Process 937,483
Raw Materials 773,686
----------
$2,095,248
=========
</TABLE>
NOTE 5 -- Property and Equipment
Property and equipment is summarized as follows:
<TABLE>
<S> <C>
Furniture and Equipment $ 447,546
Equipment 1,346,411
Equipment -- Network/Per Test 2,098,420
Test Equipment 499,686
Leasehold Improvements 409,828
Vehicles 144,912
----------
4,946,803
Less: Accumulated Depreciation 1,835,089
----------
$3,111,714
=========
</TABLE>
F-49
<PAGE> 187
U.S. ALCOHOL TESTING OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995
(Unaudited)
NOTE 6 -- Long-Term Debt
Long-term debt is summarized as follows:
<TABLE>
<S> <C>
Capitalized lease obligations, secured by certain equipment,
payable in various monthly installments, and due through January
1999. $ 86,426
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, 1955 and due January 15, 2002. 19,429
--------
105,855
Less: Current Portion 39,490
--------
$ 66,365
========
</TABLE>
NOTE 7 -- Minority Interest
The Company's consolidated financial statements at December 31, 1995
include 100% of the assets, liabilities and losses of U.S. Drug Testing, Inc., a
67% owned publicly traded subsidiary and 100% of the assets, liabilities and
losses of Good Ideas Enterprises, Inc., a 61% owned publicly traded subsidiary.
The $1,873,099 minority interest reported on the balance sheet represents the
minority shareholders' interest in the equity of these subsidiaries.
NOTE 8 -- Stockholders' Equity
During August, 1995 the Company sold 1,910,000 shares of common stock in a
private placement and realized proceeds of $3,038,505. During October, 1995 an
additional 242,469 common shares were issued in connection with the price
protection provision of the private placement agreement. Because the shares sold
F-50
<PAGE> 188
U.S. ALCOHOL TESTING OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995
(Unaudited)
were not publicly registered stock they were issued below the existing market
prices. The market price of the Company's stock ranged from $2.12 to $2.50 per
share at the dates of the private placement and the Company received a range
from $1.38 to $1.62 per share from the private placement for an average price of
$1.59 per shares. There was no accounting impact on the Statement of Operations
for the difference between the per share amounts. The subsequent issuance of the
242,469 shares reduced the average price received by the Company to $1.41 per
share.
NOTE 9 -- Industry Segments
<TABLE>
<CAPTION>
For the
Nine Months Ended
December 31,
---------------------------
1995 1994
----------- -----------
<S> <C> <C>
Revenues:
Substance Abuse Testing -- Alcohol $ 901,439 $ 1,232,448
Substance Abuse Testing -- Drug -- --
Toys 1,473,416 4,286,705
Recycled Rubber Products 640,151 1,947,984
----------- -----------
Total $ 3,015,006 $ 7,467,137
========== ==========
Income (Loss) From Operations:
Substance Abuse Testing -- Alcohol $(4,052,749) $(2,435,869)
Substance Abuse Testing -- Drug (1,445,236) (1,589,888)
Toys (1,032,977) (428,415)
Recycled Rubber Products (368,274) (85,095)
----------- -----------
Total $(6,899,236) $(4,539,267)
========== ==========
</TABLE>
NOTE 10 -- Commitments and Contingencies
In June, 1995 the License Agreement with the Department of the Navy was
renegotiated and amended to provide the 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.
Royalties of $100,000 paid under the license agreement during the period ended
December 31, 1995 and royalties of $285,000 were paid during the period ended
December 31, 1994.
F-51
<PAGE> 189
U.S. ALCOHOL TESTING OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995
(Unaudited)
NOTE 11 -- Subsequent Events
During February, 1996, USAT intends to file two Regustration Statements on
Form S-4 with the Securities and Exchange Commission in an attempt, through
Consent Solicitations, to acquire the common shares owned by the minority
interests of U.S. Drug Testing, Inc., its 67% owned public Subsidiary, and Good
Ideas Enterprises, Inc., its 61% owned public Subsidiary, and own 100% of these
companies. There is no assurance that either solicitation will be successfully
completed..
On February 2, 1996 USAT signed a non-binding leter of intent in connection
with the possible sale of its rubber recycling subsidiary. There is no assurance
that any sale will be successfully completed.
F-52
<PAGE> 190
[WOLINETZ, GOTTLIEB & LAFAZAN, P.C. LETTERHEAD]
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors and Shareholders
U.S. Drug Testing, Inc.
Rancho Cucamonga, California
We have audited the accompanying balance sheets of U.S. Drug Testing, Inc. (A
Development Stage Enterprise) as of March 31, 1995 and 1994, and the related
statements of operations, stockholders' equity and cash flows for the years
ended March 31, 1995 and 1994, the period October 8, 1992 (Inception) to March
31, 1993 and the period October 8, 1992 (Inception) to 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 material respects, the financial position of U.S. Drug Testing, Inc. as of
March 31, 1995 and 1994, and the results of its operations and its cash flows
for the years ended March 31, 1995 and 1994, the period October 8, 1992
(Inception) to March 31, 1993 and the period October 8, 1992 (Inception) to
March 31, 1995 in conformity with generally accepted accounting principles.
We have also audited Schedule I of U.S. Drug Testing, Inc. as of March 31, 1995
and 1994, Schedule II as of March 31, 1995 and Schedules V and VI for the years
ended March 31, 1995 and 1994 and the period October 8, 1992 (Inception) to
March 31, 1993. These schedules are presented for purposes of complying with
rules of the Securities and Exchange Commission and are not part of the basic
financial statements. In our opinion, these schedules present fairly, in all
material respects, the information required to be set forth therein.
WOLINETZ, GOTTLIEB & LAFAZAN, P.C.
Rockville Centre, New York
May 26, 1995
F-53
<PAGE> 191
U.S. DRUG TESTING, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
BALANCE SHEET
ASSETS
<TABLE>
<CAPTION>
MARCH 31,
-------------------------------
1995 1994
---------- ----------
<S> <C> <C>
Current Assets:
Cash and Cash Equivalents $ 49,368 $ 1,067,922
Trading Securities 3,208,405 3,439,595
Prepaid Expenses and Other Current Assets 65,297 41,830
Note Receivable -- Parent 488,519 --
---------- ----------
Total Current Assets 3,811,589 4,549,347
---------- ----------
Property and Equipment (Net of Accumulated Depreciation
of $238,608 at March 31, 1995 and $111,350 at
March 31, 1994) 604,191 657,662
---------- ----------
Other Assets:
Patents (Net of Accumulated Amortization of $40,811 at
March 31, 1995 and $5,199 at March 31, 1994) 20,830 46,809
Other Assets 7,495 15,002
---------- ----------
Total Other Assets 28,325 61,811
---------- ----------
Total Assets $ 4,444,105 $ 5,268,820
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts Payable $ 50,775 $ 54,850
Accrued Expenses 72,788 23,059
Current Portion of Long-Term Debt 29,111 29,955
Loan Payable -- Parent -- 81,121
Brokerage Loan Payable 1,569,592 --
---------- ----------
Total Current Liabilities 1,722,266 188,985
Long-Term Debt 24,147 49,926
---------- ----------
Commitments and Contingencies (See Note 11)
Total Liabilities 1,746,413 238,911
---------- ----------
Stockholders' Equity:
Common Stock, $.001 Par Value; 50,000,000 shares
Authorized, Issued and Outstanding 5,221,900 Shares
at March 31, 1995 and at March 31, 1994 5,222 5,222
---------- ----------
Additional Paid-In Capital 7,542,401 7,542,401
Deficit Accumulated in the Development Stage (4,849,931) (2,517,714)
---------- ----------
Total Stockholders' Equity 2,697,692 5,029,909
---------- ----------
Total Liabilities and Stockholders' Equity $ 4,444,105 $ 5,268,820
========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-54
<PAGE> 192
U.S. DRUG TESTING, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
For the Period Cumulative From
For The Year For The Year October 8, 1992 October 8, 1992
Ended Ended (Inception) To (Inception) To
March 31, 1995 March 31, 1994 March 31, 1993 March 31, 1995
-------------- -------------- --------------- ---------------
<S> <C> <C> <C> <C>
Revenues $ - $ - $ - $ -
----------- ----------- ----------- -----------
Costs and Expenses:
Selling, General and
Administrative Expenses 850,400 604,185 146,316 1,600,901
Research and Development 886,219 728,272 90,960 1,705,451
Depreciation and Amortization 162,871 92,245 16,939 272,055
Interest Expense - Parent 3,319 31,639 3,207 38,165
Management Fees - Parent 420,000 420,000 - 840,000
Interest Expense 40,640 - - 40,640
----------- ----------- ----------- -----------
Total Costs and Expenses 2,363,449 1,876,341 257,422 4,497,212
----------- ----------- ----------- -----------
Loss From Operations ( 2,363,449) ( 1,876,341) ( 257,422) ( 4,497,212)
----------- ----------- ----------- -----------
Other Income (Expense):
Interest Income 245,139 85,695 - 330,834
Unrealized Loss on
Marketable Securities ( 234,307) ( 469,646) - ( 703,953)
Interest Income - Parent 20,400 - - 20,400
----------- ----------- ----------- -----------
Total Other Income
(Expense) 31,232 ( 383,951) - ( 352,719)
----------- ----------- ----------- -----------
Net Loss ($2,332,217) ($2,260,292) ($ 257,422) ($4,849,931)
----------- ----------- ----------- -----------
Weighted Average Common
Shares Outstanding 5,221,900 4,342,458 3,500,000
----------- ----------- -----------
Net Loss Per Common Share ($ .45) ($ .52) ($ .07)
----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-55
<PAGE> 193
U.S. DRUG TESTING, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE PERIOD OCTOBER 8, 1992 (INCEPTION) TO MARCH 31, 1995
<TABLE>
<CAPTION>
Deficit
Accumulated
Additional in the
Common Paid-In Development
Stock Capital Stage Total
-------------- -------------- --------------- ---------------
<S> <C> <C> <C> <C>
Balance - October 8, 1992 $ -0- $ -0- $ -0- $ -0-
Issuance of 3,500,000 Shares
of Common Stock For Value of
Assets Transferred From Parent 3,500 445,186 -- 448,686
Net Loss For The Period Ended
March 31, 1993 -- -- (257,422) (257,422)
---------- --------- ----------- ----------
Balance - March 31, 1993 3,500 445,186 (257,422) 191,264
Sale of 1,721,900 Shares of
Common Stock in Connection With
Initial Public Offering,
Net of Offering Costs 1,722 7,097,215 -- 7,098,937
Net Loss For The Year
Ended March 31, 1994 -- -- (2,260,292) (2,260,292)
---------- ---------- ----------- ----------
Balance - March 31, 1994 5,222 7,542,401 (2,517,714) 5,029,909
Net Loss For The Year
Ended March 31, 1995 -- -- (2,332,217) (2,332,217)
---------- --------- ----------- ----------
Balance - March 31, 1995 $ 5,222 $7,542,401 $(4,849,931) $2,697,692
========== ========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-56
<PAGE> 194
U.S. DRUG TESTING, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
For The Period Cumulative From
For The Year For The Year October 8, 1992 October 8, 1992
Ended Ended (Inception) To (Inception) To
March 31, 1995 March 31, 1994 March 31, 1993 March 31, 1995
-------------- -------------- --------------- ---------------
<S> <C> <C> <C> <C>
Cash Flow From Operating Activities:
Net Loss ($2,332,217) ($2,260,292) ($257,422) ($4,849,931)
Adjustments to Reconcile Net Loss to
Net Cash Used by Operating
Activities:
