<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 1996
Commission File Number 0-18938
U.S. ALCOHOL TESTING OF AMERICA, INC.
-----------------------------------------------------------
(Exact name of registrant as specified in its Charter)
Delaware
(State or other jurisdiction of incorporation or organization)
22-2806310
(I.R.S. Employer Identification No.)
10410 Trademark Street
Rancho Cucamonga, California 91730
(909) 466-8378
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, par value $.01, and Preferred "A" Stock, par value $.01
(Registered on the American Stock Exchange);
Preferred "B" Stock, par value $.01
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days: YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
As of June 13, 1996, there were 35,309,210 shares of Common Stock
outstanding.
The Registrant has only one class of voting stock outstanding, the
Common Stock, and, as of June 13, 1996, the aggregate market value of the Common
Stock, held by non-affiliates was $92,758,424 based on the closing sale price of
such stock on that date.
<PAGE> 2
PART I
ITEM 1. BUSINESS OF THE COMPANY
GENERAL
U.S. Alcohol Testing of America, Inc. ("USAT") was incorporated under
the laws of Delaware on April 15, 1987 to design, manufacture and market
instruments which measure blood alcohol concentration by breath sample and
analyzation. USAT subsequently expanded its business operations through the
following acquisitions or the creation of new subsidiaries:
1. On January 24, 1992, USAT and the United States Navy ("USN") entered
into a ten-year non-assignable agreement granting USAT a partial exclusive
patent license to products for drug testing in the United States and certain
foreign countries. Effective January 1993, USAT granted a sole and exclusive
sublicense to U.S. Drug Testing, Inc. ("U.S. Drug"), then a newly-incorporated
wholly-owned subsidiary of USAT, which subsidiary assumed all of USAT's rights
and obligations under the foregoing license. However, because the USN refused to
grant a novation of the license agreement, the USN looks only to USAT for
performance thereunder. In October and November 1993, U.S. Drug had a public
offering of the its Common Stock, $.001 par value (the "U.S. Drug Common
Stock"). As of March 31, 1996, USAT owned 67.0% of the U.S. Drug Common Stock.
2. In June 1988, Good Ideas Enterprises, Inc. ("Good Ideas"), then a
Texas corporation ("Texco"), began the manufacture and shipment of toys. In May
1992, a subsidiary of USAT acquired a 55% interest in Texco. In December 1993,
Good Ideas reincorporated in Delaware and acquired Texco, of which USAT
thereafter continued to own 86% until Good Ideas had a public offering of the
Good Ideas Common Stock, $.001 par value (the "Good Ideas Common Stock"), in
March and April 1994. As of March 31, 1996, USAT owned 60.8% of the Good Ideas
Common Stock.
3. In September 1995, ProActive Synergies, Inc. ("ProActive"), a
wholly-owned subsidiary incorporated in June 1995, entered the human resource
provider business.
4. In May 1996, USAT acquired Robert Stutman & Associates, Inc.
("RSA"), a provider of substance abuse testing/background screening policy
manuals and a consultant on programs relating to alcohol and drug abuse.
5. In March 1995, USAT acquired Alconet, Inc.("Alconet"), a company
engaged in the computer software networking business which has developed an
alcohol testing network to upload test results and information from various
alcohol breath testing devices.
6. In November 1992, U.S. Rubber Recycling, Inc. ("USRR"), then a
newly-incorporated wholly-owned subsidiary of USAT, acquired the assets of an
unaffiliated company and began to manufacture and market floor covering products
for office and industrial use from used truck and bus tires. Such operations
were discontinued on April 30, 1996 when the assets of USRR were sold.
See the section "Subsidiaries" under this caption "Business of the Company" for
further information as to U.S. Drug, Good Ideas, ProActive, RSA, Alconet and
USRR.
USAT and its subsidiaries are collectively referred to herein as the
"Company."
ALCOHOL TESTING MARKET
USAT manufactures, markets and distributes alcohol testing detection
equipment directly to law enforcement and correctional facilities, various
industrial companies, medical and clinical facilities, alcohol treatment centers
and emergency rooms, as well as individual consumers. Its current product line
encompasses three distinct alcohol testing techniques for degrees of accuracy
and admissibility in court proceedings.
2
<PAGE> 3
<TABLE>
<CAPTION>
Percentage of Revenues
USAT's Products and Services Derived During Each of the
---------------------------- Last Three Fiscal Years
--------------------------
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
(1) Evidential Quality Devices 12% 55% 23%
(2) Screening (or "Non-Evidential")
Devices 23% 8% 14%
(3) Alcohol and Drug Testing Services 59% 37% 63%
</TABLE>
Evidential quality equipment, with the exception of the Mobile Alcohol
Collection System ("MACS"), which is discussed under the subsequent section
"Alcohol Testing Products" under this caption "Business of the Company," is
approved by the United States Department of Transportation (the "DOT") for use
by law enforcement agencies and industry. The information derived from the
equipment is used in court trials.
Alcohol screening devices are used by correctional facilities,
industrial companies, hospitals, nuclear agencies, companies in the maritime
industry and law enforcement agencies to gather human data on blood alcohol
levels. Although such data (from breath) is not generally admissible as court
evidence, it is used to indicate alcohol presence. These screening devices
determine the presence of alcohol and its approximate blood level. They are less
accurate and reliable than evidential quality devices, which are useable in
legal proceedings in contrast to the screening devices.
USAT purchases the raw materials and parts for its products from
various suppliers which deliver them to USAT for assembly, packaging and
distribution. These raw materials are primarily glass, plastic containers and
certain mechanical parts, all of which are readily available from many
suppliers.
ALCOHOL TESTING PRODUCTS
USAT's product line includes evidential and screening devices and
testing services which are marketed and sold in various ways. See the section
"Alcohol Testing Marketing" under this caption "Business of the Company."
(1) EVIDENTIAL DEVICES
Alco-Analyzer
USAT designed and developed this product as a gas chromatograph alcohol
testing device that determines blood alcohol levels by use of breath samples
with precision and accuracy to be used as evidence in legal proceedings. USAT's
three models have been approved by the DOT as evidential breath alcohol testing
instruments; however, only one, the Model 2100, is currently manufactured by
USAT. Such model is used to analyze blood, breath and urine specimens to
determine levels of ethyl alcohol and is described as follows:
Model 2100 - Enhanced electronics and software create an easy to use
instrument which can be networked to a central location for down loading data.
Testing information and results are displayed on a color computer monitor and
are printed on a multi-part carbonless form.
USAT, to management's knowledge, is the only manufacturer of a gas
chromatograph breath testing device designed specifically for ethyl alcohol
determinations using an inert carrier gas. Management believes that gas
chromatography is recognized as the ideal, convenient and reliable method for
determining and identifying chemical substances within a compound.
3
<PAGE> 4
Mobile Alcohol Collection System (MACS)
USAT manufactures a Mobile Alcohol Collection System ("MACS") device
used to collect a breath sample for future analysis. The MACS device contain a
silica gel compound within a glass vial accompanied by collection and waste bags
which insure the gathering of a proper sample flow through the vial. The vial is
then sent to an independent certified laboratory where the alcohol is extracted
from the silica gel and analyzed on a gas chromatograph to determine the exact
blood alcohol content. Management is unaware of any product which currently
competes with the MACS device.
(2) SCREENING DEVICES
Screening devices are designed to determine the presence and
approximate level of alcohol in a person's blood via his or her breath and
whether further testing is warranted.
The Alco-Breath Tubes ("ABT") are disposable alcohol breath glass vial
testers containing yellow bands comprised of silica gel treated with a reagent
solution. Testing begins with breath blown into a balloon which is then attached
to the glass vial into which the sample flows. If alcohol is present within the
subject's breath, a chemical reaction occurs within the gel changing the yellow
bands to green. Measurement results are determined by the extent of color
change. USAT manufactures four variations of the Alco-Breath Tubes specifically
designed for various applications of alcohol breath testing.
(3) CALIBRATION DEVICES
USAT manufactures two devices which are used to calibrate and check
alcohol testing instruments made by both the Company and its competitors for
continued accuracy. The devices are designed to simulate the breath of a person
who has been drinking alcohol. The standard alcohol solutions used in these
calibration devices are produced by USAT in its own certified laboratory.
(a) Alco-Simulator and Alco-Simulator 2000
The Alco-Simulator and its newer 2000 model are approved by the DOT as
calibrating devices for evidential breath testing instruments.
(b) Alco-Equilibrator
The Alco-Equilibrator operates on the same general principle as the
Alco-Simulator, but is less accurate and may only be used for calibrating
non-evidential breath testing instruments.
ALCOHOL TESTING MARKETING
Sales are made directly by USAT's sales representatives. USAT markets
its products at trade shows, conventions and through print advertisements.
USAT currently segments its merchandise into four market areas:
Law Enforcement/Correctional
Industrial
Medical/Clinical Facilities
Alcohol and Drug Testing Services
(1) LAW ENFORCEMENT/CORRECTIONAL
USAT markets and sells the Alco-Analyzer and the MACS to law
enforcement agencies for evidential testing purposes.
ABT are generally used for roadside screening to determine probable
cause for further breath testing by evidentiary quality testing equipment.
4
<PAGE> 5
USAT markets and sells breath alcohol screening devices to the
correctional and institutional market, which includes probation and prison work
release programs.
(2) INDUSTRIAL
USAT markets and sells both evidential quality and screening devices to
several companies for blood alcohol testing of employees.
In February 1994, the DOT published its final rule implementing the
federal act which mandates alcohol testing within the transportation industry.
The final rule requires alcohol testing solely through the use of breath
samples. These enactments have a direct bearing on the USAT's gas chromatography
products, which the DOT had previously approved as evidential breath alcohol
testing instruments. USAT has designed the Alco-Analyzer 2100 to specifically
meet the needs of this market. Its marketing strategy includes sales, leases and
placements of the instrument with a cost per test charge.
USAT, as part of its current business strategy, intends to capitalize
upon the DOT's rules for mandatory alcohol testing within the transportation
industry. The final rule, which became effective in January 1995 as to the
larger transportation companies and, in January 1996, as to the balance,
affected nearly 8,000,000 employees who are engaged in safety- sensitive
positions in the transportation industry by requiring them to be tested for
alcohol on DOT-approved breath testing devices. Mandatory pre-employment
screening, however, is not required by the DOT rule. USAT's Alco-Analyzer series
and, in particular, its Model 2100 meet the DOT's standard. In December 1994,
USAT entered into two agreements with major testing laboratories, Corning
Clinical Laboratories Inc., formerly Metpath Inc., and Laboratory Corporation of
America ("Lab Corp."), formerly National Healthcare Laboratories Incorporated,
for placement of approximately 700 units of its Model 2100 at the respective
laboratory's collection sites with remuneration to USAT on a per test basis.
These two agreements, copies of which agreements are filed (by incorporation by
reference) as Exhibits to this Report and are incorporated herein by this
reference, as well as others with smaller customers, have terms ranging from
three to five years.
USAT has also sold its ABT and MACS devices to the maritime industry
which must conform to government regulations established to test alcohol blood
levels of ship operators. Its testing devices and equipment have been purchased
by other private and public companies which include alcohol testing in their
substance abuse testing programs.
USAT also intends to pursue the non-regulated market for alcohol
testing where approximately 93% of the American work force is employed.
Management is of the opinion that the Mobile Alcohol Collection System ("MACS")
and the Alco-Breath Tubes ("ABT") can increasingly be sold to commercial
companies which, recognizing the adverse impact of alcohol abuse on the
productivity of their employees, wish to institute on-site testing programs. In
order to implement this program, management believes that the ABTs must be
reformatted and DOT approval be obtained for both the MACS and the ABTs.
Although management believes that the non-regulated market is a market with
great potential, there can be no assurance that USAT will derive significant
revenues from this market.
(3) MEDICAL/CLINICAL FACILITIES
USAT sells its alcohol screening devices to the medical and clinical
markets for testing of patients in alcohol treatment facilities and those who
are brought to hospital emergency rooms under suspected influence of alcohol.