Depreciation and Amortization 162,871 92,245 16,939 272,055
Disposal of Property and Equipment 25,475 -- -- 25,475
Unrealized Loss on Marketable
Securities 234,307 469,646 -- 703,953
Amortization of Bond Discount (3,116) (960) -- (4,076)
Changes in Operating Assets and Liabilities:
Increase in Prepaid Expenses and
Other Current Assets (23,467) (40,530) (1,300) (65,297)
(Increase) Decrease in Other Assets 7,507 (15,002) -- (7,495)
Increase (Decrease) in Accounts Payable (4,075) 34,976 19,874 50,775
Increase (Decrease) in Accrued Expenses 49,729 (11,512) 34,571 72,788
----------- ------------ ---------- -----------
Net Cash Used By Operating Activities (1,882,986) (1,731,429) (187,338) (3,801,753)
----------- ------------ ----------- -----------
Cash Flow From Investing Activities:
Purchase of Marketable Securities -- (3,908,281) -- (3,908,281)
Purchases of Property and Equipment (99,262) (325,046) (39,035) (463,343)
Additional Patent Costs (9,635) (12,514) -- (22,149)
----------- ------------ ----------- -----------
Net Cash Used by Investing Activities (108,897) (4,245,841) (39,035) (4,393,773)
----------- ------------ ----------- -----------
Cash Flow From Financing Activities:
Sales of Common Stock -- 8,609,600 11,626 8,621,226
Expenses of Stock Offering -- (1,510,663) -- (1,510,663)
Payments of Loan to Parent (488,519) -- -- (488,519)
Proceeds of Loan Payable - Parent -- 1,082,759 217,023 1,299,782
Payment of Loan Payable - Parent (81,121) (1,218,661) -- (1,299,782)
Proceeds of Long-Term Debt 11,707 89,865 -- 101,572
Payments of Long-Term Debt (38,330) (9,984) -- (48,314)
Proceeds of Brokerage Loan Payable 1,674,683 -- -- 1,674,683
Payments of Brokerage Loan Payable (105,091) -- -- (105,091)
----------- ------------ ----------- -----------
Net Cash Provided By Financing Activities 973,329 7,042,916 228,649 8,244,894
----------- ------------ ----------- -----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-57
<PAGE> 195
U.S. DRUG TESTING, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENT OF CASH FLOWS
(Continued)
<TABLE>
<CAPTION>
For The Period Cumulative From
For The Year For The Year October 8, 1992 October 8, 1992
Ended Ended (Inception) To (Inception) To
March 31, 1995 March 31, 1994 March 31, 1993 March 31, 1995
-------------- -------------- --------------- ---------------
<S> <C> <C> <C> <C>
Increase (Decrease) in Cash
and Cash Equivalents (1,018,554) 1,065,646 2,276 49,368
Cash and Cash Equivalents --
Beginning of Period 1,067,922 2,276 -- --
----------- ---------- --------- ---------
Cash and Cash Equivalents --
End of Period $ 49,368 $1,067,922 $ 2,276 $ 49,368
----------- ---------- --------- ---------
Supplemental Disclosure of Cash
Information:
Cash Paid For Interest $ 43,959 $ 34,846 $ -- $ 78,805
----------- ---------- --------- ---------
Income Taxes Paid $ -- $ -- $ -- $ --
----------- ---------- --------- ---------
Non-Cash Financing Activities:
Value of Common Stock Issued
For The Transfer of Assets
at Carrying Value From Parent $ -- $ -- $ 437,060 $ 437,060
----------- ---------- --------- ---------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-58
<PAGE> 196
U.S. DRUG TESTING, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1995
NOTE 1 - Summary of Significant Accounting Policies
Organization and Business
U.S. Drug Testing, Inc. ("the Company") was incorporated October 8,
1992 under the laws of the State of Delaware as a wholly owned subsidiary of
U.S. Alcohol Testing of America, Inc. ("USAT"), a publicly owned corporation and
is presently a 67% owned subsidiary of USAT (see Note 9). The Company commenced
activities on January 1, 1993 and is engaged in the design, manufacture and
marketing of certain patented technology known as the "Flow Immunosensor"
developed by U.S. Navy Department scientists for the detection of drugs of
abuse.
Cash and Cash Equivalents
The Company considers all highly liquid cash investments with a
maturity of three months or less when purchased to be cash equivalents.
Trading Securities
Marketable securities at March 31, 1995, consists of mortgage-backed
debt 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.
F-59
<PAGE> 197
U.S. DRUG TESTING, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1995
NOTE 1 -- Summary of Significant Accounting Policies (Continued)
------------------------------------------
Trading Securities (Continued)
------------------
Prior to the adoption of SFAS No. 115, 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 classifies all of its debt
securities as trading securities. Management determines the appropriate
classification of all securities at the time of purchase and reevaluates such
designation as of each balance sheet date. The Company's trading securities are
recorded at fair value. Unrealized holding gains and losses, net of the related
tax effect, are included in earnings.
Property and Equipment
----------------------
Property and equipment is stated at cost. Depreciation is computed by
the straight-line method over the estimated useful lives of the related assets
which range from 5 to 13 years. Expenditures for maintenance and repairs are
charged to expense as incurred whereas major betterments and renewals are
capitalized.
Patents
--------
The costs of patents is being amortized over its expected useful life
of 17 years using the straight-line method.
Research and Development Costs
------------------------------
Research and development costs are expensed currently.
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-60
<PAGE> 198
U.S. DRUG TESTING, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1995
NOTE 1 - Summary of Significant Accounting Policies (Continued)
Income Taxes
------------------------------------------
The Company accounts for income taxes under Financial Accounting
Standards Statement 109, "Accounting for Income Taxes". The objective of the
asset and liability method used under Statement 109 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.
NOTE 2 - Cash and Cash Equivalents
-------------------------
Cash and cash equivalents are summarized as follows;
<TABLE>
<CAPTION>
March 31,
---------------------------
1995 1994
---------- ----------
<S> <C> <C>
Cash in Banks $ 21,298 $ 19,704
Money Market Funds 28,070 1,048,218
---------- ----------
$ 49,368 $1,067,922
========== ==========
</TABLE>
NOTE 3 - Trading Securities
------------------
Trading securities are summarized as follows:
<TABLE>
<CAPTION>
March 31,
---------------------------
1995 1994
---------- ----------
<C> <C>
Federal Home Loan Mortgage
Corporation REMIC Bonds $3,428,998 $3,426,488
Federal National Mortgage
Association REMIC Bonds 483,360 482,753
---------- ----------
3,912,358 3,909,241
Less: Allowance For Unrealized
Loss 703,953 469,646
---------- ----------
$3,208,405 $3,439,595
========== ==========
</TABLE>
At March 31, 1995 the trading securities were collateral for the brokerage loan
payable (see Note 7).
F-61
<PAGE> 199
U.S. DRUG TESTING, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1995
NOTE 4 -- Property and Equipment
Property and equipment is summarized as follows:
<TABLE>
<CAPTION>
MARCH 31,
---------------------
1995 1994
-------- --------
<S> <C> <C>
Furniture, Fixtures and Equipment $262,855 $177,600
Test Equipment 371,122 396,597
Leasehold Improvements 208,822 194,815
-------- --------
842,799 769,012
Less: Accumulated Depreciation 238,608 111,350
-------- --------
$604,191 $657,662
======== ========
</TABLE>
NOTE 5 -- Note Receivable - Parent
At March 31, 1995 the note receivable - parent represents demand loans
made to the Parent due on or before December 31, 1995. The note bears monthly
interest at the rate paid by the Company on its brokerage loan payable. Such
interest rate was 9% per annum at March 31, 1995. The note is secured by the
Parent's shares in the Company.
NOTE 6 -- Loan Payable - Parent
At March 31, 1994 the loan payable - parent consisted of unsecured
advances made to the Company with no specific repayment terms. The loan carried
interest at 9% per annum.
F-62
<PAGE> 200
U.S. DRUG TESTING, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1995
NOTE 7 - 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 cannot exceed 75%
of the current market value of the REMIC Bonds (see Note 3).
Based upon market and interest fluctuations, the Company could be
required at any time, to sell the REMIC Bonds to repay the demand loans and
realize a material loss on the sale of such Bonds. If this were to occur, the
Company's unrealized losses would have to be recognized.
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
transaction 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 unrealized losses, and
recognized the realized losses. No investments of this type are anticipated in
the future.
F-63
<PAGE> 201
U.S. DRUG TESTING, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1995
NOTE 8 - Long-Term Debt
---------------
Long-term debt is summarized as follows:
<TABLE>
<CAPTION>
March 31,
---------------------
1995 1994
-------- --------
<S> <C> <C>
Capitalized lease obligations, secured by
certain equipment, payable in installments
of $2,496 and $434 monthly, and due from
November 1996 to November 1997. $53,258 $79,881
Less: Current Portion 29,111 29,955
------- -------
$24,147 $49,926
======= =======
Long-term debt matures as follows:
<CAPTION>
<S> <C>
March 31,
1996 $29,111
1997 20,908
1998 3,239
-------
$53,258
=======
</TABLE>
NOTE 9 - Stockholders' Equity
--------------------
Initial Public Offering
-----------------------
On October 5, 1993 the Company completed an initial public offering of
its common stock. The Company sold 1,500,000 shares at $5.00 per share and
netted approximately $6,143,000. In November, 1993 an additional 221,900 shares
were sold pursuant to the offering's over-allotment provision and the Company
netted an additional $956,000.
In connection with the offering, the underwriters were granted for a
nominal fee Common Stock Purchase Warrants entitling the underwriters to
purchase up to 150,000 shares at $7.50 share.
As a result of the sales of these securities, the Company's parent had
its ownership reduced from 100% to 67%.
F-64
<PAGE> 202
U.S. DRUG TESTING, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1995
NOTE 9 - Stockholders' Equity (Continued)
Stock Option/Stock Issuance Plan
In September, 1994, the shareholders ratified the 1994 Stock
Option/Stock Issuance Plan which covers 500,000 shares of the Company's
common stock.
The principal features of the Option Grant Program may be summarized
as follows:
Options granted under the Option Grant Program may be either incentive
stock options designed to meet the requirements of Section 422 of the Internal
Revenue Code or non-statutory options not intended to satisfy such
requirements. The exercise price per share for incentive stock options will not
be less than one hundred percent (100%) of the fair market value per share of
Common Stock on the grant date. For non-statutory options, the exercise price
per share may be less than eighty-five (85%) of such fair market value. No
granted option will have a maximum term in excess of ten (10) years.
In October 1994 the Board of Directors granted 252,000 stock options
with an exercise price of $7 per share to certain officers, directors and key
employees of the Company.