USAT continues to expand its sales of screening devices and the gas
chromatograph into this market to provide instantaneous and accurate on-site
testing procedures for breath alcohol analysis.
5
<PAGE> 6
(4) ALCOHOL AND DRUG TESTING SERVICES
Biochemical Toxicology Laboratories ("Biotox") operates as a division
of USAT and also services the needs of U.S. Drug, USAT's drug testing
subsidiary. Biotox is certified as a Clinical Laboratory by the State of
California and also possesses specific state licenses for alcohol and methadone
analysis. Biotox is engaged in alcohol and drug testing for many area police
departments, detoxification centers, coroners departments and corporations and
functions within USAT's facilities maintaining state of the art instrumentation.
Management is of the opinion that, if Biotox obtained certain regulatory
approvals, it could be used by the alcohol testing, the drug testing and the
human resource provider operations of the Company to a greater extent and,
thereby enable the Company to realize greater revenues. There can be no
assurance that these governmental approvals will be obtained or that the Company
will derive greater revenues as a result of the efforts of Biotox.
LIABILITY INSURANCE
USAT maintains liability insurance of $1,000,000, together with an
umbrella policy providing coverage of $3,000,000, to protect the Company against
legal actions related to injury resulting from product failure, whether such
product is offered by USAT or a subsidiary thereof.
COMPETITION
Alcohol Testing
The substance abuse detection equipment industry is highly competitive.
Although USAT's Alco Analyzer 2100 is, to management's knowledge, the only
DOT-approved evidential alcohol breath testing instrument utilizing gas
chromatography, it still competes with other substance abuse detection
techniques developed by other companies. USAT competes with small companies
which also offer alcohol testing equipment such as CMI Inc., Intoximeters, Inc.
and Lifeloc, Inc. Although all of these competitors are believed currently to
have greater revenues than USAT from sales of alcohol testing devices,
management is of the opinion that only CMI, Inc., which is a subsidiary of
MPD/MPH, may have greater financial resources than USAT. In addition, several
companies, including Hoffman-La Roche, Inc. ("Roche") and STC, Inc., offer an
on-site screening saliva based alcohol test. Roche has, and several of these
companies may have, greater revenues and financial resources than the Company.
Although USAT believes that its product and service quality, combined with its
experienced personnel, will offer it a competitive edge in marketing its
products and services, there can be no assurance that USAT will be able to
compete successfully with larger companies which have greater financial
resources available to them to develop and offer an array of substance abuse
detection products, nor is there any assurance that other companies will not
enter the marketplace and present additional competition for USAT and its
products.
Drug Testing
The Company has not received any revenues from U.S. Drug because its
products are still in the developmental stage. U.S. Drug had previously been
developing two products which screen for the presence of drugs of abuse, one
which utilizes flow immunosensor technology with urine samples as a medium of
testing and another which utilizes flow immunosensor technology with saliva
samples as a medium of testing. Only the saliva sampling system is currently
being developed; however, if this product is successfully developed, U.S. Drug
intends to use the technology to complete the urine sample system. The
technology in development will specifically test for five commonly used drugs of
abuse: cocaine, opiates (heroin, morphine and codeine), phencyclidine (PCP),
amphetamines (including methamphetamine) and tetrahydrocannabinol (THC,
marijuana). When the drug testing product is developed, as to which there can be
no assurance, U.S. Drug will compete with many of the companies of varying size
that already exist or may be founded in the future which utilize urine samples
as a medium of testing. U.S. Drug will face competition from at least eight
major companies providing substance abuse screening methods: (1)
enzyme-multiplied immunoassay technique (EMIT) manufactured and distributed by
Syntex Corporation ("Syva"); (2) radioimmunoassay (RIA) manufactured and
distributed by Roche and others; (3) thin layer chromatography (TLC)
6
<PAGE> 7
manufactured and distributed by Marion Laboratories, Inc.; (4) a fluorescence
polarization immunoassay (FPIA) manufactured by Abbott Laboratories,
Inc.("Abbott"), and other immunoassay tests provided by (5) Editek, Inc.
("Editek"); (6) Hycor Biomedical, Inc. ("Hycor"); (7) Princeton Biotech, Inc.
("Princeton"), and (8) Biosite, Inc. ("Biosite"). Almost all of these companies
(i.e., Syva, Roche, Marion, Abbott, Editek, Hycor, Princeton and Biosite) have
substantially greater financial resources available to them than does the
Company to develop and to market their products.
Management believes that saliva sample testing is unique in that, to
management's knowledge, no company is currently offering a drug of abuse
detection method using saliva samples as a medium on an "on-site" basis.
However, U.S. Drug has been advised that such a product is under development by
other companies and, accordingly, there can be no assurance that such a product
will not be offered by a competitor. In addition, even if no such product is
developed, U.S. Drug anticipates, as indicated above, competition from other
substance abuse detection methods such as Syva's EMIT, Roche's RIA, Marion's
TLC, Abbott's FPIA methods, and other immunoassay tests provided by Editek,
Hycor, Princeton and Biosite. U.S.s Drug's market research to date has indicated
a greater market potential for a saliva sample portable testing instrument for
use in detecting drugs of abuse by law enforcement agencies, correctional
facilities, hospitals and other medical facilities than a urine sample
instrument. However, because of the expected limited life cycle of a saliva
specimen, the use of this product in other potential markets may be limited.
If U.S. Drug successfully develops both the urine sample and saliva
sample testing methods, as to which there can be no assurance, it is not certain
whether U.S. Drug will have the financial resources to compete successfully with
other companies which have greater financial resources available to them.
Depending on the progress in the drug testing research and development program
(including the current feasibility study), U.S. Drug may at a later date seek a
major company to assist in the development program and, depending on the
financial arrangements to be negotiated, such development partner may seek
marketing rights to the products when and if successfully developed. Although
such a partner may reduce certain current expenditures, it may later, by
assuming marketing rights, reduce prospective revenues to U.S. Drug. Because of
the stage of development of the product and the fact that no search or
negotiations are currently being conducted, management believes that it is
currently too speculative to anticipate U.S. Drug's competitive position based
on the presence of a development and/or marketing partner.
U.S. Drug's management currently anticipates that U.S. Drug will submit
its five-panel screening assay to the Food and Drug Administration (the "FDA")
late in 1997 at the earliest and that U.S. Drug will commence marketing its
products six months to a year later. There can be no assurance as to when U.S.
Drug will submit such assay to the FDA, if at all, as to when the FDA will give
its approval and as to when marketing will commence.
Human Resource Provider
ProActive is a single source service provider, meaning that it is a
provider of both substance abuse testing services and background screening
services. A single source service provider is a relatively new concept.
Additionally, the Company, through the recent acquisition of RSA, can also
provide customized loss prevention services specifically designed to reduce the
negative effect of workplace substance abuse. The competition from single source
providers which ProActive currently encounters is primarily from small local and
regional companies. To management's knowledge, currently there is no single
source provider on a national level, which is what ProActive hopes to become and
there are no providers of customized programs and policies. However, Lab Corp.,
through Med-Express, is currently offering background screening services to
corporations on a limited basis. Although, ProActive has experienced personnel
in both the drug testing and investigative arena, there is no assurance that
ProActive will become successful in marketing its services as a single source
provider on a national level. In addition, ProActive will face competition from
other companies which provide each of these services separately such as the
companies mentioned in the preceding subsections of this section "Competition"
under this caption "Business of the Company" as it relates to substance abuse
testing providers (including the laboratories which are vendors to ProActive),
and local or regional
7
<PAGE> 8
investigative firms or private investigators (including vendors to ProActive) as
it relates to background investigative services. Assuming that the combined
RSA/ProActive operations achieve national status as a single source provider,
there can be no assurance that existing or new companies will not enter the
national marketplace to compete with the combined RSA/ProActive operations.
RESEARCH AND DEVELOPMENT
During the fiscal year ended March 31, 1996 ("fiscal 1996"), the
Company spent approximately $1,006,000 on research and development, including
$851,000 expended on development of the drug testing technology of U.S. Drug. In
the fiscal year ended March 31, 1995 ("fiscal 1995"), the Company spent
approximately $1,249,000 on research and development, including $886,000
expended on development of the technology of U.S. Drug. In the fiscal year ended
March 31, 1994 ("fiscal 1994"), the Company spent approximately $948,000 on
research and development, including $728,000 expended on development of the
technology by U.S. Drug.
PATENTS AND TRADEMARKS
U.S. Drug has rights under three patents, in addition to its rights to
use the USN patent under its sublicense from USAT. USAT and its other
subsidiaries currently have no patents on the other products of the Company. The
term of the USN patent is set forth in the section "Subsidiaries-U.S. Drug
Testing, Inc." under the caption "Business of the Company" and the terms of the
U.S. Drug patents are 17 years from the date of issuance as set forth in that
section, subject to renewal. Termination of the Licensing Agreement for the USN
patent, which would occur only on a default by USAT or an invalidation of the
USN patent, would end the Company's rights to develop drug testing products.
Termination of the other patents or licenses to use the same would require USAT
to make changes to its products which could further delay development and
marketing thereof.
The Company has obtained tradenames for its major products. The
following are the registered trademarks of the Company and have been published
by the U.S. Patent and Trademark Office (the "PTO"): Alco-Equilibrator(TM),
Sobriety Checkpoint(TM), ABT(TM), Alco-Analyzer(TM), Final Call(TM),
Alco-Equilbrator(TM) and Drug Won't Work Here(TM). On April 12, 1995, the
Company abandoned the following trademarks: Mobile Alcohol Collection, MACS,
Alco-Report; Alco-Breath Tubes, Alco-Link and Alco-Simulator. Good Ideas has
registered the trademarks Good Ideas(TM) and Big Bill's Bric Builders(TM) and
the same are published by the PTO. The Company believes these tradenames afford
adequate protection. However, there can be no assurance that infringement claims
will not be asserted against the Company in the future.
SUBSIDIARIES
(1) U.S. DRUG TESTING, INC.
In October and November 1993, USAT's then wholly-owned subsidiary U.S.
Drug completed an initial public offering of the U.S. Drug Common Stock, which
security trades on the Pacific Stock Exchange. As of March 31, 1996, USAT owned
3,500,000 of the 5,221,900 outstanding shares of the U.S. Drug Common Stock or
67.0% thereof.
The Company has not received any revenues from U.S. Drug because its
products are still in the developmental stage. U.S. Drug is developing
proprietary systems that test for drug use, specifically the following five
commonly used Drugs of Abuse: cocaine, opiates (heroin, morphine and codeine),
phencyclidine hydrochloride (PCP), amphetamines (including methamphetamines),
and tetrahydrocannabinol (THC, marijuana). Its line of products under
development are based on its sub-license from USAT for Drug of Abuse detection
utilizing the USN patent for flow immunosensor technology. U.S. Drug is
developing its own proprietary "Immunoassay Chemistry" for these five drugs
which work with the USN developed technology. U.S. Drug has received six FDA
marketing approvals covering its Model 9000 Flow Immunoassay System and the
attendant assays for each of the five Drugs of Abuse listed above, using urine
as the test medium. However, additional development work would be required
before the urine based testing product can be marketed. U.S. Drug, based on its
review of current market
8
<PAGE> 9
conditions, has decided to defer completion of the calibrators and the other
elements required to be completed in order to market the urine medium testing
product until it can complete the assays for a saliva medium testing product
and, as a result, has produced no revenues through March 31, 1996. U.S. Drug has
commenced research using saliva as a testing medium in connection with the flow
immunosensor technology, is currently conducting a feasibility study as to such
product and, assuming a successful conclusion with respect to such study and
subsequent success in the remainder of the development program, currently
expects to submit its five-panel screening assay to the FDA in late 1997. Until
FDA approval is obtained of the saliva medium product, no revenues from product
sales are likely to be produced. U.S. Drug's management expects marketing of
U.S. Drug products to commence six months to a year later, but there can be no
assurance as to when the submission will be made to the FDA, if at all, as to
when FDA approval will be given or as to when marketing will commence.