F-65
<PAGE> 203
U.S. DRUG TESTING, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1995
NOTE 9 -- Stockholders' Equity (Continued)
Stock Option/Stock Issuance Plan (Continued)
A summary of the stock option activity for the year ended March 31,
1995 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, 1994
April 1, 1994 -0- $ -0- -0- $ -0-
Granted 242,000 7.00 10,000 7.00
Canceled (24,000) (7.00) -0- -0-
------- ----- ------ -----
Outstanding -- March 31, 1995 218,000 $ 7.00 10,000 $7.00
======= ===== ====== ====
</TABLE>
NOTE 10 -- Income Taxes
For income tax purposes, the Company has a net operating loss
carryforward at March 31, 1995 of approximately $4,146,000 expiring March 31,
2010 if not offset against future federal taxable income.
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,
--------------------------
1995 1994
--------- ---------
<S> <C> <C>
Computed "Expected" Tax Benefit $ 713,000 $ 627,000
Decrease in Tax Benefit
Resulting from:
Net Operating Loss For Which
No Benefit is Currently Available (713,000) (627,000)
--------- ---------
$ -- $ --
========= =========
</TABLE>
F-66
<PAGE> 204
U.S. DRUG TESTING, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1995
NOTE 10 - Income Taxes (Continued)
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,
-------------------------
1995 1994
---------- --------
<S> <C> <C>
Deferred tax assets:
Net Operating Loss Carryforwards $1,410,000 $715,500
Allowances for Unrealized Losses 239,000 164,400
---------- --------
1,649,000 879,900
Less:
Valuation Allowance Under Statement 109 1,649,000 879,900
---------- --------
Net Deferred Tax Assets $ -- $ --
========== ========
</TABLE>
NOTE 11 - Commitments and Contingencies
Concentration of Credit Risk
The Company's financial instruments that are exposed to concentration
of credit risk consist of trading securities. At times, such amounts are in
excess of the SIPC insurance limits.
Employment Agreements
The company has entered into three year employment agreements with
three of its officers which will terminate at various dates through July 1997.
The agreements provide for aggregate annual minimum salaries in the amount of
$382,000 as well as for reimbursement of related business expenses incurred.
F-67
<PAGE> 205
U.S. DRUG TESTING, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1995
NOTE 11 -- COMMITMENTS AND CONTINGENCIES (Continued)
LEASE COMMITMENTS
The Company has entered into an agreement with its Parent Company
commencing January 1, 1993 and terminating on January 31, 1997 sub-leasing a
portion of its Parent's office and factory facilities in Rancho Cucamonga,
California. In addition to rent, the Company will pay for its proportionate
share of real estate taxes and other occupancy costs.
Approximate future minimum payments under this sub-lease are
summarized as follows:
April 1, 1995 - March 31, 1996 $73,000
April 1, 1996 - March 31, 1997 $62,500
Rent has been generally allocated between the Parent and the Company
on the basis of approximate square feet occupied -- 50% Parent, 50% the Company.
Telephone is allocated on a 50%-50% basis.
MATERIAL CONTRACTS
On January 1, 1993 the Company entered into a sub-license agreement
with its parent company in which the Company acquired all of the Parent's
rights under a license agreement with the Department of the Navy.
The Parent company and the Department of the Navy, on January 24,
1992 had entered into a ten year agreement granting the Parent a partial
exclusive patent license to product(s) for drug testing in the United States
and certain foreign countries. The agreement called for a licensing fee (to be
applied as advanced royalties) of $150,000 to be paid during the initial year
of the contract and a royalty percentage of the net selling price of
F-68
<PAGE> 206
U.S. DRUG TESTING, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1995
NOTE 11 -- Commitments and Contingencies (Continued)
Material Contracts (Continued)
royalty products sold with minimum royalties over the next five years of
approximately $2,405,000 and additional royalties of approximately $4,750,000
over an additional five years. Minimum royalties paid by the Company amounted
to $375,000 for the year ended March 31, 1995, $228,750 for the year ended
March 31, 1994 and $45,000 for the three month period ended March 31, 1993.
The Company has obligations to its Parent company for the
royalty payments required by the license agreement. At March 31, 1994 minimum
payments over the remaining initial five year term of the license agreement
approximated $2,131,250 with additional royalties of approximately $4,750,000
over an additional five years.
In November, 1994 the 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.
Management Agreement
On April 1, 1993 the Company entered into a Management
agreement with its Parent which obligated the Company to pay ten (10%) percent
of its product sales in exchange for administrative management services to be
provided by the Parent. The minimum annual management fee had been set at
$300,000.
During July, 1993 the Company amended the management agreement
with its Parent. Under the terms of the revised agreement, which is retroactive
to April 1, 1993, the Company is obligated to pay a fixed annual management fee
of $420,000 plus three (3%) percent of its gross revenues. The term of the
amended agreement is five (5) years from April 1, 1993.
F-69
<PAGE> 207
U.S. DRUG TESTING, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
BALANCE SHEET
DECEMBER 31, 1995
(Unaudited)
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Current Assets:
Cash and Cash Equivalents $ 45,812
Trading Securities
Prepaid Expenses and Other Current Assets 158,945
Notes Receivable -- Parent 917,057
-----------
Total Current Assets 1,121,814
Property and Equipment (Net of Accumulated
Depreciation of $347,906) 534,494
-----------
Other Assets:
Patents (Net of Accumulated Amortization
of $41,788) 19,853
Other Assets 7,495
-----------
Total Other Assets 27,348
-----------
Total Assets $ 1,683,656
===========
LIABILITIES AND STOCKHOLDERS EQUITY
Current Liabilities:
Accounts Payable $ 84,670
Accrued Expenses 65,822
Current Portion of Long-Term Debt 25,326
-----------
Total Current Liabilities 175,818
Long-Term Debt -- Net of Current Portion 4,535
Commitments and Contingencies -----------
Total Liabilities 180,353
-----------
Stockholders' Equity:
Common Stock, $.001 Par Value; 50,000,000 Shares
Authorized, Issued and Outstanding 5,221,900 Shares 5,222
Additional Paid-In Capital 7,542,401
Deficit Accumulated in the Development Stage (6,044,320)
-----------
Total Stockholders' Equity 1,503,303
-----------
Total Liabilities and Stockholders' Equity $ 1,683,656
===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-70
<PAGE> 208
U.S. DRUG TESTING, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENT OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Cumulative
From
October 8,
For The 1992
Nine Months Ended (Inception)
December 31, to
------------------------------- December 31,
1995 1994 1995
----------- ---------- -----------
<S> <C> <C> <C>
Revenues: $ -- $ -- $ --
----------- ---------- -----------
Costs and Expenses:
Selling, General &
Administrative Expenses 266,623 639,194 1,867,524
Research & Development 682,551 533,576 2,388,002
Depreciation & Amortization 110,276 102,118 382,331
Interest Expense - Parent -- 2,805 38,165
Management Fees - Parent 315,000 315,000 1,155,000
Interest Expense 70,786 -- 111,426
----------- ---------- -----------
Total Costs and Expenses 1,445,236 1,592,693 5,942,448
----------- ---------- -----------
Loss From Operations (1,445,236) (1,592,693) (5,942,448)
Other Income (Expense) 250,847 (214,868) (101,872)
----------- ---------- -----------
Net Loss $(1,194,389) $(1,807,561) $(6,044,320)
=========== =========== ===========
Weighted Average Common Shares
Outstanding 5,221,900 5,221,900
----------- -----------
Net Loss Per Common Share $ (.23) $ (.35)
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-71
<PAGE> 209
U.S. DRUG TESTING, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED DECEMBER 31, 1995
(Unaudited)
<TABLE>
<CAPTION>
Deficit
Accumulated
Additional in the
Common Paid-In Development
Stock Capital Stage Total
------ ---------- ----------- -----
<S> <C> <C> <C> <C>
Balance - March 31, 1995 $5,222 $7,542,401 $(4,849,931) $2,697,692
Net Loss For The Nine Months
Ended December 31, 1995 -- -- (1,194,389) (1,194,389)
====== ========== =========== ==========
Balance - December 31, 1995 $5,222 $7,542,401 $(6,044,320) $1,503,303
====== ========== =========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-72
<PAGE> 210
U.S. DRUG TESTING, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENT OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Cumulative
From
October 8,
1992
For The Nine For The Nine (Inception)
Months Ended Months Ended to
December 31, December 31, December 31,
1995 1994 1995
------------ ------------ ------------
<S> <C> <C> <C>
Cash Flow From Operations
Activities:
Net Loss $(1,194,389) $(1,807,561) $(6,044,320)
Adjustments to Reconcile
Net Loss to Net Cash
Used by Operating Activities:
Depreciation and Amortization 110,276 102,118 382,330
Disposal of Property and
Equipment -- -- 25,475
Realized Loss on Marketable
Securities 627,512 -- 627,512
Unrealized Loss on Marketable
Securities (703,953) 405,072 --
Amortization of Bond Discount (779) (2,337) (4,855)
Changes in Operating Assets &
Liabilities:
Increase in Prepaid Expenses
& Other Current Assets (93,648) (15,859) (158,945)
(Increase) Decrease in Other
Assets -- 2,906 (7,495)
Increase in Accounts Payable 33,895 49,077 84,670
Increase (Decrease) in
Accrued Expenses (6,966) 14,028 65,822
----------- ----------- -----------
Net Cash Used by Operating
Activities (1,228,052) (1,252,556) (5,029,806)
----------- ----------- -----------
Cash Flow From Investing
Activities:
Sales of Marketable Securities 3,285,625 -- 3,285,625
Purchases of Marketable
Securities -- -- (3,908,281)
Purchases of Property and
Equipment (39,601) (218,144) (502,944)
Additional Patent Costs -- (11,032) (22,149)
----------- ----------- -----------
Net Cash Provided (Used) By
Investing Activities 3,246,024 (229,175) (1,147,749)
----------- ----------- -----------
Cash Flow From Financing
Activities:
Sales of Common Stock -- -- 8,621,226
Expenses of Stock Offering -- -- (1,510,663)
Payment of Loan to Parent (1,428,538) (586,308) (1,917,057)
Payment of Loan by Parent 1,000,000 -- 1,000,000
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-73
<PAGE> 211
U.S. DRUG TESTING, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENT OF CASH FLOWS
(Unaudited)
(Continued)
<TABLE>
<CAPTION>
Cumulative
From
October 8
1992
For The Nine For The Nine (Inception)
Months Ended Months Ended to
December 31, December 31, December 31,
1995 1994 1995
------------ ------------ ------------
<S> <C> <C> <C>
Cash Flow From Financing
Activities - (continued):
Proceeds of Loan Payable -
Parent -- -- 1,299,782
Payment of Loan Payable -
Parent -- (81,121) (1,299,782)
Proceeds of Long-Term Debt -- -- 101,572
Payments of Long-Term Debt (23,398) (22,467) (71,711)
Proceeds of Brokerage Loan
Payable 1,000,000 1,127,104 2,674,683
Payments of Brokerage Loan
Payable (2,569,592) __ (2,674,683)
----------- ----------- -----------
Net Cash Provided (Used) By
Financing Activities (2,021,528) 437,208 6,223,367
----------- ----------- -----------
Increase (Decrease) in Cash
and Cash Equivalents (3,556) (1,044,524) 45,812
Cash and Cash Equivalents -
Beginning of Period 49,368 1,067,292 __
----------- ----------- -----------
Cash and Cash Equivalents -
End of Period $ 45,812 $ 23,398 $ 45,812
=========== =========== ===========
Supplemental Disclosure of
Cash Information:
Cash Paid For Interest $ 70,786 $ 13,411 $ 149,591
=========== =========== ===========
Income Taxes Paid $ -- $ -- $ --
=========== =========== ===========
Non-Cash Financing Activities:
Value of Common Stock Issued
For The Transfer of Assets
at Carrying Value From
Parent $ -- $ -- $ 437,060
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-74
<PAGE> 212
U.S. DRUG TESTING, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
(Unaudited)
NOTE 1 -- Basis of Presentation
In the opinion of U.S. Drug Testing, Inc. ("U.S. Drug"), the
accompanying unaudited financial statements reflect all
adjustments (which include only normal recurring adjustments)
necessary to present fairly the financial position, results of
operations and cash flows for the periods presented. Results of
operations for interim periods are not necessarily indicative of
the results of operations for a full year due to external
factors which are beyond the control of U.S. Drug.
NOTE 2 -- Cash and Cash Equivalents
Cash and cash equivalents are summarized as follows:
<TABLE>
<S> <C>
Cash in Banks $26,362
Money Market Funds 19,450
-------
$45,812
=======
</TABLE>
F-75
<PAGE> 213
U.S. DRUG TESTING, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995
(Unaudited)
NOTE 3 -- Property and Equipment
----------------------
Property and equipment is summarized as follows:
<TABLE>
<S> <C>
Furniture, Fixtures & Equipment $268,582
Test Equipment 404,996
Leasehold Improvements 208,822
--------
882,400
Less: Accumulated Depreciation 347,906
--------
$534,494
========
</TABLE>
NOTE 4 -- Notes Receivable -- Parent
--------------------------
Notes receivable -- Parent represents demand loans made to U.S.
Alcohol Testing of America, Inc. ("USAT"), U.S. Drug's parent,
and due on or before June 30, 1996. The notes bear monthly
interest at the rate of 8% per annum. The notes are secured by
USAT's shares in U.S. Drug.
NOTE 5 -- Long-Term Debt
--------------
Long-term debt is summarized as follows:
<TABLE>
<S> <C>
Capitalized lease obligations secured
by certain equipment, payable in
installments of $2,496 and $434
monthly, and due from November,
1996 to November, 1997 $29,861
Less: Current Portion 25,326
-------
$ 4,535
=======
</TABLE>
NOTE 6 -- Commitments and Contingencies
-----------------------------
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
F-76
<PAGE> 214
U.S. DRUG TESTING, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995
(Unaudited)
NOTE 6 -- Commitments and Contingencies -- Continued
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 during the nine months ended December 31, 1995
were $25,000 and royalties of $285,000 were paid during the nine
months ended December 31, 1994.
NOTE 7 -- Subsequent Event
During February, 1996, USAT intends to file a Registration
Statement on Form S-4 with the Securities and Exchange
Commission in an attempt, through a consent solicitation, to
acquire the common shares owned by the minority interest and own
100% of U.S. Drug. There is no assurance that such solicitation
will be successfully completed.
F-77
<PAGE> 215
APPENDIX A
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER dated as of April 23, 1996 by and among
U.S. Alcohol Testing of America, Inc., a Delaware corporation ("USAT"), U.S.
Drug Acquisition Corp., a Delaware corporation ("Acquisition Corp."), and U.S.
Drug Testing, Inc., a Delaware corporation ("U.S. Drug").
WITNESSETH:
WHEREAS, of the 5,221,900 shares of the common stock, $.001 par value
(the "U.S. Drug Common Stock"), of U.S. Drug outstanding as of the date hereof,
USAT is the owner of 3,500,000 shares and 1,721,900 shares (the "Minority U.S.
Drug Common Stock") are owned by persons other than USAT (the "U.S. Drug
Minority Stockholders");
WHEREAS, the Board of Directors of each of USAT and Acquisition Corp.
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") and Section 368(a) of the
Internal Revenue Code of 1986, as amended (the "Code");
WHEREAS, because of the relationships of all three of the directors of
U.S. Drug to USAT as former directors thereof, as current or former officers
thereof and as stockholders thereof, the Board of Directors of U.S. Drug has
only authorized execution and delivery of the Agreement on the condition that
approval of the subject merger by U.S. Drug shall only be effected as a result
of the obtaining of consents thereto from the holders of more than 50% of the
Minority U.S. Drug Common Stock;
WHEREAS, the Board of Directors of U.S. Drug intends to, and shall,
submit this Agreement and the subject merger to the stockholders of U.S. Drug
for approval to the extent required by the applicable provisions of the GCL; and
WHEREAS, in connection with the subject merger and the solicitation of
stockholder consents thereto, USAT shall file a Registration Statement on Form
S-4 (the "Registration Statement") with the Securities and Exchange Commission
(the "SEC") 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 U.S. Drug Minority
Stockholders (such prospectus and consent solicitation statement, as from time
to time amended and/or supplemented, hereinafter referred to as the
<PAGE> 216
"Consent Solicitation Statement/Prospectus") (a) with respect to the
solicitation of consents from the U.S. Drug 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 U.S. Drug Minority Stockholders in exchange for
their shares of the U.S. Drug Common Stock pursuant to the terms of the
Agreement, the subject merger, the Securities Act and the rules and regulations
promulgated thereunder;
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 11 hereof) U.S.
Drug shall be merged with and into Acquisition Corp. (the "Merger") and, in
connection therewith:
(a) except to the extent provided or permitted by applicable
law, the separate existence of U.S. Drug shall cease and terminate;
(b) Acquisition Corp. 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, U.S. Drug;
(c) all of the assets and property of U.S. Drug 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 U.S. Drug, all
stock subscriptions, claims and choses in action shall be, and be deemed to be,
vested, absolutely and unconditionally, in Acquisition Corp. (to the same
extent, degree and manner as previously vested in U.S. Drug); and
(d) all debts and obligations of U.S. Drug, all rights of
creditors of U.S. Drug and all liens or security interests encumbering any of
the property of U.S. Drug shall be vested in Acquisition Corp. and shall remain
in full force and effect without modification or impairment and shall be, and be
deemed to be, enforceable against Acquisition Corp. 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
Acquisition Corp. in its own name and for
2
<PAGE> 217
its own behalf. Without limiting the generality of the foregoing, Acquisition
Corp. specifically assumes all continuing obligations which U.S. Drug would
otherwise have to indemnify its officers and directors, to the fullest extent
currently provided in Acquisition Corp.'s By-Laws and pursuant to the GCL, with
respect to any and all claims arising out of actions taken or omitted by such
officers and directors 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 U.S. Drug 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 Acquisition Corp. 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
Acquisition Corp., 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 U.S. Drug (or in which U.S. Drug 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 Acquisition Corp. 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 Acquisition Corp. on
such date in full force and effect shall be the Certificate of Incorporation of
Acquisition Corp., 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 Acquisition Corp.;
(b) The By-Laws of Acquisition Corp. on such date in full
force and effect shall be the By-Laws of Acquisition Corp., 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
Acquisition Corp. and/or the GCL, which rights of alteration, amendment,
modification, termination and/or rescission are hereby expressly reserved by
Acquisition Corp.
(c) The members of the Board of Directors and the officers of
Acquisition Corp., the surviving corporation, shall
3
<PAGE> 218
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 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 U.S. Drug
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 U.S. Drug 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 U.S. Drug 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 $5.25 per share; provided however, that to the
extent any holder of the U.S. Drug 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 of the USAT Common Stock to be exchanged for each share of
U.S. Drug Common Stock shall be determined by dividing $5.25 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 calendar days prior to the record date set
by the Board of Directors of U.S. Drug pursuant to Section 213 of
4
<PAGE> 219
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 warrant expiring October 13, 1998 (the "Warrant")
shall, by virtue of the Merger and without any action on the part of the holder
thereof, be converted and exchanged into a warrant (the "Merger Warrant") to
purchase shares of USAT 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 shall be
adjusted to the product of $7.50, and a fraction, the numerator of which shall
be the number of shares of the U.S. Drug Common Stock issuable upon exercise of
the Warrant prior to the Merger and the denominator will be the number of shares
of the USAT Common Stock issuable upon the exercise of the Merger Warrant. The
expiration date shall not be changed.
(c) Each option and similar right to purchase shares of the
U.S. Drug Common Stock shall become exercisable immediately prior to the
Effective Date and, if not exercised into shares of the U.S. Drug Common Stock
on or before the Effective Date, shall be cancelled.
(d) Anything in this Section 4 to the contrary
notwithstanding:
(i) Any and all issued shares of the U.S. Drug Common
Stock owned by U.S. Drug and held as treasury stock shall be cancelled and
retired and no shares of the USAT Common Stock shall be issued with respect
thereto;
(ii) Any and all issued shares of the U.S. Drug Common
Stock owned by USAT shall be cancelled and retired and no shares of the USAT
Common Stock shall be issued to USAT with respect thereto;
(iii) U.S. Drug shall secure from each person who holds
an option to purchase shares of the U.S. Drug Common Stock and who is a current
or former director of U.S. Drug a waiver of the option so that it is not assumed
by USAT or exercisable by the holder thereof; and
(iv) Upon the issuance of shares of the USAT Common
Stock to the U.S. Drug Minority Stockholders in exchange for their shares of the
U.S. Drug 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.
5
<PAGE> 220
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 Effective Date) of
certificates representing shares of the U.S. Drug 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 U.S. Drug 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 U.S. Drug 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 U.S. Drug and/or USAT.
(b) From and after the Effective Date any and all dividends
and/or distributions of every kind, nature or
6
<PAGE> 221
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:
(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 or Section 4(a)
hereof) shall be those to which they are entitled as owners of the USAT Common
Stock into which the shares of the U.S. Drug Common Stock evidenced by such Old
Certificates shall have been converted as herein provided.
(d) A holder of a Warrant shall, after the Effective Date,
have no obligation to exchange the holder's certificate evidencing the Warrant
for a new certificate evidencing the Merger Warrant. Whenever thereafter a
holder wishes to exercise
7
<PAGE> 222
his, her or its Warrant, the holder shall present the Warrant, with the exercise
form duly executed and with payment of the new exercise price per share
determined in accordance with Section 4(b) hereof, to USAT and not to U.S. Drug
or Acquisition Corp. USAT shall then cause the Exchange Agent as the transfer
agent for the USAT Common Stock to issue the shares of the USAT Common Stock as
to which the Warrant is exercised. To the extent that the Warrant is not
exercised for all of the shares of the USAT Common Stock subject thereto, USAT
will issue a new certificate evidencing a Merger Warrant for the balance.