U.S. Drug spent approximately $2,556,000 on research and development
during the period from October 1992 through March 31, 1996.
The following material contracts relate to the drug testing operations
now conducted by the subsidiary:
(a) On January 24, 1992, USAT and the USN entered into a ten-year non-assignable
agreement granting USAT a partial exclusive patent license to products for drug
testing in the United States and certain foreign countries. The license applies
to the U.S. Government owned invention described in U.S. Patent Application
Serial No. 07486024, "Flow Immunosensor Method and Apparatus" filed February 23,
1990. The technology covered by the patent application is designed to test and
detect minute and large amounts of drugs contained in body fluids rapidly and
efficiently. In November 1994, the license agreement was revised to provide for
minimum annual royalties to be paid to the USN of $375,000 for 1995, $600,000
for 1996 and $1,000,000 for 1997 and thereafter. In June 1995, the license
agreement with the USN was renegotiated and amended to provide for minimum
annual royalties to be paid to the USN of $100,000 per year commencing October
1, 1995 and terminating September 30, 2005. Additional royalties will be paid
pursuant to a schedule based upon sales of products. By an amendment dated June
16, 1995, the term of the exclusive right under the License Agreement was
extended to terminate ten years from June 27, 1995 and USAT has a nonexclusive
right to use the technology thereafter for the balance of the patent term,
unless the License Agreement is terminated sooner because of USAT's default. By
letter dated May 15, 1995, the USN notified USAT that, because the expiration
date of the USN patent had been extended to February 23, 2010 under the GATT/WTO
treaty, the expiration date of the License Agreement was extended to February
23, 2010.
(b) On April 16, 1992, USAT entered into a 12-month cooperative development
research agreement ("CRDA") with the Naval Research Laboratory section of the
USN to further develop the licensing technology of the "Flow Immunosensor".
(c) Effective January 1993, USAT granted a sole and exclusive sublicense to U.S.
Drug which assumed all of USAT's rights and obligations under the License
Agreement. However, the USN refused to grant, as requested, a novation of the
License Agreement so that the USN looks to USAT for performance thereunder. In
the event of a default by U.S. Drug under its sublicense from USAT, all rights
of U.S. Drug under the License Agreement would terminate and USAT as the
licensee can continue to exercise all rights, and be subject to all obligations,
thereunder without any claim by U.S. Drug. USAT simultaneously assigned to U.S.
Drug all of its rights under the CRDA. USAT transferred all of its assets and
intellectual property rights related to drug testing operations in exchange for
3,500,000 shares of the U.S. Drug Common Stock.
(d) On April 1, 1993, USAT and U.S. Drug entered into a five-year management
agreement (the "U.S. Drug Management Agreement") which obligated U.S. Drug to
pay USAT $300,000 annually plus ten percent of its product sales in exchange for
USAT's administrative management services, including management, administrative,
accounting and other financial services and advice, including, without
limitation, the services currently performed by Gary S. Wolff as the Treasurer
of U.S. Drug, for which he is not directly compensated by U.S. Drug; services
9
<PAGE> 10
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. In July 1993, the parties amended the U.S. Drug Management Agreement
retroactive to April 1, 1993, changing U.S. Drug's annual management fee
obligation to $420,000 plus three percent of its gross revenues.
Copies of the License Agreement (including all amendments), the
cooperative research agreement with CRDA (and the assignment thereof to U. S.
Drug), the sublicense (and the USN's consent thereto) and the U.S. Drug
Management Agreement (including the amendment thereto) are filed (some by
incorporation by reference) as exhibits to this Report and are incorporated
herein by this reference.
U.S. Drug has rights under three patents, in addition to its rights to
use the USN patent under its sublicense from USAT. These patents are as follows:
U.S. Patent No. 5,183,740, "Flow Immunosensor Method and Apparatus,"
issued on February 2, 1993. Unless extended, the Company's license under this
patent expires on February 23, 2010. The Flow Immunosensor provides a method of
detecting drugs of abuse or other target molecules by flowing a solution
containing the analyte through the immunosensor. The technology relies on the
displacement of fluorescent-labeled antigen from a solid phase immobilized
antibody and measuring the released labeled antigen in the immunosensor effluent
with a detection apparatus.
U.S. Patent No. 5,066,859, "Hematocrit and Oxygen Saturation Blood
Analyzer," issued on November 19, 1992. Unless extended, the Company's license
under this patent expires on February 23, 2010. The patented device is used to
measure hematocrit and oxygen saturation levels in blood and compensates for the
effects of oxygen saturation, pH, and temperature.
U.S. Patent No. 5,249,584, "Hematocrit and Oxygen Saturation Blood
Analyzer," issued on November 5, 1993. Unless extended, the Company's license
under this patent expires on November 5, 2010. The device is a low cost
disposable syringe which has a single optical window that is inserted into a
tubular barrel.
U.S. Patent No. 5,354,654, "Lyophilized Ligand-Receptor Complexes for
Assay and Senors" issued on October 11, 1994. Unless extended, the Company's
license under this patent expires on July 16, 2013. This patented process allows
for the freeze-drying of ready-to-use immunoassay chemistry or reagents which is
then indefinitely preserved.
During May 1996, USAT filed a Registration Statement on Form S-4, File
No. 333-4790 (the "U.S. Drug Registration Statement"), under the Securities Act
of 1933, as amended (the "Securities Act"), to register shares of USAT's Common
Stock, $.01 par value (the "USAT Common Stock"), to be issued to the minority
stockholders of U.S. Drug upon the consummation of a merger of U.S. Drug with
and into a newly formed wholly-owned subsidiary of USAT. The USAT Board of
Directors has concluded that the value of the USAT Common Stock could best be
maximized if the Company concentrated its operations on the USAT alcohol testing
business, U.S. Drug's drug testing business and the related human resource
provider business of ProActive and operated the three as if one corporation. The
U.S. Drug Registration Statement is not yet effective and, accordingly, no offer
has been made to the minority stockholders of U.S. Drug.
(2) PROACTIVE SYNERGIES, INC./ROBERT STUTMAN & ASSOCIATES, INC.
ProActive, which is a wholly-owned subsidiary of USAT that commenced
operations in September 1995, provides single source services to assist
corporations in their hiring practices ranging from substance abuse testing and
background screening services to total program management. ProActive's substance
abuse testing services include specimen collections, laboratory testing and
medical review officer services. Medical review officers review drug test
results to verify that chain-of-custody procedures were followed and determine
if there is an alternative medical explanation for a positive test result.
ProActive's background investigative services include criminal history checks,
employment verifications, credit checks, reference checks, driving record
checks, workers' compensation
10
<PAGE> 11
history checks, and social security number, educational and professional license
verifications. ProActive's services also include physicals and employee
assistance programs. Its total program management services include establishing
a substance abuse policy with corporations and conducting program audits to
ensure regulatory compliance with such policy. ProActive's hiring solutions to
corporations include the use of its proprietary computer software which provides
ProActive with access to immediate on-line information.
On December 14, 1995, USAT and ProActive entered into an agreement with
RSA and Robert Stutman, personally, pursuant to which (1) USAT and ProActive
engaged Mr. Stutman to be their expert spokesman and a consultant with respect
to their drug and alcohol testing businesses; (2) ProActive agreed to refer
customers to RSA for the purpose of RSA providing its services to such
customers, including writing drug testing/background screening policy manuals;
and (3) RSA agreed to refer customers to ProActive. Prior to forming RSA, Mr.
Stutman was Special Agent in charge of the United States Drug Enforcement
Administration's New York office. He also currently serves as special consultant
on substance abuse for the CBS News Division. On December 14, 1995, pursuant to
the agreement, USAT agreed to issue to Mr. Stutman and RSA three-year Common
Stock purchase warrants, each to purchase 200,000 shares of the USAT Common
Stock at $2.00 per share, which was the market price on the date of grant. These
warrants were issued on December 14, 1995 and April 1, 1996. The agreement,
which had a term of ten years (except the term for the consulting and
spokesperson services by Mr. Stutman was three years), provided for payment of
fees to ProActive based on referrals to RSA and an initial $100,000 payment by
ProActive and varying monthly fees thereafter to RSA. A copy of the Consulting
Agreement dated as of December 14, 1995 by and between USAT, ProActive, RSA and
Robert Stutman is filed (by incorporation by reference) as an exhibit to this
Report and is incorporated herein by this reference.
On April 18, 1996, Mr. Stutman was elected as the Chairman of the Board
and a director of USAT and designated as its Chief Executive Officer. See the
section "Recent Developments under this caption "Business of the Company". USAT
also agreed in principle to acquire RSA. On May 21, 1996, the Company completed
its acquisition of RSA and RSA became a 100% owned subsidiary of USAT. USAT paid
$2,100,000 to the RSA stockholders for their 30 shares of RSA (including
$1,078,920 paid to Mr. Stutman for his 52.8% of the RSA shares and $721,080 paid
to Brian Stutman, son of Mr. Stutman and now Director of Sales and Marketing of
USAT, for his 35.3% of the RSA shares and issued to the RSA holders an aggregate
of 500,000 shares of the USAT Common Stock (including 263,750 shares issued to
Mr. Stutman and 176,250 shares to Brian Stutman) registered under the Securities
Act as Acquisition Shares in USAT's Registration Statement on Form S-1, File No.
33-43337 (the "January 1992 Registration Statement"), and USAT Common Stock
purchase warrants expiring May 20, 1999 to purchase an aggregate of 900,000
shares of the USAT Common Stock (including a warrant to purchase 474,750 shares
issued to Mr. Stutman and a warrant to purchase 317,250 shares issued to Brian
Stutman). USAT also issued two promissory notes aggregating $400,000 in
principal amount (the "RSA Notes") to two RSA stockholders (one of whom is Mr.
Stutman who received a RSA Note for $239,760 and Brian Stutman received a note
for the balance). The RSA Notes bear interest at the rate of 7.5% per annum and
become due in one year from the May 21, 1996 closing date. USAT is required to
prepay the RSA Notes if the gross proceeds received by USAT from the exercises
of the USAT Common Stock purchase warrants after April 17, 1996 exceeds
$7,000,000. The RSA Notes are secured by all of USAT's tangible and intangible
personal property except the following: (1) USAT's cash and cash equivalents;
(2)USAT's securities, including the stock of its subsidiaries; and (3) certain
contracts, including the license with the USN. Copies of the Stock Purchase
Agreement dated as of May 21, 1996, the Secured Promissory Note dated May 21,
1996, the Security Agreement dated May 212, 1996, the Common Stock purchase
warrant expiring May 20, 1999 and Registration Rights Agreement dated as of May
21, 1996, all related to the acquisition of RSA, are filed (by incorporation by
reference) as exhibits to this Report and, by this reference, are incorporated
herein. As a result of the acquisition of RSA, the Consulting Agreement
described in the preceding paragraph terminated; however, the Common Stock
purchase warrants described therein remain outstanding, except that the RSA
warrant was distributed to its shareholders.
ProActive entered into a lease for office space in Savannah, Georgia.
See the caption "Property" under the caption "Business of the Company."
11
<PAGE> 12
(3) ALCONET, INC.
In March 1995, USAT acquired 100% of the issued and outstanding common
stock of Alconet and all the membership interests of Dakotanet, L.L.C. As
consideration, USAT issued 782,321 shares of the USAT Common Stock registered
under the Securities Act as Acquisition Shares in the January 1992 Registration
Statement and valued at $1,564,642. The acquisitions have been accounted for as
a purchase in the financial statements of the Company. A copy of the Stock
Purchase Agreement relating to the Alconet acquisition is filed (by
incorporation by reference) as an exhibit to this Report and is incorporated
herein by this reference. In March 1996, USAT settled a dispute with two
officers of Alconet for an aggregate payment of $250,000 and the assignment of
certain software to one of the officers, both of whom then resigned. Alconet is
engaged in the computer software/networking business. Alconet has developed an
alcohol testing network to upload test results and information from various
alcohol breath testing devices. As a cost reduction action, USAT may seek to
consolidate or integrate the Alconet operations with other operations of the
Company; however, there can be no assurance as to the timing or the effect of
such a program.