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 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, U.S. Drug 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. SPECIAL PAYMENT. If U.S. Drug or, subsequent to the Effective Date,
Acquisition Corp. executes a definitive agreement (the "Marketing Agreement")
with an unaffiliated corporation to act as a marketing partner (the "Partner")
with respect to its drug testing products and if the Partner makes a cash
payment or payments to U.S. Drug, Acquisition Corp. or USAT upon the execution
of the Marketing Agreement (the "Special Payment"), then:
(a) USAT will calculate the percentage (to the nearest tenth) that
the outstanding shares of the Minority U.S. Drug
8
<PAGE> 223
Common Stock on the Effective Date constitute of the outstanding shares of the
U.S. Drug Common Stock on the Effective Date (the "Percentage") and (i) if the
Marketing Agreement is entered into on or prior to the 180th day following the
Effective Date, USAT or, if U.S. Drug or Acquisition Corp. is the recipient of
the Special Payment, Acquisition Corp. shall pay to each of the former U.S. Drug
Minority Stockholders his, her or its pro rata share of one third of the
Percentage of the Special Payment; (ii) if the Marketing Agreement is entered
into during the period after the 180th day following the Effective Date and on
or prior to the first anniversary of the Effective Date, USAT or, if Acquisition
Corp. is the recipient of the Special Payment, Acquisition Corp. shall pay to
each of the former U.S. Drug Minority Stockholders his, her or its pro rata
share of one sixth of the Percentage of the Special Payment; and (iii) if the
Marketing Agreement is entered into after the first anniversary of the Effective
Date, the former U.S. Drug Minority Stockholders shall receive none of the
Special Payment.
(b) If a cash payment is received from the Partner after
execution, but on or prior to the first anniversary of the Effective Date, and
if such payment is not based on sales effected by the Partner or some similar
criteria, USAT or Acquisition Corp. will treat any such payment or payments as a
Special Payment as if received on the execution of the Marketing Agreement.
(c) A loan or an equity investment made by the Partner shall
not be deemed to be part of the Special Payment.
(d) A transferee of the shares of the USAT Common Stock
received as a result of the Merger shall not be eligible to receive a
proportionate share of the Special Payment and USAT or Acquisition Corp. shall
make such payments only to the U.S. Drug Minority Stockholders as reflected on
the stock books of U.S. Drug on the Effective Date or, in the event of the death
of the U.S. Drug Minority Stockholder, his or her heirs or legal
representatives, in the case of the dissolution of a partnership, to its
partners or, in the case of a corporation, to its successor by merger or other
operation of law.
10. 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 business days after the satisfaction or waiver of the last of the
conditions set forth in Sections 18 and 19 hereof as shall be designated by
USAT. The closing of such transactions shall be referred to herein as the
"Closing;" 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.
9
<PAGE> 224
11. THE EFFECTIVE DATE. Subject to the satisfaction and/or waiver of
the conditions herein described, the Merger shall become effective 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 (the
"Effective Date"). Upon the receipt by U.S. Drug of consents from the holders of
more than 50% of the outstanding shares of the Minority U.S. Drug Common Stock
and of a consent from USAT to the Merger, U.S. Drug and Acquisition Corp. shall
cause to be filed the Certificate of Merger in the manner required by the GCL.
Subject to the provisions of Section 20 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 U.S. Drug Common Stock pursuant to Section 12(b) of the Exchange
Act and to delist the U.S. Drug Common Stock from the Pacific Stock Exchange.
The Certificate of Merger shall provide for the change of name of Acquisition
Corp. to "U.S. Drug Testing, Inc."
12. 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 U.S. Drug
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 12.
(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 SEC; and, without limiting the
generality of the foregoing, each of USAT and U.S. Drug 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.
10
<PAGE> 225
(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 U.S.
Drug or its transfer agent to the U.S. Drug Minority Stockholders as soon after
such effective date as is reasonably possible. Subsequent thereto U.S. Drug
shall transmit to the U.S. Drug 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.
(c) U.S. Drug hereby authorizes the utilization by USAT in the
Registration Statement or in any filing with a state securities administrator of
all information concerning U.S. Drug either provided to USAT by U.S. Drug in
connection with or contained in the Consent Solicitation Statement/Prospectus
and/or contained in any filings heretofore made by U.S. Drug pursuant to the
Securities Act and/or the Exchange Act. U.S. Drug 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,
U.S. Drug shall provide USAT with such information and material as shall be
needed to correct any such inaccuracy or omission. USAT shall promptly advise
U.S. Drug 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 12(c).
(d) Each of USAT and U.S. Drug 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
11
<PAGE> 226
promulgated thereunder by the SEC; and (iii) will not contain any statement
which, at the time, 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
U.S. Drug 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 12(d)
hereof.
(e) USAT does hereby agree to indemnify and hold harmless U.S.
Drug and each of its directors and officers, and each person, if any, other than
USAT who controls U.S. Drug 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' 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 U.S. Drug 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 14 or 15 hereof or are based upon any untrue statement or alleged
untrue statement of a material fact contained in the Registration Statement or
the Consent Solicitation Statement/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 12(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 U.S. Drug), and shall make payment of expenses (including
attorneys' fees as herein
12
<PAGE> 227
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.
13. U.S. DRUG REPRESENTATIONS AND WARRANTIES. In order to induce USAT
and Acquisition to execute and perform this Agreement, U.S. Drug 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) U.S. Drug 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.
(b) Subject only to the consent of its stockholders as
required by the GCL: (i) U.S. Drug 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 U.S. Drug of the transactions
herein contemplated and the compliance by U.S. Drug with the terms of this
Agreement have been duly authorized by U.S. Drug; (iii) this Agreement is the
valid and binding obligation of U.S. Drug, 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 U.S. Drug and
the consummation by U.S. Drug 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 U.S. Drug 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
13
<PAGE> 228
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 U.S. Drug pursuant to, any indenture, mortgage, note, contract,
commitment or other agreement or instrument to which U.S. Drug is a party or by
which it is, or any of its respective properties or assets are, or may be, bound
or affected.
14. USAT REPRESENTATIONS AND WARRANTIES. In order to induce U.S. Drug
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, 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 U.S. Drug 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;
14
<PAGE> 229
(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 any
of the Subsidiaries (other than U.S. Drug 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 U.S. Drug 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 U.S. Drug 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 U.S.
Drug 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
15
<PAGE> 230
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 U.S. Drug 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 U.S. Drug
copies of 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 "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 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 U.S. Drug 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
16
<PAGE> 231
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 U.S. Drug 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 U.S. Drug 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 U.S. Drug as to which USAT makes no representation) own
all trademarks, service marks, tradenames, copyrights, similar rights and their
registrations, trade secrets, 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 U.S. Drug as to which
17
<PAGE> 232
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
U.S. Drug 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) cancelled, 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 operation of its material 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 U.S. Drug 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 U.S. Drug 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
U.S. Drug as to which USAT makes no representation) or involving their
respective properties or
18
<PAGE> 233
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 U.S.
Drug 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 U.S. Drug 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 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" or upon the
exercise of outstanding warrants or options or the conversion of outstanding
shares of preferred stock. 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
19
<PAGE> 234
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 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 and/or the Subsidiaries (other than
U.S. Drug 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 material 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;
20
<PAGE> 235
(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;
(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;
(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 14(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 U.S. Drug Minority
Stockholders in exchange for their shares of the U.S. Drug Common Stock, duly
and validly issued, fully paid and nonassessable and free and clear of all
21
<PAGE> 236
federal and state issuance, stock and/or company taxes, liens, security
interests, claims, encumbrances and charges.
15. ACQUISITION REPRESENTATIONS AND WARRANTIES. In order to induce U.S.
Drug to execute and perform this Agreement, Acquisition Corp. 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 Corp. 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 Corp. engaged,
nor prior to the Closing Date will Acquisition Corp. engage, in any business
activity of any kind nature or description except in connection with the
implementation of the transactions herein described. Acquisition Corp. 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 Corp. 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 Corp. of the
transactions herein contemplated and the compliance by Acquisition Corp. with
the terms of this Agreement have been duly authorized by Acquisition Corp.;
(iii) this Agreement is the valid and binding obligation of Acquisition Corp,
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 Corp. and the consummation by
Acquisition Corp. 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
Corp., (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 Corp. pursuant to, any indenture, mortgage, note, contract,
commitment or other agreement or instrument to which Acquisition Corp. is a
party or
22
<PAGE> 237
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 Corp., 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 Corp. 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 Corp. 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 Corp. of the transactions contemplated by
this Agreement.
(c) Acquisition Corp. 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 Corp. 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 Corp. 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.
(e) The financial and other books and records of Acquisition
Corp. 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 Corp., threatened
against Acquisition Corp. or involving its assets which, if determined adversely
to Acquisition Corp., would, individually or in the aggregate, result in a
material adverse change in the financial position, stockholders' equity, results
of operations,
23
<PAGE> 238
properties, business, management or affairs of Acquisition Corp., or which
question the validity of this Agreement or of any action taken or to be taken by
Acquisition Corp. pursuant to, or in connection with, this Agreement; nor, to
the best of the knowledge of Acquisition Corp., 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 Corp. and/or enjoining Acquisition Corp. from taking, or requiring
Acquisition Corp. to take, any action, and/or by which Acquisition Corp. is,
and/or its assets are, bound or subject.
16. U.S. DRUG COVENANTS, U.S. Drug 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 U.S. Drug
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 U.S. Drug herein contained and/or satisfy each covenant or
condition required to be performed or satisfied by U.S. Drug 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 U.S. Drug 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 U.S. Drug 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 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
24
<PAGE> 239
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 U.S. Drug
herein contained and/or which prevents, inhibits or limits or may prevent,
inhibit or limit U.S. Drug from satisfying, in full and on a timely basis, any
covenant, term or condition herein contained and/or implementing this Agreement.
17. 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 U.S. Drug
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;
(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 U.S. Drug or, in the case of an announcement required
by applicable securities laws, prior consultation with U.S. Drug;
(e) Immediately advise U.S. Drug of any event, condition or
occurrence which constitutes, or may, with the
25
<PAGE> 240
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; and
(f) Subject to U.S. Drug's compliance with its obligations
under Section 12 hereof, use its best efforts to have the Registration Statement
declared effective under the Securities Act.
18. USAT AND ACQUISITION CORP. CONDITIONS PRECEDENT. The obligations of
USAT and Acquisition Corp. 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 Sections 18(a), (b), (f) 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 Minority U.S. Drug Common Stock 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 U.S. Drug 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
and U.S. Drug 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 U.S. Drug (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 U.S. Drug herein
contained, including, without limitation, those set forth in Section 13 hereof.
(d) Prior to the Closing, there shall not have occurred any
material adverse change in the financial condition, business or operations of
U.S. Drug, 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.
26
<PAGE> 241
(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
U.S. Drug 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 U.S. Drug of the transactions herein described and/or to
permit the businesses currently carried on by U.S. Drug 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) U.S. Drug 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 U.S. Drug Minority Stockholders
of the exchange ratio offered pursuant to the terms of the Merger.
19. U.S. DRUG CONDITIONS PRECEDENT. The obligation of U.S. Drug to
implement this Agreement and to consummate the Merger is, at its election,
subject to, and conditioned upon, the satisfaction (and/or waiver except as to
Section 19(a), (b), (c), (g) and (i)) of each of the following conditions:
(a) Prior to the Closing Date the holders of more than 50% of
the shares of the Minority U.S. Drug Common Stock shall have adopted this
Agreement by consenting to the adoption of this Agreement pursuant to the
Consent Solicitation Statement/ Prospectus.
27
<PAGE> 242
(b) Prior to the Closing Date USAT shall have adopted this
Agreement by filing with U.S. Drug 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
Corp. 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, U.S. Drug shall have received a certificate,
executed by the President and the Secretary of USAT and Acquisition Corp.
(effective as of the Closing and the Effective Date) and in form and content
reasonably acceptable to U.S. Drug, 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 Corp. herein
contained, including, without limitation, those set forth in Sections 14 and 15
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 U.S. Drug) 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 U.S. Drug and its counsel and U.S. Drug 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.
28
<PAGE> 243
(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) U.S. Drug shall have received a written opinion from Whale
Securities Co., L.P., satisfactory to U.S. Drug in form and content, regarding
the fairness, from a financial point of view, to the U.S. Drug Minority
Stockholders of the exchange ratio offered pursuant to the terms of the Merger.
20. 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 U.S. Drug Minority Stockholders as herein provided either:
(a) by mutual agreement of the Boards of Directors of U.S. Drug and USAT; or (b)
by the Board of Directors of either U.S. Drug or USAT if either (i) the Closing
shall not have taken place on or prior to December 31, 1996 (other than by
reason of the default hereunder by the terminating party) 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, U.S. Drug or Acquisition Corp. 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; or (c) by the Board of Directors of USAT or
U.S. Drug if, based upon the opinion of its outside counsel, such Board of
Directors determines that making a recommendation to the U.S. Drug Minority
Stockholders to adopt the Merger Agreement could reasonably be deemed to cause
the members of such Board of Directors to breach their fiduciary duty under
applicable law to its respective stockholders.
(b) If this Agreement shall be terminated and/or the Merger
abandoned pursuant to the provisions of subsection (a) of this Section 20 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 counsel to U.S. Drug and there shall be no
liability on the part of any party hereto (and/or their respective officers,
directors, agents and employees) to any
29
<PAGE> 244
other party hereto (and/or their respective officers, directors, agents and
employees).
21. 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 U.S. Drug will
pay all costs and expenses of Whale Securities Co., L.P. and of its special
counsel.
22. 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, delivered by express courier or mailed to the
recipient first class, postage prepaid, certified, return receipt requested at
the following respective addresses:
To: U.S. Drug
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: President
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 22.
23. 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
30
<PAGE> 245
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 23 to the
contrary notwithstanding, no party hereto may waive the requirements that the
holders of more than 50% of the shares of the Minority U.S. Drug Common Stock
must consent to the adoption of this Agreement and the Merger, the fairness
opinion be delivered as set forth in Section 18(h) or Section 19(i) or the
Registration Statement be effective as set forth in Section 18(b) or Section
19(c).
24. AMENDMENTS. This Agreement may be amended at any time prior to the
Effective Date (whether before or after the consent of stockholders of U.S. Drug
as herein provided) by a writing executed by an authorized officer of USAT, U.S.
Drug and Acquisition (upon due authorization by their respective Boards of
Directors); provided, however, that in no event may the provisions of Sections 4
and 9 hereof be altered, amended, modified, terminated or rescinded without the
approval of the U.S. Drug Minority Stockholders.
25. 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.
26. 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.
27. 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.
28. 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.
29. 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
31
<PAGE> 246
be executed and delivered pursuant to the provisions of this Agreement as herein
provided) sets forth the entire agreement among the 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.
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
U.S. DRUG ACQUISITION CORP.
________________________________ By:___________________________________
Secretary
U.S. DRUG TESTING, INC.
________________________________ By:___________________________________
Secretary
32
<PAGE> 247
APPENDIX B
May __, 1996
The Board of Directors
U.S. Drug Testing, 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 U.S Drug Testing, Inc. ("U.S. Drug"), from a
financial point of view, of the exchange ratio to be offered to the minority
stockholders of U.S. Drug under the Agreement and Plan of Merger dated as of
April 23, 1996 (the "Merger Agreement") among U.S. Drug, U.S. Alcohol Testing
of America, Inc. ("USAT") and U.S. Drug Acquisition Corp., a wholly owned
subsidiary of USAT ("Acquisition Corp."), pursuant to which U.S. Drug will be
merged with and into Acquisition Corp. (the "Proposed Merger") with the result
that U.S. Drug will become a wholly-owned subsidiary of USAT. As more
specifically set forth in the Merger Agreement, holders of the 1,721,900 issued
and outstanding shares of U.S. Drug's common stock, par value $.001 per share,
not owned by USAT (the "Minority U.S. Drug Common Stock"), will receive ______
shares (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. 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) U.S. Drug's and USAT's Annual
Reports on Form 10-K for the two fiscal years ended March 31, 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; (v) publicly
available information concerning certain other companies and transactions we
considered relevant to our analysis; and (vi) such other matters as we deemed
appropriate. In addition, we have held discussions with the managements of U.S.
Drug and USAT for the
<PAGE> 248
The Board of Directors
U.S. Drug Testing, Inc.
May , 1996
Page 2
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 U.S. Drug's or
USAT's assets or liabilities. We have assumed and relied upon the senior
management of U.S. Drug 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 U.S. Drug to act as financial advisor to U.S. Drug only with respect to this
fairness opinion. We have not in the past three years previously acted on
behalf of U.S. Drug or USAT. We are currently separately engaged to render a
fairness opinion to the Board of Directors of Good Ideas Enterprises, Inc.
("Good Ideas"), an affiliate of U.S. Drug 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 U.S. Drug and/or USAT and/or Good
Ideas 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 U.S. Drug and does not constitute a
recommendation to any stockholder of U.S. Drug as to how such a stockholder
should consent on any matter submitted for U.S. Drug 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 U.S. Drug from a financial point of view.
Very truly yours,
Whale Securities Co., L.P.
<PAGE> 249
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 must not be relied upon as having been authorized
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
Page
----
[S] [C]
Available Information....................... 2
Summary..................................... 3
Summary Historical and Proforma
Combined Financial Data................... 14
Risk Factors................................ 21
Terms of the Transaction.................... 29
The Merger and Related Matters.............. 37
Material Contacts of USAT with U.S. Drug.... 59
Business of the Company..................... 61
Business of U.S. Drug....................... 76
USAT Principal Stockholders................. 88
U.S. Drug Principal Stockholders............ 92
USAT Market Information..................... 94
U.S. Drug Market Information................ 95
USAT Management............................. 96
The Company's Selected Financial Data....... 105
The Company's Management's Discussion
of Financial Condition and Results of
Operations................................ 108
U.S. Drug's Selected Financial Data......... 130
U.S. Drug's Management's Discussion of
Financial Condition and Results of
Operations................................ 131
Commission Position on Indemnification...... 134
Legal Matters............................... 135
Experts..................................... 135
Change in Accountants....................... 135
Index to The Company's Financial
Statements................................ 137
Index to U.S. Drug Financial
Statements................................ 138
Appendix A - The Merger Agreement...........
Appendix B - Opinion of Whale
<PAGE> 250
U.S. ALCOHOL TESTING OF
AMERICA, INC.
CONSENT SOLICITATION
STATEMENT/
PROSPECTUS
TO
MINORITY STOCKHOLDERS
OF
U.S. DRUG TESTING, INC.
___________________, 1996
U.S. Drug
<PAGE> 251
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
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
U.S. Drug
II-1
<PAGE> 252
reasonably entitled to indemnity for such expenses which the court shall deem
proper.
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 will be filed with an
Amendment to this Registration Statement. If no footnote reference or marking
with an asterisk is made, the exhibit is filed with this Registration Statement.
<TABLE>
<CAPTION>
Number Exhibits
- ------ --------
<S> <C>
2(a) Agreement and Plan of Merger dated as of March 6,
1996 by and among USAT, U.S. Drug Acquisition Corp.
("Acquisition Corp.") and U.S. Drug Testing, Inc.
("U.S. Drug"). (Reference is made to Appendix A to
Part I of this Registration Statement.)
3(a) Copy of Certificate of Incorporation of USAT as filed
in Delaware on April 15, 1987. (1)
3(a)(1) Copy of Amendment to the Certificate of Incorporation
as filed in Delaware on July 10, 1989. (1)
3(a)(2) Copy of Amendment to the Certificate of Incorporation
as filed in Delaware on September 25, 1989. (1)
3(a)(3) Copy of Amendment to the Certificate of Incorporation
as filed in Delaware on October 5, 1990. (1)
3(a)(4) Copy of Amendment to the Certificate of Incorporation
as filed in Delaware on December 26, 1990. (2)
</TABLE>
U.S. Drug
II-2
<PAGE> 253
<TABLE>
<CAPTION>
Number Exhibits
- ------ --------
<S> <C>
3(a)(5) Copy of Amendment to the Certificate of Incorporation
as filed in Delaware on November 1, 1991. (2)
3(a)(6) Copy of Amendment to the Certificate of Incorporation
as filed in Delaware on May 20, 1992. (3)
3(b) Copy of By-Laws of USAT. (1)
4(a) Specimen of Common Stock certificate of USAT. (1)
4(b) Specimen of Class "A" Cumulative and Convertible
Preferred Stock certificate of USAT. (1)
4(c) Specimen of Class "B" Non-Voting Preferred Stock
certificate of USAT. (4)
5 Opinion of Gold & Wachtel, LLP.
8* Opinion of Rosenman & Colin, LLP.
10(a) Form of the Company's Indemnification Agreement with
Officers and Directors. (1)
10(b) Copy of Employment Agreement dated December 13, 1993
between USAT and James C. Witham. (4)
10(c) Copy of Employment Agreement dated December 13, 1993
between USAT and Karen B. Laustsen. (4)
10(d) Copy of Employment Agreement dated December 13, 1993
between USAT and Gary S. Wolff. (4)
10(e) Copy of Employment Agreement dated December 13, 1993
between USAT and Michael J. Witham. (4)
10(f) Copy of Employment Agreement dated March 1, 1993
between Douglas G. Allen, USAT and U.S. Drug. (5)
10(g) Copy of Employment Agreement dated as of December 15,
1993 between William D. Robbins and Good Ideas
Enterprises, Inc. ("Good Ideas"). (6)
10(h) License Agreement dated January 24, 1992 by and
between the United States Department of the Navy (the
"USN") and USAT. (Confidential Treatment Requested
for Exhibit.) (5)
</TABLE>
U.S. Drug
II-3
<PAGE> 254
<TABLE>
<CAPTION>
Number Exhibits
- ------ --------
<S> <C>
10(h)(1) Amendment dated March 15, 1994 to License Agreement
filed as Exhibit 10(h) hereto.
10(h)(2) Amendment dated June 16, 1995 to License Agreement
filed as Exhibit 10(h) hereto.
10(h)(3) Letter dated May 15, 1995 from the USN to USAT.
10(i) Assignment dated as of January 1, 1993 between the
Company and U.S. Drug of Licensing Agreement filed as
Exhibit 10(h) hereto. (5)
10(i)(1) Amended Sublicense Agreement dated September 23, 1993
superseding the Assignment filed as Exhibit 10(i)
hereto.
10(i)(2) Approval dated September 24, 1993 by Department of
the Navy of Amended Sublicense Agreement filed as
Exhibit 10(i) hereto.