(4) GOOD IDEAS ENTERPRISES, INC.
In February and April 1994, Good Ideas completed an initial public
offering of Good Ideas Common Stock, which security trades on the Pacific Stock
Exchange. As of March 31, 1996, USAT owned 2,400,000 of the 3,948,680
outstanding shares of the Good Ideas Common Stock or 60.8% thereof.
Good Ideas has designed, marketed and distributed a variety of
traditional toy products for children of various ages. Its sales historically
have been derived from a line of traditional wooden construction toys. Good
Ideas' strategy has been to design and develop enduring traditional lines of
toys and to create enhancements to, and extensions of, these toy lines which
were intended to maximize product line sales while minimizing development and
advertising expenses for new and enhanced products.
Good Ideas' principal product line, wooden construction toys, includes
classic interlocking log sets marketed under the trademark Paul Bunyan Log
Builders(TM), themed playsets such as General Custer's Fort Apache(TM), building
block sets marketed under the trademark Paul Bunyan Bloc' Builders(TM) and
brightly-painted, multi-colored combination log and block sets marketed under
the trademark Paul Bunyan Wood Builders(TM). In addition to its line of wooden
construction toys, it marketed one other line of traditional toys. Since March
1993, it has sold a line of equestrian toys comprising of various styles and
sizes of flocked plastic horses and related accessories marketed under the
trademark Black Beauty and Friends(TM).
Good Ideas has sold its products to over 100 customers, almost all of
whom are located in the United States. Since it first commenced business in June
1988, its principal customers have been mass merchandisers, such as Toys R Us,
Inc. ("Toys R Us"), Wal-Mart Stores, Inc., and J.C. Penney Company, Inc., and
wholesale clubs, such as Price Costco Wholesale Corporation, and BJ's Wholesale
Club, Inc. Its domestic distribution network also expanded to include high-end
specialty retailers, such as F.A.O. Schwartz and Imaginarium. During fiscal
1996, fiscal 1995 and fiscal 1994, Toys R Us accounted for 51.7%, 59.2% and
57.4%, respectively, of Good Ideas' sales. During fiscal 1996, fiscal 1995 and
fiscal 1994, Costco accounted for 3.3%, 20.9% and 10.0%, respectively, of Good
Ideas' sales. No other customer accounted for 10.0% or more of Good Ideas' sales
during such three-year period.
Toys R Us, the major customer of Good Ideas, has not been placing
orders for Good Ideas' toy products. The customer has attributed its reduction
in orders to its large inventories and declining sales and customer traffic.
Management believes that other manufacturers in the toy industry are currently
facing those same problems - their distributors or retailers to which they sell
have large inventories of products and declining sales and customer traffic. In
addition, management believes that many retailers are minimizing their number of
vendors, which has the result of squeezing out the smaller companies with their
limited product lines. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations-Good Ideas Enterprises, Inc." for further
discussion.
12
<PAGE> 13
Since July 1992, USAT has provided, and continues to provide, certain
management and administrative services to Good Ideas. These services included
management and financial advice; maintenance of financial books and records and
preparation of financial statements, budgets, forecasts and cash flow
projections; services relating to banking relationships; payment of accounts
payable and payroll; collection of accounts receivable and credit analysis;
order processing; import processing; cash management; and other miscellaneous
services and advice. From July 1992 through March 1993, the fee payable to USAT
for these services was computed on a fixed monthly charge of $25,000. In April
1993, Good Ideas and USAT entered into a formal management agreement, pursuant
to which the fee for such services was computed at ten percent of annual net
sales.
In December 1993, Good Ideas and USAT entered into a management
services agreement (the "Management Services Agreement"), effective
retroactively to October 1, 1993, pursuant to which the fee for management and
administrative services provided by USAT was computed on a fixed monthly fee of
$25,000, plus five percent of annual gross sales in excess of $5,000,000. A copy
of the Management Services Agreement is filed (by incorporation by reference) as
an exhibit to this Report and is incorporated herein by this reference. The fee
charged by USAT for its management services was determined arbitrarily by its
Board of Directors after taking into consideration the anticipated diversion of
USAT resources required to provide such services, both in terms of employee time
and allocated overhead costs. Pursuant to the Agreement, the term, which
initially was to expire on September 30, 1994, has been automatically renewed so
that it is now scheduled to expire on September 30, 1996. The Agreement,
however, provides for automatic one-year renewals unless terminated by Good
Ideas upon six months' notice prior to the commencement of any renewal term or
by USAT at least 12 months prior to the commencement of any renewal term. In
view of the USAT Board's decision on February 26, 1996 to sell or liquidate Good
Ideas (see the succeeding paragraph), the Board suspended management fees to
USAT retroactive to January 1, 1996. Accordingly, Good Ideas recorded no
management fee expense in the last quarter of fiscal 1996 and USAT recorded no
income from management fees in the same period.
USAT has filed a Registration Statement on Form S-4, File No. 333-3734
(the "Good Ideas Registration Statement"), under the Securities Act to register
shares of the USAT Common Stock to be issued to the minority stockholders of
Good Ideas upon the consummation of a merger of a newly formed wholly-owned
subsidiary of USAT with and into Good Ideas. The Good Ideas Registration
Statement is not yet effective and, accordingly, no offer has been made to the
minority stockholders of Good Ideas. The USAT Board of Directors has concluded
that the value of the USAT Common Stock could best be maximized if the Company
concentrated its operations on the USAT alcohol testing business, the U.S. Drug
testing business and the related human resource provider business of ProActive
and operated the three as if one corporation. The USAT directors have concluded
that, because of the history of losses in Good Ideas and what they perceive to
be the problems generally in the toy industry as described in the third
preceding paragraph, it would be difficult to make Good Ideas' operations
profitable within what they considered an acceptable time frame, assuming that
such result could be achieved at all, as to which there can be no assurance. On
February 26, 1996, for both of these reasons, the USAT Board authorized
management to seek offers from prospective purchasers of Good Ideas. There can
be no assurance that an acceptable offer to purchase Good Ideas will be received
or that the terms of any such offer will be acceptable. If no acceptable offer
is received, the USAT Board will liquidate Good Ideas by December 31, 1996.
Accordingly, Good Ideas has been presented under the caption "Discontinued
Operations" in the accompanying financial statements.
(5) U.S. RUBBER RECYCLING, INC.
In November 1992, USAT purchased all the assets of Adflo International,
Inc. for its then newly formed wholly-owned subsidiary, USRR, which then began
to manufacture floor covering products for office and industrial use from used
truck and bus tires. These tires were delivered to USRR's then Rancho Cucamonga
plant and to an off-site storage facility, where they were recycled by splitting
and cutting the tires and reassembling the recycled parts into finished
products. Sales were made nationwide through manufacturer's representatives and
distributors. All manufacturing was performed in the Rancho Cucamonga
13
<PAGE> 14
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 assets of Adflo International, Inc. for a total
consideration of 185,000 shares of the USAT Common Stock valued at $196,563.
These shares were registered under the Securities Act as Acquisition Shares in
the January 1992 Registration Statement. The transaction was accounted for as a
purchase in the financial statements of the Company.
On April 30, 1996, USRR sold substantially all of its assets to an
unaffiliated buyer for $450,000, $150,000 of which was paid at the closing and
the balance by the delivery of a $300,000 promissory note. The purchaser also
paid approximately $80,000 in accounts payable of USRR and assumed certain other
liabilities, including USRR's lease. The sale resulted in a loss of
approximately $88,000. The promissory note is payable in six annual installments
of $50,000, together with interest at a rate of 7% per annum. In addition to the
annual installments, the promissory note will be prepaid in an amount equal to
12-1/2% of the buyer's annual gross sales of USRR products in excess of
$1,400,000. The promissory note is secured by a first priority security interest
in all of the buyer's assets. USRR is required to agree, however, to subordinate
its security interest to up to $1,000,000 of institutional financing for the
buyer. Because of the sale subsequent to fiscal year end, USRR has been
presented under the caption of "Discontinued Operations" in the accompanying
financial statements.
Copies of the Asset Acquisition Agreement relating to the acquisition
of assets by USSR and of the Asset Purchase Agreement relating to the sale of
USRR assets are filed (by incorporation by reference) as exhibits to this Report
and are incorporated herein by this reference.
EMPLOYEES
As of March 31, 1996, the Company had 69 full time employees other than
its officers, 27 engaged in manufacturing, 7 in sales, 7 technical, 6 scientists
and 22 in clerical administrative jobs. The Company has no collective bargaining
agreement with its employees. Eighteen of these employees work for the
operations treated as discontinued in the March 31, 1996 financial statements.
RECENT DEVELOPMENTS
In mid-May 1995, as a result of communications among certain
stockholders of USAT relating to their dissatisfaction with the performance of
the management of USAT in maximizing the value of USAT, Lee S. Rosen, Michael S.
McCord, Arthur Schwartz, Morris B. Black and Stuart S. Greenberg (the then
Chairman of Baraban Securities Corporation) formed a stockholders' committee
later named "The Committee for Maximizing Stockholder Value of U.S. Alcohol
Testing of America, Inc." (the "Committee") to make recommendations to the
management of USAT. On July 5, 1995, Mr. Black resigned from the Committee for
personal reasons and, on July 19, 1995, Peter M. Mark joined the Committee.
Between May 12, 1995 and August 17, 1995, the Committee or affiliated
stockholders took certain actions, including the formulation of certain
recommendations by the Committee which it attempted to communicate to
management.
On August 17, 1995, the Committee determined to seek consents (1) to
remove and replace incumbent directors with its own nominees; (2) to amend the
by-laws of USAT to delete the provision that establishes three classes of
directors on USAT's Board of Directors; and (3) to amend the by-laws of USAT to
fix the number of directors at seven instead of five and to require that a
majority of the directors be independent. On September 11, 1995, the Committee,
acting through Georgeson & Company Inc. as its solicitation agent, first
delivered and mailed definitive consent solicitation material pursuant to
Regulation 14A under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), to brokers and certain stockholders of record of USAT. USAT
thereafter initiated an action in the Delaware District Court alleging that the
Committee had violated Section 14 of the Exchange Act, sent out a "stop, look
and listen letter" and filed its preliminary consent revocation statement.
14
<PAGE> 15
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.
At the Annual Meeting of Stockholders held on February 7, 1996, Mr.
Witham and Ms. Laustsen were elected to serve for a one-year term, Messrs.
Goldman and Mark were elected to serve for a two-year term and Messrs. Lawn and
Rosen and Ms. Masterson were elected to serve for a three-year term.
On April 18, 1996, Mr. Witham and Ms. Laustsen resigned their
officerships and directorships in USAT; however, they remained as employees of
USAT to assist in the transition and other matters until May 31,1996. They
continued to serve as directors of U.S. Drug and Good Ideas until May 28, 1996
in the case of Ms. Laustsen and May 31, 1996 in the case of Mr. Witham. The
resignations of Mr. Witham and Ms. Laustsen were voluntary and relationships
have continued on a cordial, cooperative basis since April 18th.
Recognizing that RSA could bring potential revenues to the Company in
what the USAT Board deemed to be the Company's core businesses, especially if
RSA were part of the Company and not just a consultant, and that Mr. Stutman was
a recognized authority in the area of substance abuse prevention programs, four
of the independent directors of USAT negotiated with Mr. Stutman the terms for a
possible acquisition of RSA. When Mr. Witham joined the discussions, he favored
naming Mr. Stutman as Chief Executive Officer of USAT and offered to resign so
that there would be no question as to Mr. Stutman's authority, believing that
this would be in the best interests of the Company and all USAT stockholders.
Ms. Laustsen subsequently also offered to resign for the same reason.
Recognizing that, as a result of these offers, USAT would lose two of its
principal executive officers, the remaining directors and Mr. Stutman then
negotiated with Ms. Masterson the terms of her becoming President and Chief
Operating Officer of USAT.
On April 18, 1996, Robert Stutman was elected as Chairman of the Board
and a director of USAT and designated as its Chief Executive Officer. On the
same day, but effective May 13, 1996, Ms. Masterson, a director, was elected as
the President of USAT and designated as its Chief Operating Officer. Mr. Stutman
and Ms. Masterson were, on May 31, 1996, elected as directors of Good Ideas and
U.S. Drug, as was Michael S. McCord, a former member of the Committee, a
consultant to USAT's Board of Directors, and a stockholder of each of USAT, Good
Ideas and U.S. Drug.
On April 18, 1996, USAT agreed in principle to acquire RSA, a provider
of corporate drug-free work place programs and of which Mr. Stutman was
President and founder. As indicated above, the terms of the acquisition were
negotiated with Mr. Stutman by four independent directors of USAT. Since January
1996, RSA has been designing policies and
15
<PAGE> 16
programs for the ProActive subsidiary. The acquisition of RSA was completed on
May 21, 1996. (See the section "Subsidiaries - ProActive Synergies, Inc./Robert
Stutman & Associates, Inc." under this caption "Business of the Company" and
Note 16 to the Financial Statements included elsewhere in the Report.)
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
EFFECT OF MERGER -- U.S. DRUG TESTING, INC.
During May 1996, USAT filed the U.S. Drug Registration Statement to
register shares of the USAT Common Stock to be issued to the minority
stockholders of U.S. Drug upon consummation of a proposed merger of U.S. Drug
with and into a wholly owned subsidiary of USAT. The effects of the proposed
merger (the "U.S. Drug Merger") are discussed below.
Although consummation of the U.S. Drug Merger will result in the
cancellation of the indebtedness from USAT to U.S. Drug ($282,000 outstanding as
of March 31, 1996 and due June 30, 1996), USAT will still have to invest at
least $4,500,000 to $5,000,000 in the drug testing operations during the next
two years in order to complete the development of the drug testing products. The
foregoing estimate does not reflect an additional $2,000,000 to $2,500,000
required for manufacturing line start-up expenses. Because no revenues from
sales are currently expected from the drug testing operations for at least 20 to
30 months, assuming U.S. Drug Acquisition Corp., as the successor to U.S. Drug
by merger, meets the current product development schedule, as to which there can
be no assurance, the drug testing operations will operate at a loss for at least
the next two fiscal years, requiring the Company to seek to generate revenues
from the combined RSA/ProActive business and from its alcohol testing operation,
assuming that the sale of Good Ideas is effected. Although USAT management is
optimistic about the Company achieving a significant amount of revenues from the
alcohol testing and the combined RSA/ProActive operations, there can be no
assurance that management's expectations will be achieved and in the time frame
that management contemplates. Management believes that the combined
RSA/ProActive operations can also increase the revenues from the alcohol testing
products and, when its products are developed and marketable, those of the drug
testing subsidiary. Although the sale of the rubber recycling operation and the
desired sale of the toy operation, as to which there can be no assurance that
the latter sale will be consummated or, if sold, as to when and for what
purchase price the sale will be effected, will eliminate a substantial portion
of the Company's operating losses, such sales will also substantially reduce the
Company's revenues (the toy and rubber recycling operations constituted 79.9% of
the Company's revenues in fiscal 1995 and 67.3% in fiscal 1996). Accordingly, in
order to meet the Company's cash requirements, particularly those relating to
its drug testing operation, the Company must develop new sources of revenues -
as to which the combined RSA/ProActive operation is the most likely source, seek
additional financing and/or secure additional exercises of outstanding USAT
Common Stock purchase warrants and stock options. There can be no assurance that
any of these sources of cash will produce sufficient amounts required for the
Company's operations, including U.S. Drug's, although USAT management believes,
as discussed below under "Liquidity and Capital Resources," that, as the result
of the recently completed private placement, the recent exercises of Common
Stock purchase warrants and other potential sources of funds, the Company
expects to meet its cash requirements for at least the next 12 months. There is,
of course, no assurance that management's expectations will be realized. If the
U.S. Drug Merger is successful, USAT will record a non-recurring charge to
income of approximately $8,500,000 as Incomplete Research and Development cost,
representing the excess of the market value of the USAT Common Stock issued in
the U.S. Drug Merger over the book value of the acquired minority investment
in U.S. Drug.
If the U.S. Drug Merger is not effected, an infusion of equity will be
necessary for U.S. Drug to maintain its listing of the U.S. Drug Common Stock on
the Pacific Stock Exchange because U.S. Drug, based on its balance sheet as of
March 31, 1996, did not meet such Exchange's assets and stockholders' equity
maintenance requirements. Similarly, U.S. Drug would not meet the entry
requirements of the American Stock Exchange or the National
16
<PAGE> 17
Association of Securities Dealers Automated Quotation ("NASDAQ") System. Even if
the current maintenance problem is resolved by an infusion of equity, because of
the anticipated continuing losses, U.S. Drug will probably have the same
compliance problem for at least 20 to 30 months (i.e., the necessity to infuse
capital to offset operational losses). Any delisting from the Pacific Stock
Exchange and inability to list on another exchange or the NASDAQ System will
adversely affect U.S. Drug's ability to raise additional equity financing. In
such event, the burden to seek financing for the drug testing operation would
fall solely on USAT, which owns 67.0% of U.S. Drug and holds the license to the
USN technology.
EFFECT OF MERGER -- GOOD IDEAS
During April 1996, USAT filed the Good Ideas Registration Statement to
register shares of the USAT Common Stock to be issued to the minority
stockholders of Good Ideas upon consummation of a proposed merger of a wholly
owned subsidiary of USAT with and into Good Ideas. If the proposed merger is
successful, USAT will record a charge to Loss on Disposal of Discontinued
Operations of approximately $635,000 representing the excess of the market value
of the USAT Common Stock issued in the merger over the book value of the
acquired minority interest in Good Ideas. The other effects of the proposed
merger (the "Good Ideas Merger") are discussed below.
Management believes that, during the past three years, manufacturers in
the toy industry have faced the problem that distributors or retailers have been
requesting that the manufacturers maintain the inventory, thereby increasing
manufacturers' expenses, and have been minimizing the number of vendors which
sell to them, which has the effect of squeezing out the smaller companies like
Good Ideas with their limited product lines. Because of these problems which
management believe are characteristic of the toy industry generally and Good
Ideas' declining sales and increasing losses, the USAT Board of Directors
concluded on February 26, 1996 that Good Ideas was not likely to reverse the
trend of increasing losses during the next 12 months. The Board believed that,
whether or not the Good Ideas Merger was consummated, the only way to improve
operational results was to secure new toy products, whether through licensing
arrangements or otherwise; however, this type of program, even if successful, as
to which there can be no assurance, would require substantial cash investments,
which is contrary to the Board's conclusion that the Company's best opportunity
at maximizing revenues and securing profitability was by concentrating on its
alcohol and drug testing and human resource provider operations as its core
businesses. Accordingly, on February 26, 1996, the USAT Board authorized seeking
a purchaser for Good Ideas. In addition, the USAT Board suspended management
fees to USAT retroactive to January 1, 1996. The Board, believes that, pending
receipt of an acceptable offer, as to which there can be no assurance, Good
Ideas' cash resources and expected cash flow from operations, coupled with its
cost reduction actions (such as not renewing the lease for office and warehouse
facilities), will be sufficient to meet Good Ideas' cash requirements for the
next 12 months if such time is required to sell or liquidate. However, there can
be no assurance that additional funds may not be required. The USAT Board
believes that liquidation of Good Ideas by no later than December 31, 1996 would
be preferable than investing at that time substantial additional funds in Good
Ideas, other than repaying USAT's indebtedness to Good Ideas due June 30, 1996.
The Good Ideas Merger would terminate USAT's obligation to make such repayment.
If the Good Ideas Merger is not consummated, the Good Ideas Board could
consider whether the expenditure of funds to secure new products was preferable
to a sale or liquidation. However, for the reasons set forth in the preceding
paragraph, the answer will probably be in the negative.
LIQUIDITY AND CAPITAL RESOURCES
Although the Company has a history of operating losses through March
31, 1996, management believes that the Company will have the cash resources
available to meet all of its operating requirements for the ensuing 12 months.
Management bases its belief on the following:
17
<PAGE> 18
Discontinued Businesses. Good Ideas and USRR have produced significant operating
losses over the last several years. Both operations were treated as discontinued
operations in the financial statements for fiscal 1996. USRR was sold April 30,
1996. Good Ideas' operations have been substantially suspended and the Company
is seeking a buyer for its assets. If no satisfactory offers are received, the
operation will be liquidated prior to December 31, 1996.
Nonrecurring Losses. Fiscal 1996 included $1,137,914 in losses from the
settlement of litigation. Management is not aware of any litigation or claims
which would cause this type of loss to recur in the fiscal year ending March 31,
1997 ("fiscal 1997"), although there can be no assurance that such claims will
not arise.
Operational Sources. Management believes that cash flow from operations will be
increased in fiscal 1997 through the addition of the RSA revenues and by
developing the ProActive human resource business, neither of which were
significant contributors in fiscal 1996. Management also believes that increased
emphasis can be made on selling its Mobile Alcohol Collection System ("MACS")
and Alco-Breath Tubes ("ABT") for use in industrial companies and thereby
increase the revenues in the alcohol testing operation. By unifying its sales
force to on sell both the RSA/ProActive "product" and these alcohol testing
products and changing the marketing emphasis, management believes that increased
revenues can be developed in fiscal 1997. Management will also continue to
emphasize the cost reduction programs previously instituted. If the feasibility
study as to saliva based testing product currently being conducted by U.S. Drug
indicates further development is desirable, the Company can seek to have a major
company help in the development program, which would reduce current
expenditures, but would also reduce future revenues to the extent marketing
rights are demanded by such "development partner." To the extent that the
feasibility study indicates insurmountable problems with respect to further
development, then the anticipated further research and development expenses can
be avoided. There can be no assurance that the Company's operational programs
will produce an increased cash flow from operations or, if it does, when such
result will be achieved.
Equity Sources. From December 1995 to February 1996, USAT completed a private
placement of USAT Common Stock pursuant to Regulation D under the Securities Act
in which it realized gross proceeds of $3,750,000. Because of USAT's past
history of successfully raising funds privately, management believes that this
source can be "tapped" in the future if required; however, management would
prefer not to use this method of financing because of the substantial dilution
to current stockholders which it causes and because, absent a stockholder
authorization of additional shares, the number of unreserved shares of the USAT
Common Stock is currently limited. There can be, of course, no assurance that
USAT will be able to consummate any future financings on a timely and favorable
basis in the amount necessary to meet the Company's cash requirements should any
such financing be necessary.
Between April 1, 1996 and June 5, 1996, warrants and options were
exercised to purchase 2,353,449 shares of the USAT Common Stock generating
$4,242,000 in cash. Outstanding unexercised USAT Common Stock purchase warrants
as of June 5, 1996 could generate approximately $15,348,000 of new capital to
the Company. Outstanding stock options could generate proceeds of approximately
$1,040,000 if exercised. USAT will have to update or file registration
statements under the Securities Act to make these exercises more attractive to
the holders. There can be, of course, no assurance that any of the remaining
warrants or options will be exercised.
In the event that the Company is unable to generate sufficient cash
flow from operations or from sources other than those described above (which
event, in management's opinion, is not likely to occur based upon past
experience; however, there is no assurance that management will be successful in
any future financing efforts), then the Company may have to provide for
additional reductions in operating costs, thereby not only resulting in less
cash from operations currently, but also delaying future revenue growth. In such
event the market price of the USAT Common Stock is likely to drop, not only
discouraging the future exercises of the USAT Common Stock purchase warrants and
the stock options and possibly discouraging potential new investors, but also
increasing the risk that a current investor in USAT may lose the value of his,
her or its investment.