10(j) 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. (5)
10(j)(1) Assignment of CRDA Agreement dated as of January 1,
1993 by and between U.S. Drug and USAT. (5)
10(k) Management Agreement dated April 1, 1993 by and
between U.S. Drug and USAT. (5)
10(k)(1) Amendment dated July 20, 1993 to Management Services
Agreement filed as Exhibit 10(j) hereto. (5)
10(l) Management Services Agreement dated December 29, 1993
by and between Good Ideas and USAT. (6)
10(m) Equipment, Licensing, Servicing and Maintenance
Agreement dated as of December 13, 1994 by and
between USAT and METPATH, Inc. (4)
10(n) Equipment, Licensing, Servicing and Maintenance
Agreement dated as of December 22, 1994 by and
between USAT and National Health Laboratories
Incorporated. (4)
10(o) Copy of Lease expiring January 31, 1997 by and
between Rancho Cucamonga Business Park as landlord
and USAT as tenant. (4)
</TABLE>
U.S. Drug
II-4
<PAGE> 255
<TABLE>
<CAPTION>
Number Exhibits
- ------ --------
<S> <C>
10(o)(1) Copy of Lease Modification Agreement to Lease filed
as Exhibit 10(o) hereto. (3)
10(o)(2) Sub-Lease Agreement dated as of January 1, 1993 by
and between USAT as sublandlord and U.S. Drug as
subtenant. (5)
10(p) Copy of Lease dated December 9, 1992 by and between
Melvin E. Evans as landlord and Good Ideas as tenant.
(6)
10(q) Copy of Lease expiring June 30, 1999 by and between
Rancho Cucamonga Business Park as landlord and U.S.
Rubber Recycling, Inc. as tenant. (4)
10(r) Copy of Asset Purchase Agreement dated June 20, 1988
between Luckey Laboratories, Inc. and USAT. (1)
10(r)(1) Copy of Consulting and Royalty Agreement dated June
20, 1988 between Manley Luckey and USAT. (1)
10(r)(2) Copy of Amendment dated August 1990 to Consulting and
Royalty Agreement filed as Exhibit 10(r)(1) hereto.
(1)
10(s) Copy of Investment Banking Agreement dated July 1,
1991, as revised October 1, 1991, between Jeffrey
Brooks Securities, Inc. and USAT. (1)
10(t) Copy of Asset Purchase Agreement dated November 2,
1992 by and between Adflo International, Inc. and
USAT. (7)
10(u) Copy of Stock Purchase Agreement dated March 30, 1995
between Alconet, Inc., Dakotanet, L.L.C. and USAT.
(8)
10(v) Form of Warrant Agreement dated December 17, 1990
between J. Gregory & Company Inc. and USAT. (1)
10(v)(1) Form of Underwriter's Warrant expiring December 17,
1997 of USAT. (1)
10(w) Form of Common Stock purchase warrant expiring
October 31, 1996 of USAT. (3)
</TABLE>
U.S. Drug
II-5
<PAGE> 256
<TABLE>
<CAPTION>
Number Exhibits
- ------ --------
<S> <C>
10(x) Form of Common Stock purchase warrant. (2)
USAT's Common Stock purchase warrants expiring August
28, 1996, September 1, 1996, September 16, 1996,
September 30, 1996, October 31, 1996, May 17, 1997,
September 16, 1997, November 1, 1997, December 17,
1997, December 31, 1997, February 28, 1998, April 15,
1998, July 17, 1998, August 27, 1998, September 1,
1998, November 1, 1998, November 15, 1998, December
13, 1998, December 20, 1998, December 27, 1998,
January 2, 1999, January 31, 1999, February 26, 1999,
February 28, 1999, March 31, 1999, April 14, 1999,
May 12, 1999, July 17, 1999, July 19, 1999, August
11, 1999, December 31, 1999, 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. (1)
10(y)(1) Form of Stock Option expiring August 1, 2004 issued
pursuant to Exhibit 10(y) hereto. (4)
10(z) Form of Common Stock purchase warrant expiring
December 17, 1999. (10)
10(aa) Form of Warrant Agreement by and between U.S. Drug
and Baraban Securities, Incorporated. (5)
10(aa)(1) Form of Common Stock purchase warrant expiring
October 13, 1998 of U.S. Drug. (5)
10(bb) Copy of U.S. Drug 1994 Stock Option/Stock Issuance
Plan. (11)
10(bb)(1) Form of Stock Option expiring October 2, 2004 of U.S.
Drug. (11)
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. (12)
</TABLE>
U.S. Drug
II-6
<PAGE> 257
<TABLE>
<CAPTION>
Number Exhibits
- ------ --------
<S> <C>
10(dd) Copy of Asset Purchase Agreement dated April 30, 1996
by and among U.S. Rubber Recycling, Inc., USAT and
Reclamation Resources Inc.
16 Letter dated November 16, 1995 from Wolinetz,
Gottlieb & Lafazan, P.C. to the Securities and
Exchange Commission. (9)
21 Subsidiaries of USAT. (4)
23(a) Consent of Wolinetz, Gottlieb & Lafazan, P.C.
23(b) Consent of Gold & Wachtel, LLP is included in their
opinion filed as Exhibit 5 hereto.
23(c) Consent of Rosenman & Colin, LLP will be included in
their opinion filed as Exhibit 8 hereto.
</TABLE>
- --------------
1. Filed as an exhibit to USAT's Registration Statement on Form S-18, File
No. 33-29718, and incorporated herein by this reference.
2. Filed as an exhibit to USAT's Registration Statement on Form S-1, File
No. 33-43337, and incorporated herein by this reference.
3. Filed as an exhibit to USAT's Registration Statement on Form S-1, File
No. 33-47855, and incorporated herein by this reference.
4. 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.
5. 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.
6. Filed as an exhibit to Good Ideas' Registration Statement on Form S-1,
File No. 33-73494, and incorporated herein by this reference.
7. Filed as an exhibit to USAT's Current Report on Form 8-K filed on
November 2, 1992 and incorporated herein by this reference.
U.S. Drug
II-7
<PAGE> 258
8. Filed as an exhibit to USAT's Current Report on Form 8-K dated April
12, 1995 and incorporated herein by this reference.
9. 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.
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 U.S. Drug's Registration Statement on Form S-8,
File No. 33-89346.
12. Filed as an exhibit to USAT's Registration Statement on Form S-8 filed
on March 11, 1996 and incorporated herein by his reference.
(C) ITEM 4(B) INFORMATION
The opinion of Whale Securities, Inc. will be furnished as Appendix B
to the Consent Solicitation Statement/Prospectus which is Part I of this
Registration Statement.
ITEM 22. UNDERTAKINGS.
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 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.
U.S. Drug
II-8
<PAGE> 259
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.
U.S. Drug
II-9
<PAGE> 260
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of New York,
State of New York, on May 1, 1996.
U.S. ALCOHOL TESTING OF AMERICA, INC.
(Registrant)
By: /s/ Robert Stutman
------------------------------------
Robert Stutman
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities indicated on May 1, 1996.
<TABLE>
<CAPTION>
Signature Title
- --------- -----
<S> <C>
/s/ Robert Stutman Principal Executive Officer
- ----------------------------------- and Director
Robert Stutman
/s/ Gary S. Wolff Principal Financial and
- ----------------------------------- Accounting Officer
Gary S. Wolff
/s/ Alan I. Goldman Director
- -----------------------------------
Alan I. Goldman
/s/ John C. Lawn Director
- -----------------------------------
John C. Lawn
</TABLE>
U.S. Drug
II-10
<PAGE> 261
<TABLE>
<S> <C>
/s/ Peter M. Mark Director
- -----------------------------------
Peter M. Mark
/s/ Linda H. Masterson Director
- -----------------------------------
Linda H. Masterson
/s/ Lee S. Rosen Director
- -----------------------------------
Lee S. Rosen
</TABLE>
U.S. Drug
II-11
<PAGE> 262
U.S. ALCOHOL TESTING OF AMERICA, INC.
REGISTRATION STATEMENT ON FORM S-4
EXHIBITS FILED WITH REGISTRATION STATEMENTS
<TABLE>
<CAPTION>
Number Exhibit Page Number
- ------ ------- -----------
<S> <C> <C>
2(b) Agreement and Plan of Merger dated as of
March 6, 1996 by and among USAT, Good Ideas
Acquisition Corp. and Good Ideas
Enterprises, Inc. Appendix A
5(a) Opinion of Gold & Wachtel, LLP E-1
10(h)(1) Amendment dated March 15, 1994 to License
Agreement filed as Exhibit 10(h) hereto E-3
10(h)(2) Amendment dated June 16, 1995 to License
Agreement filed as Exhibit 10(h) hereto E-4
10(h)(3) Letter dated May 15, 1995 from the USN
to USAT E-7
10(i)(1) Amended Sublicense Agreement dated September
23, 1993 superseding the Assignment filed as
Exhibit 10(i) hereto. E-8
10(i)(2) Approval dated September 24, 1993 by the
Department of the Navy of Amended Sublicense
Agreement filed as Exhibit 10(i) hereto E-10
23(a) Consent of Wolinetz, Gottlieb
& Lafazan, P.C. E-11
</TABLE>
<PAGE> 1
EXHIBIT 5(a)
[GOLD & WACHTEL, LLP LETTERHEAD]
April 30, 1996
U.S. Alcohol Testing of America, Inc.
10410 Trademark Street
Rancho Cucamonga, California 91730
Dear Sirs:
We refer to the Registration Statement on Form S-4 (the "Registration
Statement") to be filed by U.S. Alcohol Testing of America, Inc. ("USAT") under
the Securities Act of 1933, as amended (the "Securities Act"), relating to (1)
USAT's offer of (1) that number of shares of USAT's Common Stock, $.01 par value
(the "USAT Common Stock"), to be determined on the basis set forth in an
Agreement and Plan of Merger dated as of April 23, 1996 (the "Merger Agreement")
among USAT, U.S. Drug Acquisition Corp. and U.S. Drug Testing, Inc. ("U.S.
Drug"), to the stockholders of U.S. Drug other than USAT (the "U.S. Drug
Minority Stockholders") in exchange for their 1,721,900 shares of U.S. Drug's
Common Stock, $.001 par value (the "U.S. Drug Common Stock"), and (2) that
number of shares of the USAT Common Stock issuable upon the exercise of Common
Stock purchase warrants expiring October 13, 1998 (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 October 13, 1998 to purchase
150,000 shares of the U.S. Drug Common Stock.
As counsel to USAT, we have examined the Certificate of Incorporation
of USAT, its By-Laws, its minutes and other corporate proceedings related to the
authorization and, where applicable, the issuance of the aforesaid shares of the
USAT Common Stock and the Merger Warrants and have reviewed the Registration
Statement in the form intended to be filed. In our opinion, we have made such an
investigation and examination as we have deemed necessary for the purposes of
expressing an informed opinion on the matters hereafter discussed.
<PAGE> 2
U.S. Alcohol Testing of America, Inc.