18
<PAGE> 19
Because USAT offers its alcohol testing products, and U.S. Drug will
offer, when the research and development program is successfully consummated, as
to which there can be no assurance, its drug testing products, in the substance
abuse industry which is noted for its scientific developments and rapidly
changing technology, each faces the risk that new or modified products of
competitors may make USAT's or U.S. Drug's products not competitive, either from
an obsolescence or a pricing point of view. In addition, these developments may
require USAT and U.S. Drug to expend substantial funds on research and
development to remain competitive, possibly at times when such funds may not be
available.
CHANGES IN FINANCIAL CONDITION
During fiscal 1996, the Company's investments in trading securities
were sold and the Company realized proceeds of $3,610,000. The REMIC bonds were
sold for $3,286,000 and a brokerage loan payable in the amount of $2,570,000 was
repaid. In addition, the Company sold its 288,400 share investment in the common
stock of Marquest Medical Products, Inc. ("Marquest"), realizing proceeds of
$324,000. The sales of these investments resulted in a net gain of $302,000 over
their carrying value on the March 31, 1995 balance sheet. The Company realized a
loss on sale of marketable securities in fiscal 1996 of $1,889,000. Management
will make no further investments in any high risk trading securities.
The Company's investment policy on a prospective basis, assuming the
availability of funds not required for immediate use in the operations of the
business, will require such funds to be invested in certificates of deposit,
money market accounts, government securities and high quality commercial paper
where the principal will be substantially protected from market fluctuations.
OPERATING CASH FLOWS
Cash used for operations was $8,711,000 for fiscal 1996. The net loss
for the period was $10,461,000 and the difference between the net loss and the
net cash used by operating activities was $1,750,000. Components of this
difference included:
<TABLE>
<CAPTION>
Increases Decreases
--------- ---------
<S> <C> <C>
Accounts Receivable $ 361,000
Inventory 1,302,000
Minority Share $1,009,000
Accounts Payable 1,011,000
Unrealized Gain 302,000
Depreciation/Amortization 1,311,000
Net Assets -- Discontinued Operations 505,000
Loss on Disposal of Discontinued
Operations 1,326,000
Other Components, net -- 337,000
---------- ----------
Total $2,887,000 $4,637,000
2,887,000
----------
Net Decrease $1,750,000
==========
</TABLE>
INVESTING CASH FLOWS
Cash provided from investing activities was $3,358,000 for fiscal 1996.
$3,610,000 was generated from the sales of trading securities as described above
and $288,000 was used for the purchase of property and equipment. Other net
sources of funds amounted to $36,000.
FINANCING CASH FLOWS
Cash provided from financing activities was $4,937,000 during the
fiscal 1996. The Company provided cash from the sale of securities in two
private placements in the aggregate gross amount of $6,788,000, from the
exercise of warrants in the amount of $167,000 and from demand loans, secured by
U.S. Drug's REMIC bonds, in the amount of $1,000,000. Cash from the sale of the
REMIC bonds included as an investing activity was used to pay off brokerage
loans
19
<PAGE> 20
in the amount of $2,570,000. Expenses of raising the $6,955,000 from the
placements and warrants were $363,000. Net payments of long term debt and
payment of dividends on the Preferred "A" Stock used cash of $88,000.
Cash resources will be more than adequate, in management's opinion, to
meet the Company's commitments which include lease obligations, royalty
obligations and development of products for at least the next 12 months. There
are currently no unfunded commitments for capital expenditures.
RESULTS OF OPERATIONS
FISCAL 1996 VS. FISCAL 1995
Revenues from continuing operations for fiscal 1996 were $1,166,000, a
decrease of $529,000 or 31.2% from revenues of $1,695,000 reported for fiscal
1995. Revenues from the sale of alcohol breath analyzing equipment decreased by
$750,000, which decrease was attributable to an unusually high volume of alcohol
breath analyzing machines sold in the third quarter of the prior year and a
reduction in sales effort as the sales force was reassigned to the ProActive
startup. Sales of the Biotox division decreased $227,000, reflecting the end of
a contract performing methadone tests. These decreases were offset by an
increase in cost per test revenue from the alcohol breath analyzing equipment of
$185,000, miscellaneous sales of supplies of $42,000 and revenues of $203,000
from Alconet, which was acquired March 31, 1995, and the human resource provider
business which, while still in a start up mode, produced revenues of $18,000.
Cost of sales for the fiscal 1996 on a continuing operations was 100.4%
of revenues as compared to 82.4% of revenues for fiscal 1995 as a result of
lower sales volumes, increased labor and supply costs relating to the cost per
test business and an inventory write-off of $193,000 during fiscal 1996.
Selling, general and administrative expenses were $5,721,000 for fiscal
1996, representing an increase of $437,000 or 8.3% from the $5,284,000 of such
expenses incurred for the comparable period of the prior year. The expenses for
fiscal 1996 included $397,000 of expenses incurred by a newly acquired
subsidiary, Alconet, not included in the comparable numbers for the prior year.
Research and development expenses were $1,006,000 for fiscal 1996,
representing a decrease of $243,000 or 19.5% from the expenses in the prior
year. Research and development expenses in connection with USAT's alcohol
testing machine decreased by $215,000 during fiscal 1996 from such expenses in
the prior year, which decrease was attributable to the fact that the machines
were placed in service in the fourth quarter of the prior year. U.S. Drug's
research and development expenses decreased $35,000 as compared with such
expenses in the prior year.
Loss from the settlement of litigation for fiscal 1996 included
nonrecurring legal and other expenses in the amount of $888,000 which were
incurred by USAT in connection with its settlement with the Committee of the
consent solicitation litigation. Additionally, a non-recurring settlement of
$250,000 was paid to two former owners of Alconet, Inc. relating to a dispute
over the terms of their employment contracts.
Depreciation and amortization was $1,018,000 for fiscal 1996,
representing an increase of $322,000 or 46.3% over depreciation and amortization
in fiscal 1995, which increase was attributable primarily to depreciation on
USAT's alcohol testing machines placed in testing sites in connection with the
cost per test agreements with major laboratories. The majority of these machines
were placed in service in the fourth quarter of fiscal 1995. These machines
represented an increase in depreciation expense of $514,000 for fiscal 1996 as
compared to the expense in the prior year based on a full year's depreciation in
fiscal 1996.
The Company's operating loss of $9,006,000 for fiscal 1996 increased by
$2,029,000 over its operating loss of $6,977,000 for the prior year. The
increased operating loss can be
20
<PAGE> 21
attributed to: the lower level of revenues generated from the alcohol testing
business attributable to an unusually high volume of alcohol breath analyzing
machines sold in the third quarter of the prior year; negative gross margins for
fiscal 1996 resulting from higher labor and supply costs necessary to support
the start up of the cost per test business; increased selling, general and
administrative expenses and nonrecurring losses from settlement of litigation in
the amount of $1,138,000, operating losses of $576,000 incurred by Alconet, a
newly acquired subsidiary not included in the prior year numbers; and increased
depreciation cost relating to the cost per test business.
Other income, net of other expenses, for fiscal 1996 was $409,000 as
compared to an expense of $499,000 reported for fiscal 1995. The trading
securities sold by the Company in fiscal 1996 generated a profit of $302,000
over their carrying value in the March 1995 balance sheet. During fiscal 1995,
these securities generated a loss of $155,000 and an unrealized loss of
$598,000. Interest income decreased by $134,000 for fiscal 1996 as compared to
the interest income in the prior year.
Management is of the opinion that it is too speculative to project at
this time when the Company will turn profitable because of the Company's history
of operational losses, the delay in completing and then marketing its urine
sample drug testing product in order to wait until a saliva sample drug testing
product is available, the fact that its human resource provider program is in
its early marketing stages and the discontinued operations of the toy
subsidiary.
U.S. DRUG TESTING, INC. (SUBSTANCE ABUSE TESTING)
During fiscal 1996, the Company continued as a development stage
enterprise with no revenues. Selling, general and administrative expenses were
$417,000 in fiscal 1996 as compared with $850,000 in fiscal 1995 or a decrease
of $433,000, resulting primarily from a $325,000 reduction in the royalty
payments on the USAT license with the USN from $375,000 in fiscal 1995 to
$50,000 in fiscal 1996. Other selling, general and administrative expenses for
fiscal 1996 were comprised of royalty expenses of $62,000, rent, utilities and
telephone charges of $97,000, insurance expenses of $35,000, marketing research
expenses of $44,000, legal and auditing services of $33,000, directors' fees of
$10,000, travel expenses of $24,000 and other expenses of $112,000. Research and
development expenditures totaled $851,000 in fiscal 1996 as compared with
$886,000 in fiscal 1995. The 1996 expenditures consisted of payroll and fringe
benefits of $593,000, outside consulting services of $184,000 and other costs of
$74,000. Depreciation expense decreased $19,000 from $163,000 in fiscal 1995 to
$144,000 in fiscal 1996 as some assets became fully depreciated during the year.
Management fees paid to USAT were $420,000 in both fiscal 1996 and fiscal 1995.
For a description of the services rendered under the management agreement
relating to these fees, see the section "Subsidiaries-U.S. Drug Testing, Inc."
in Item 1 to this Report. Interest expenses on brokerage loans were $72,000
during fiscal 1996 as compared with $42,000 during fiscal 1995 or an increase of
$30,000 resulting from increased borrowings during fiscal 1996. Other income
(expense) resulted in net income of $263,000 in fiscal 1996 as compared with net
income of $31,000 in the prior year or an increase of $232,000. Fiscal 1996
other income (expense) is comprised of a gain of $76,000 on the sale of REMIC
bonds over their earnings value at March 31, 1995, interest income primarily
relating to the REMIC bonds of $105,000 and interest income on loans to USAT of
$82,000. In fiscal 1995 other income (expense) was comprised of interest income,
primarily on the REMIC bond of $245,000, interest income from USAT of $20,000
and an unrealized loss on the market value of the REMIC bonds caused by
generally higher interest rates.
As of March 31, 1996, U.S. Drug did not anticipate generating revenues
from product sales during fiscal 1997 and, accordingly, anticipated that
operating losses would continue for at least a 12 to 24-month period. USAT will
need to provide the funding necessary to complete the development of the U.S.
Drug products and bring them to market.
DISCONTINUED OPERATIONS
GOOD IDEAS ENTERPRISES, INC. (TOY)
21
<PAGE> 22
Net sales for fiscal 1996 were $1,508,000, a decrease of $3,098,000 or
67.3% from the net sales in the prior year. Of this decrease, $1,994,000 or
64.4% was attributable to Toys R Us, the major customer of Good Ideas, not
placing orders for Good Ideas' toy products. The customer attributed its
reduction in orders to its large inventories and declining sales and customer
traffic. Management believes that other manufacturers in the toy industry are
currently facing these same problems - their distributors or retailers to which
they sell have large inventories of products and declining sales and customer
traffic. In addition, management believes that many retailers are minimizing
their number of vendors and reducing the number of items carried in inventory
which has the result of squeezing out the smaller companies with their limited
product lines.
Gross profit for fiscal 1996 was $163,000 or 10.8% of net sales as
compared with $1,324,000 or 28.7% of net sales for the prior year. The decrease
in gross profit as a percentage of net sales was primarily due to a writeoff of
inventory in the amount of $192,000.
Selling, general and administrative expenses for fiscal 1996 decreased
to $1,279,000 from $1,924,000 for the comparable period in fiscal 1995, which
decrease was attributable to reductions in payroll and related costs during
fiscal 1996.
Management fees paid to USAT were $225,000 for fiscal 1996,
representing a decrease of $80,000 from the $305,000 of fees paid for fiscal
1995. The decrease resulted from USAT's suspension of the management fee
retroactive to January 1, 1996.
Good Ideas recognized interest income of $158,000 from its loans to
related parties during fiscal 1996, as compared with $68,000 in the prior year
due to increased loan balances. Good Ideas also recognized interest income from
money market investments of $3,500 and $44,000 during fiscal 1996 and fiscal
1995, respectively.
The net loss for Good Ideas was $1,566,000 for fiscal 1996,
representing an increase of $768,000 from the net loss of $798,000 reported for
fiscal 1995. The increase in the net loss was due to the decreases in sales and
gross profit offset by the decreases in selling, general and administrative
expenses and management fees, all as described in the preceding paragraphs. The
net loss for the current year was also increased by the writedown of assets in
the amount of $258,000 and the projected costs through sale or liquidation in
the amount of $110,000. Included above but excluded in discontinued operations
in the financial statements are intercompany allocations of general corporate
overhead of $225,000 and $305,121 in fiscal 1996 and 1995, respectively, and
intercompany allocations of interest income of $157,812 and $64,320 in fiscal
1996 and 1995, respectively.
Unless Good Ideas were to add new products to its line, as to which
there can be no assurance, and there were a stronger demand for toy products in
the industry generally, management does not believe that a turnaround in Good
Ideas' operations would occur during the next 12 months, if not at a later date.
Although management of Good Ideas had in the past considered plans to expand the
product line, it was reluctant to implement these plans absent a change in the
industry conditions described above. On February 26, 1996, the USAT Board
determined to sell or liquidate Good Ideas, a conclusion concurred with by the
Good Ideas Board. As a result of the above decision, the assets of Good Ideas
are included in the consolidated balance sheet at management's estimate of
liquidation value and the results of operations of Good Ideas are presented on a
discontinued basis.
U.S. RUBBER RECYCLING, INC. (RECYCLED RUBBER PRODUCTS)
Net sales of USRR for fiscal 1996 were $892,000, a decrease of
$1,244,000 or 58.2% as compared with sales of $2,136,000 in the prior year. This
decrease was attributable to the continuing effects of the cancellation of an
agreement with a distributor (Matworks, Inc.) by USRR in October 1994 because of
significant breaches of the contract by the distributor relating to its use of
competitors' flooring products in violation of a contractual requirement to use
only USRR's products. USAT does not intend to institute any legal action
22
<PAGE> 23
against the distributor because USRR does not want to incur the protracted legal
expenses involved in litigation.
Gross margin for fiscal 1996 was $419,000 or 47.0% of net sales, up
from a gross margin of 41.8% of net sales for fiscal 1995. The increase in gross
margin was attributable to an increase in the selling price of USRR's product to
its customers. This offset an inventory write off of floor tiles which became
non-repairable during the six months ended September 30, 1995. Floor tiles not
meeting quality control standards are segregated in the inventory for future
repairs to correct the flaws and those not repairable are discarded. During
fiscal 1995, USRR worked a double shift to meet the production demand created by
the agreement with the distributor. Inexperienced labor resulted in an increase
in tiles not initially suitable for shipments.
Selling, general and administrative expenses were $605,000 for fiscal
1996, representing a decrease of $214,000 from such expenses in fiscal 1995. Of
this amount, $162,000 represented a decrease in commissions and freight related
to the decline in sales revenue.
Management fees paid to USAT were $89,000 for fiscal 1996, representing
a decrease of $124,000 from such fees in the prior year.
Depreciation expense was $99,000 for fiscal 1996, representing an
increase of $40,000 over such expense in the comparable prior year, which
increase was attributable to the commencement of depreciation on additional
manufacturing equipment built in contemplation of potential expansion.
Interest expense was $123,000 for fiscal 1996 as compared with a
$112,000 expense in the comparable period in 1995 as a result of borrowings from
affiliates.
The operating loss of $492,000 for fiscal 1996 represented a decrease
of approximately $131,000 from an operating loss of $623,000 for fiscal 1995.
The decrease was primarily attributable to the increased percentage of gross
margin and the decrease in selling, general and administrative expenses incurred
during fiscal 1996. Included above but excluded in discontinued operations in
the financial statements are intercompany allocations of general corporate
overhead of $89,193, $213,173 and $119,216 in fiscal 1996, 1995 and 1994,
respectively, and intercompany allocations of interest expense (income) of
$122,545, $109,575 and $61,034 in fiscal 1996, 1995 and 1994, respectively.
The USAT Board, on February 26, 1996, concluded that the Company should
concentrate on alcohol and drug testing and ProActive's human resource provider
operations as its core businesses and, accordingly, authorized seeking a
purchaser for USRR. A sale of substantially all of the assets of USRR was
consummated on April 30, 1996. The net loss for fiscal 1996 included a $88,000
loss on disposal of USRR's assets.
FISCAL 1995 VS. FISCAL 1994
Revenues from continuing operations for fiscal 1995 were $1,695,000, an
increase of $1,252,000 or 282.6% over the revenues of $443,000 reported for
fiscal 1994. This sales increase was attributable to sales of USAT's Alco
Analyzer 2100.
Cost of sales for fiscal 1995 was 82.4% of revenues as compared to
88.1% of revenues for the prior year. This increase was attributable to the
higher than projected costs involved in building the initial alcohol testing
machines that were sold in fiscal 1995.
Selling, general and administrative expenses were $5,284,000 for fiscal
1995, representing an increase of $1,524,000 over the $3,760,000 in such
expenses reported for fiscal 1994. The Company incurred $1,230,000 of
development marketing and training costs in connection with the alcohol testing
machine during fiscal 1995.
23
<PAGE> 24
Research and development expenses were $1,249,000 for fiscal 1995,
representing an increase of $301,000 over the expenses reported for fiscal 1994.
Of the total expenditures in fiscal 1995, $886,000 represented research and
development by U.S. Drug in connection with technology licensed to USAT from the
USN for drugs of abuse, representing an increase of $158,000 over the fiscal
1994 expenditures. The Company incurred research and development expenditures of
$363,000 during fiscal 1995 in connection with the development of its alcohol
testing machine, representing an increase of $143,000 over the expenditures for
fiscal 1994.
Depreciation and amortization was $695,000 for fiscal 1995,
representing an increase of $314,000 over the $381,000 in depreciation and
amortization reported for fiscal 1994, primarily attributable to depreciation of
the alcohol testing machines.
Losses from settlement of class action and other litigation were
$4,650,000 for fiscal 1994. The Company incurred no similar costs during fiscal
1995.
Operating losses of $6,977,000 for fiscal 1995 decreased by $2,710,000
from the losses of $9,687,000 reported for fiscal 1994, primarily attributable
to the litigation losses of $4,650,000 incurred for fiscal 1994.
Other income (expense) for fiscal 1995 and 1994 included charges for
unrealized losses on marketable securities of $598,000 and $388,000,
respectively. A primary cause of these charges was the decline in the market
value of the Company's investments in REMIC bonds issued by the Federal Home
Loan Mortgage Corporation and the Federal National Mortgage Association. The
Company originally invested in the REMIC bonds on the advice of a registered
broker-dealer which recommended these bonds as an investment with high interest
rates and low market risk. The Company, through inexperience in dealing with
this type of investment, did not enter into any hedging transactions to mitigate
these losses and held the bonds in anticipation of increases in their market
value. Upon such increases in market value, the Company sold the bonds,
partially recovering its previously recorded unrealized losses. Since December
1993, no additional investments of this type have been made and none are
contemplated in the future. Interest income was $250,000 for fiscal 1995,
representing an increase of $156,000 over the $94,000 in interest income
reported for fiscal 1994, which increase was attributable to an increase in
interest earned for fiscal 1995 by U.S. Drug of $159,000 by virtue of having the
excess proceeds from its initial public offerings, completed during fiscal 1994,
invested for a full twelve months.
U.S. DRUG TESTING, INC. (SUBSTANCE ABUSE TESTING)
During fiscal 1995, U.S. Drug, a development stage enterprise with no
revenues, spent $886,000 on research and development as compared with $728,000
in such expenses in the prior year. During fiscal 1995, U.S. Drug also spent
$850,000 on selling, general and administrative expenses as compared with
$604,000 in the prior year.
U.S. Drug paid management fees to USAT of $420,000 in both fiscal 1995
and fiscal 1994. During fiscal 1995, the loss from operations of $2,363,000 also
reflected interest expense of $44,000 and depreciation and amortization of
$163,000. During fiscal 1994, the loss from operations of $1,876,000 also
reflected interest and depreciation of $124,000.
U.S. Drug's operating loss was $2,363,000 in fiscal 1995 as compared to
an operating loss of $1,876,000 in fiscal 1994. These operating losses were
attributable to the fact that U.S. Drug was expending funds for research and
development and selling, general and administrative expenses as indicated in the
second preceding paragraph, as well as incurring a management fee to USAT and
the other expenses as described in the preceding paragraph, while not realizing
any revenues.
24
<PAGE> 25
DISCONTINUED OPERATIONS
GOOD IDEAS ENTERPRISES, INC. (TOY)
Net sales of Good Ideas for fiscal 1995 were $4,606,000, a decrease of
$938,000 or 16.9% from the sales in the prior year. Net sales from Good Ideas'
wooden construction toy category for fiscal 1995 were $2,841,000, a decrease of
$733,000 or 20.5% from the sales in fiscal 1994, which decrease was attributable
to a decline in this category sales by Toys R Us, Good Ideas' major customer,
resulting in a reduction of orders placed by such customer. The customer
attributed its reduction in orders to its large inventories and declining sales
and customer traffic. At March 31, 1995, management believed that other
manufacturers in the toy industry were facing these same problems - their
distributors or retailers to which they sold had large inventories of products
and declining sales and customer traffic.
Gross profit for fiscal 1995 was $1,324,000 or 28.7% of net sales as
compared to $1,487,000 or 26.8% of net sales for fiscal 1994. The increase in
gross profit as a percentage of net sales was primarily due to Good Ideas'
effort to increase its gross margins on product sold by either raising selling
prices or adjusting the quantity of parts in its playsets.
Selling, general and administrative expenses for fiscal 1995 increased
to $1,924,000 or 41.8% of net sales from $1,487,000 or 27.6% of net sales for
fiscal 1994. This increase was the result of two factors. First, the fixed
overhead was spread over a decreased sales volume. Second, Good Ideas
experienced increased legal and other public company expenses of $127,000,
increased payroll costs of $86,000 resulting from additional employees hired and
increased travel and promotion expenses in the amount of $97,000 resulting from
Good Ideas' efforts to expand its business base.
Pursuant to the Good Ideas Management Agreement, USAT's fees for
management and administrative services provided to Good Ideas during fiscal 1995
were $305,000, representing a decrease of $120,000 from the fees in fiscal 1994.
This decrease was the result of two 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.
Included above but excluded in discontinued operations in the financial
statements are allocations of general corporate overhead of $305,121 and
$425,150 in fiscal 1995 and 1994, respectively and intercompany allocations of
interest expense (income) of $64,320 and $163,554 in fiscal 1995 and 1994,
respectively.
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
25
<PAGE> 26
attributable to manufacturing inefficiencies, resulting from running a double
shift which was necessitated by the increase in product demand arising from the
agreement with the distributor (Matworks, Inc.). As a result of the double
shift, an increase in the number of tires was required to supply the second
shift, resulting in additional costs to USRR to purchase tires to maintain an
adequate inventory, to remove waste from the increased volume of tires processed
and an increase in the number of irregular tiles produced causing additional
repair labor cost because of the training required for the new labor force to
staff the second shift.
Selling, general and administrative expenses were $819,000 for fiscal
1995, representing an increase of $151,000 over the $668,000 of expenses for
fiscal 1994. Of this amount, $131,000 represented additional payroll and
consulting fees resulting from an expansion of the business.
Management fees paid to USAT were $213,000 for fiscal 1995,
representing an increase of $94,000 over the $119,000 reported for fiscal 1994,
which increase was related to the increase in sales.
Depreciation expense was $59,000 for fiscal 1995, representing an
increase of $18,000 over such expense in the fiscal 1994, which increase was
attributable to the commencement of depreciation on additional manufacturing
equipment built in contemplation of potential expansion.
Interest expense was $2,000 for fiscal 1995 as compared with no such
expense in fiscal 1994.