April 30, 1996
Page 2
Based upon such examination, it is our opinion that:
1. USAT is duly organized and validly existing under the laws of the
State of Delaware; and
2. The shares of the USAT Common Stock being offered by USAT in
exchange for the shares of the U.S. Drug Common Stock owned by the U.S. Drug
Minority Stockholders and the shares of the USAT Common Stock of the USAT Common
Stock issuable upon the exercise of the Merger Warrants will be, when issued,
fully paid and non-assessable.
In addition, we hereby consent to the filing of this opinion as an
Exhibit to the Registration Statement and to the references to our firm under
the captions "Certain Tax Consequences" and "Legal Matters" included in the
Consent Solicitation Statement/Prospectus which constitutes Part I of the
Registration Statement.
Very truly yours,
Gold & Wachtel, LLP
<PAGE> 1
Exhibit 10(h)(1)
[DEPARTMENT OF THE NAVY LETTERHEAD]
5870
Ser OOCC3/139
March 15, 1994
Mr. James Witham
U.S. Alcohol Testing of America, Inc.
10410 Trademark Street
Rancho Cucamonga, California 91730
Re: Flow Immunosensor License; U.S. Patent
No. 5,183,740
Dear Mr. Witham:
On January 23, 1992 Navy granted a license to your company to practice the
above invention in the field of "drugs of abuse" as that term is defined in the
license. Navy subsequently published a notice in the Federal Register dated
December 9, 1993 of its intent to grant a partially exclusive license to your
company to practice this invention in the field of testing for methadone,
benzodiazapines, barbituates, propoxyphene, tricyclic antidepressants, and
anabolic steroids. No objections were filed within the allowed 60 day period.
Navy (LICENSOR) and U.S. Alcohol Testing of America (LICENSEE) hereby
modify their license by inserting after the word "abuse" in line 4 of Article II
the following language "as well as the field of testing for methadone,
benzodiazapines, barbituates, propoxyphene, tricyclic antidepressants, and
anabolic steroids."
Your consent to this modification of the license may be evidenced by
affixing your signature in the space provided below and returning this letter to
me. A duplicate original of this letter is provided for signature and retention
in your files.
Sincerely,
/s/ R. J. Erickson
------------------------------
ROGER J. ERICKSON
Staff Patent Attorney
U.S. Alcohol Testing of America United States of America
For the Secretary of the
Navy
By: /s/ Date: 3/17/94 By: /s/ Date: 3/15/94
------------- ------- ------------------------ -------
President Deputy Counsel
(Intellectual Property)
Office of Naval Research
E-3
<PAGE> 1
Exhibit 10(h)(2)
[DEPARTMENT OF THE NAVY LETTERHEAD]
1004/524G
16 June 1995
Mr. Douglas Allen
President
U.S. Drug Testing, Inc.
10410 Trademark Street
Rancho Cucamonga, CA 91730
Dear Mr. Allen:
In your letter of May 25, 1995 to me at the Naval Research Laboratory
(NRL) you requested certain modifications to the partially exclusive license
between the Navy & U.S. Alcohol Testing of America, Inc. (USAT), dated
January 23, 1992.
Accordingly, we propose the following modifications:
1. Article IV Royalties
Delete the first paragraph and substitute the following:
The following Royalty Schedule will be applied to the net selling
price for (I) each royalty-bearing product made, used or sold by
LICENSEE or it sublicensees in the United States or in the Licensed
Territory, (II) any parts sold by LICENSEE or its sublicensees in the
United States or in the Licensed Territory for use to reconstruct any
royalty-bearing product, and (III) from revenues received from the
leasing of any royalty-bearing product, and the sale of consumable
products for use with such leased royalty-bearing product, for use in
the United States or in the Licensed Territory.
Royalty Schedule
<TABLE>
<CAPTION>
Annual Net Sales Royalty Rate
---------------- ------------
<S> <C>
0 - $ 5 million 10%
$ 5 - $10 million 9%
$10 - $15 million 8%
$15 - $25 million 7%
over - $25 million 6%
</TABLE>
Notwithstanding the provisions of the proceeding paragraph,
LICENSEE agrees to pay at least a minimum annual royalty of one
hundred thousand dollars ($100,000) each calendar year throughout
the period of
E-4
<PAGE> 2
the License. The minimum annual royalty shall be due and payable in advance
on October 1, 1995 and each calendar year thereafter and will be credited as
advance payment of royalties to accrue during the following calendar year;
and will not be refundable in whole or in part.
2. Article II License Grant
Delete the first paragraph and substitute the following:
LICENSOR agrees to and does hereby grant to LICENSEE an exclusive right and
license to practice the licensed invention throughout the United States and
in the Licensed Territory in the field of drugs of abuse and in the field of
testing for Methadone, Benzodiazapines Barbituates, Propoxyphene, Tricyclic,
Antidepressants and Anabolic Steroids for a period of ten (10) years
commencing on the date of execution of this Modification by LICENSOR, which
shall become the effective date of the LICENSE, and a nonexclusive right and
license to practice the licensed invention after completion of that ten (10)
year period until the expiration of licensed patents unless the LICENSE is
sooner modified or terminated in whole or in part.
3. The following new Article will be added to the License as follows:
Article XIV Licensing of Patent No. 5,354,654
LICENSEE and the LICENSOR entered into a Cooperative Research and Development
Agreement (CRADA) on April 16, 1992. This CRADA provided the LICENSEE with an
option to negotiate an exclusive License in each patent pertaining to a
subject invention in which the Government has title in whole or part (8.9
License Rights). Patent No. 5,354,654 was a Subject Invention of this CRADA
and LICENSEE exercised their option and requested an exclusive License.
LICENSOR agrees to and does hereby grant to LICENSEE for the life of the
patent and exclusive right and License to practice the invention of Patent
No. 5,354,654 entitled "Lyophilized Ligand-Receptor Complexes for Assays and
Sensors" dated October 11, 1994 in the field of Drugs of Abuse and in the
field of testing for Methadone, Benzodiazapines, Barbituates, Propoxyphene,
Tricyclic, Antidepressants and Anabolic Steroids. LICENSEE will pay
E-5
<PAGE> 3
LICENSOR royalties according to modified Article IV on sales of any
product defined by any claim of patent No. 5,354,654 or any product
used to perform any method claimed in patent No. 5,354,654 in the
field of Drugs of Abuse and in the field of testing for Methadone,
Benzodiazapines, Barbituates, Propoxyphene, Tricyclic,
Antidepressants and Anabolic Steroids. Royalties generated by
Licensee from Licenses granted under patent No. 5,354,654 in other
fields will be shared equally between LICENSEE and the Navy. All
other provisions of the Partially Exclusive License between the Navy
and U.S. Alcohol Testing of America, Inc., shall apply.
Your consent to these Modifications of the License may be evidenced by
affixing your signature in the space provided below. A duplicate of the
original will be provided to you.
Sincerely,
/s/ Richard H. Rein
RICHARD H. REIN
Head, Technology Transfer Office
U.S. Alcohol & Testing United States of America For
the Secretary of the Navy
By: /s/ Date: 6/20/95 By: /s/ Date: 6/27/95
------------------ ------- ----------------- --------
E-6
<PAGE> 1
EXHIBIT 10(h)(3)
[DEPARTMENT OF THE NAVY LETTERHEAD]
5870
Ser 00CC/700
May 15, 1995
James C. Witham, President
U.S. Alcohol Testing of America, Inc.
10410 Trademark Street
Rancho Cucamonga, California 91730
Re: Partially exclusive license under U.S. Patent Application Serial
No. 07/486,024, now U.S. Patent No. 5,183,740
Dear Mr. Witham:
This is notice that under the GATT/WTO treaty (more formally the
Uruguay Round Agreements Act, Public Law 103-465), the expiration date of the
referenced patent has been extended to February 23, 2010. Since the expiration
date of this license agreement is predicated on the expiration date of the '740
patent, it too is extended to February 23, 2010.
Sincerely,
/s/ Roger J. Erickson
ROGER J. ERICKSON
Staff Patent Attorney
Copy to:
Dr. Richard H. Rein, NRL Code 1004
Thomas E. McDonnell, NRL Code 3008.2
E-7
<PAGE> 1
EXHIBIT 10(i)(1)
AMENDED SUBLICENSE AGREEMENT
Amended agreement made this 23rd day of September, 1993 by and between U.S.
Alcohol Testing of America, Inc. ("USAT") and U.S. Drug Testing, Inc. ("USD")
each with executive offices at 10410 Trademark Street, Rancho Cucamonga,
California 91730.
WHEREAS, USAT is a party to a license agreement with the U.S.
Department of the Navy dated January 24, 1992 granting USAT a partial exclusive
patent license to products for drug testing in the United States and certain
foreign countries; and
WHEREAS, said license applies to the U.S. Government owned invention
known as a Flow Immunosensor Method and Apparatus; and
WHEREAS, USAT has organized a wholly owned subsidiary, USD to conduct
research and development and to develop and enhance products for the detection
of drugs of abuse; and
WHEREAS, the parties are desirous of having USD assume all rights and
undertake all obligations of USAT under the license agreement; and
WHEREAS, this sublicense agreement will supersede the Agreement dated
the second day of January, 1993 by and between USAT and USD;
E-8
<PAGE> 2
NOW, for good and valuable consideration including the issuance of all
outstanding USD shares to USAT and the execution of a management agreement
between the parties;
IT IS AGREED that USD, subject to the approval of the U.S. Department
of Navy, will be the sole and exclusive sublicensee of USAT under the
January 24, 1992 license agreement.
IT IS FURTHER AGREED that this sublicense shall automatically be
modified or terminated in whole or in part upon the modification or termination
in whole or in part of the January 24, 1992 license, and that the Government
retains rights of the type specified in Article VII of the January 24,
1992 license.
U.S. ALCOHOL TESTING OF AMERICA INC.
By: /s/ James C. Witham
---------------------------------
James C. Witham
Date: 9/23/93
-------------------------------
U.S. DRUG TESTING, INC.
By: /s/ Douglas Allen
---------------------------------
Douglas Allen
Date: 9/23/93
-------------------------------
E-9
<PAGE> 1
Exhibit 10(i)(2)
[DEPARTMENT OF THE NAVY LETTERHEAD]
IN REPLY REFER TO
5870
Ser OOCCIP/1098
September 24, 1993
Ms. Karen Lausten
U.S. Alcohol Testing of America, Inc.
10410 Trademark Street
Rancho Cucamonga, California 91730
Re: Flow Immunosensor License
Dear Ms. Lausten:
The Amended Sublicense Agreement dated September 23, 1993 between
U.S. Alcohol Testing of America, Inc. and U.S. Drug Testing, Inc. has been
reviewed and is approved on behalf of the Department of the Navy.
Sincerely,
/s/ William C. Garvert
William C. Garvert
Deputy Counsel (Intellectual Property)
E-10
<PAGE> 1
Exhibit 23(a)
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We hereby consent to the use in this Registration Statement Form S-4 of our
report dated May 25, 1995 on the consolidated financial statements of U. S.
Alcohol Testing of America, Inc. and Subsidiaries included herein and to the
reference to us under the caption "Experts" in the Prospectus.
/s/ Wolinetz, Gottlieb & Lafazan, P.C.
WOLINETZ, GOTTLIEB & LAFAZAN, P.C.
Rockville Centre, New York
May 3, 1996
E-11