The operating loss of $511,000 for fiscal 1995 increased by $143,000 or
38.9% over the operating loss of $368,000 in fiscal 1994. The increase was
attributable primarily to payroll and related costs incurred because of USRR's
anticipation of opening a second manufacturing location. Included above but
excluded in discontinued operations in the financial statements are
intercompany allocations of general corporate overhead of $212,173 and $119,216
in fiscal 1995 and 1994, respectively, and intercompany allocations of interest
expense of $119,575 and $61,034 in fiscal 1995 and 1994, respectively.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
See Item 14 of this Report for an index to the Financial Statements and
Supplementary Data.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On October 12, 1995, the Board of Directors appointed Michael S.
McCord, a stockholder of USAT (as of March 31, 1996, he beneficially owned
403,808 shares of the USAT Common Stock) and a former member of the Committee,
as a consultant to USAT to serve at the discretion of the Board. For such
services he was granted on November 16, 1995 a USAT Common Stock purchase
warrant to purchase 10,000 shares of the USAT Common Stock at $1.9375, the
closing sales price on the date of grant. He is also to receive an annual
payment of $10,000 in quarterly installments of $2,500 assuming he is still
rendering services as a consultant. On May 31, 1996, Mr. McCord was elected as a
director of Good Ideas and U.S. Drug.
In February 1996, Lee S. Rosen, a director of USAT, received $100,000
and warrants to purchase 700,000 shares of the USAT Common Stock for services
performed in connection with USAT's offering of shares of the USAT Common Stock
pursuant to Regulation D under the Securities Act. The warrants consist of (a) a
Common Stock purchase warrant expiring November 15, 1998 to purchase 400,000
shares of the USAT Common Stock at $1.9375 per share, (b) a Common Stock
purchase warrant expiring November 15, 2000 to purchase 150,000 shares of the
USAT Common Stock at $3.00 per share and (c) a Common Stock purchase warrant to
purchase
26
<PAGE> 27
150,000 shares of the USAT Common Stock at $4.00 per share. The latter two
warrants can only be exercised as to 50,000 shares of the USAT Common Stock
subject thereto in proportion to the shares issued upon the exercise of Common
Stock purchase warrants expiring December 17, 1999 to purchase 2,000,000 shares
of the USAT Common Stock at $2.00 per share issued to the purchasers in such
prior placement. During May and June 1996, Mr. Rosen was paid an additional
$400,000 for services rendered to USAT in connection with the exercise of
previous outstanding Common Stock purchase warrants to purchase shares of the
USAT Common Stock (See Note 16 to the Financial Statements). The payments to
Mr. Rosen are directly related to raising capital for the Company and have been
charged to Additional Paid-In Capital. Mr. Rosen has also received a Common
Stock purchase warrant expiring April 17, 1999 to purchase 300,000 shares of
the USAT Common Stock at $3.125 per share.
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON FORM 8-K.
1. Financial Statements
The Company's financial statements appear in a separate section of this
Report commencing on the pages referenced below:
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of the Independent Auditors F-1
Report of the Independent Certified Public Accountants F-2
Consolidated Balance Sheets at March 31, 1996 and 1995 F-3
Consolidated Statements of Operations for the years ended
March 31, 1996, 1995 and 1994 F-4
Consolidated Statements of Stockholders Equity for the
years ended March 31, 1996, 1995, and 1994 F-5
Consolidated Statements of Cash Flows for the years ended
March 31, 1996, 1995 and 1994 F-8
Notes to Consolidated Financial Statements F-10
</TABLE>
2. Financial Statement Schedules
Financial Statement Schedules are omitted as they are not required, are
inapplicable, or the information is included in the financial statements or
notes thereto.
3. Exhibits
All of the following exhibits designated with a footnote reference are
incorporated herein by reference to a prior registration statement filed by USAT
under the Securities Act or a periodic report filed by USAT pursuant to Section
13 or 15(d) of the Exchange Act. If no footnote reference is made, the exhibit
is filed with this Report.
<TABLE>
<CAPTION>
Number Exhibit
- ------ -------
<S> <C>
2(a) Copy of Exchange of Stock Agreement and Plan of Reorganization dated
May 7, 1992 between Good Ideas, U.S. Alcohol & Drug Testing
International N.V. and David Brooks. (1)
2(b) Form of Agreement and Plan of Merger dated as of April 23, 1996 by
and among USAT, U.S. Drug Acquisition Corp. and U.S. Drug. (2)
2(c) Form of Agreement and Plan of Merger dated as of April 12, 1996 by
and among USAT, Good Ideas Acquisition Corp. and Good Ideas. (3)
3(a) Copy of Certificate of Incorporation of USAT as filed in Delaware on
April 15, 1987. (4)
</TABLE>
27
<PAGE> 28
<TABLE>
<CAPTION>
Number Exhibit
- ------ -------
<S> <C>
3(a)(1) Copy of Amendment to the Certificate of Incorporation as filed
in Delaware on July 10, 1989. (4)
3(a)(2) Copy of Amendment to the Certificate of Incorporation as filed
in Delaware on September 25, 1989. (4)
3(a)(3) Copy of Amendment to the Certificate of Incorporation as filed
in Delaware on October 5, 1990. (4)
3(a)(4) Copy of Amendment to the Certificate of Incorporation as filed
in Delaware on December 26, 1990. (5)
3(a)(5) Copy of Amendment to the Certificate of Incorporation as filed
in Delaware on November 1, 1991. (5)
3(a)(6) Copy of Amendment to the Certificate of Incorporation as filed
in Delaware on May 20, 1992. (6)
3(b) Copy of By-Laws of USAT. (4)
4(a) Specimen of Common Stock certificate of USAT. (4)
4(b) Specimen of Class "A" Cumulative and Convertible Preferred
Stock certificate of USAT. (4)
4(c) Specimen of Class "B" Non-Voting Preferred Stock certificate
of USAT. (6)
10(a) Form of USAT's Indemnification Agreement with Officers and
Directors. (4)
10(b) Copy of Employment Agreement dated December 13, 1993 between
USAT and James C. Witham. (7)
10(c) Copy of Employment Agreement dated December 13, 1993 between
USAT and Karen B. Laustsen. (7)
10(d) Copy of Employment Agreement dated December 13, 1993 between
USAT and Gary S. Wolff. (7)
10(e) Copy of Employment Agreement dated December 13, 1993 between
USAT and Michael J. Witham. (7)
10(f) Copy of License Agreement dated January 24, 1992 by and
between USN and USAT. (Confidential Treatment Requested for
Exhibit) (8)
10(f)(1) Copy of Amendment dated March 15, 1994 to License Agreement
filed as Exhibit 10(f) hereto. (2)
10(f)(2) Copy of Amendment dated June 16, 1995 to License Agreement
filed as Exhibit 10(f) hereto. (2)
10(f)(3) Copy of Letter dated May 15, 1995 from the USN to USAT. (2)
10(g) Copy of Assignment dated as of January 1, 1993 between USAT
and U.S. Drug of Licensing Agreement filed as Exhibit 10(f)
hereto. (8)
10(g)(1) Copy of Amended Sublicense Agreement dated September 23, 1993
superseding the Assignment filed as Exhibit 10(g) hereto. (2)
</TABLE>
28
<PAGE> 29
<TABLE>
<CAPTION>
Number Exhibit
- ------ -------
<S> <C>
10(g)(2) Copy of Approval dated September 24, 1993 by USN of Amended
Sublicense Agreement filed as Exhibit 10(i) hereto. (2)
10(h) Copy of Cooperative Research Agreement (the "CRDA Agreement")
dated April 16, 1992 by and between Naval Research Laboratory
Section, United States Department of the Navy, and USAT. (8)
10(h)(1) Copy of Assignment of CRDA Agreement dated as of January 1,
1993 by and between U.S. Drug and USAT. (8)
10(i) Copy of Management Agreement dated April 1, 1993 by and
between U.S. Drug and USAT. (8)
10(i)(1) Copy of Amendment dated July 20, 1993 to Management Agreement
filed as Exhibit 10(k) hereto. (8)
10(j) Copy of Management Services Agreement dated December 29, 1993
by and between Good Ideas and USAT. (1)
10(k) Copy of Equipment, Licensing, Servicing and Maintenance
Agreement dated as of December 13, 1994 by and between USAT
and METPATH, Inc. (7)
10(l) Copy of Equipment, Licensing, Servicing and Maintenance
Agreement dated as of December 22, 1994 by and between USAT
and National Health Laboratories Incorporated. (7)
10(m) Copy of Lease expiring January 31, 1997 by and between Rancho
Cucamonga Business Park as landlord and USAT as tenant. (7)
10(m)(1) Copy of Lease Modification Agreement to Lease filed as Exhibit
10(m) hereto. (6)
10(m)(2) Copy of Sub-Lease Agreement dated as of January 1, 1993 by and
between USAT as sublandlord and U.S. Drug as subtenant. (8)
10(n) Copy of Lease dated December 9, 1992 by and between Melvin E.
Evans as landlord and Good Ideas as tenant. (1)
10(o) Copy of Lease expiring June 30, 1999 by and between Rancho
Cucamonga Business Park as landlord and U.S. Rubber Recycling,
Inc. ("USRR") as tenant. (7)
10(p) Copy of Asset Purchase Agreement dated June 20, 1988 between
Luckey Laboratories, Inc. and USAT. (4)
10(p)(1) Copy of Consulting and Royalty Agreement dated June 20, 1988
between Manley Luckey and USAT. (4)
10(p)(2) Copy of Amendment dated August 1990 to Consulting and Royalty
Agreement filed as Exhibit 10(p)(1) hereto. (4)
10(q) Copy of Investment Banking Agreement dated July 1, 1991, as
revised October 1, 1991, between Jeffrey Brooks Securities,
Inc. and USAT. (4)
10(r) Copy of Asset Purchase Agreement dated November 2, 1992 by
and between Adflo International, Inc. and USAT. (9)
10(s) Copy of Stock Purchase Agreement dated March 30, 1995 between
Alconet, Inc., Dakotanet, L.L.C. and USAT. (10)
</TABLE>
29
<PAGE> 30
<TABLE>
<CAPTION>
Number Exhibit
- ------ -------
<S> <C>
Number Exhibit
10(t) Copy of Asset Purchase Agreement dated April 30, 1996 by and
between USRR, USAT and Reclamation Resources, Inc. (11)
10(u) Copy of Agreement made as of December 14, 1995 by and between
USAT, ProActive Synergies, Inc., RSA and Robert Stutman. (12)
10(v) Copy of Stock Purchase Agreement dated as of May 21, 1996 by
and among USAT, Robert Stutman, Brian Stutman, Sondra DeBow,
Michael Rochelle and Kimberly Rochelle. (11)
10(v)(1) Form of Secured Promissory Note dated May 21, 1996 is Exhibit
A to Exhibit 10(v) hereto.
10(v)(2) Form of Security Agreement dated May 21, 1996 by and among
USAT, Robert Stutman and Brian Stutman is Exhibit C to Exhibit
10(v) hereto.
10(v)(3) Form of USAT Warrant expiring May 20, 1999 is Exhibit B to
Exhibit 10(v) hereto.
10(v)(4) Form of Registration Rights Agreement dated as of May 21, 1996
by and between USAT, Robert Stutman, Brian Stutman, Michael
Rochelle, Kimberly Rochelle and Sondra DeBow is Exhibit D to
Exhibit 10(v) hereto.
10(w) Copy of Severance Agreement dated May 21, 1996 by and between
USAT and Robert Stutman. (11)
10(x) Copy of Severance Agreement dated May 21, 1996 by and between
USAT and Brian Stutman. (11)
10(y) Form of Warrant Agreement dated December 17, 1990 between J.
Gregory & Company Inc. and USAT. (4)
10(z) Form of Underwriter's Warrant expiring December 17, 1997 of
USAT. (4)
10(aa) Form of Common Stock purchase warrant expiring October 31,
1996 of USAT. (6)
10(bb) Form of Common Stock purchase warrant. (5)
USAT's Common Stock purchase warrants expiring August 28,
1996, September 1, 1996, September 16, 1996, September 30,
1996, October 31, 1996, May 17, 1997, September 16, 1997,
November 1, 1997, December 17, 1997, December 31, 1997,
February 28, 1998, April 15, 1998, July 17, 1998, August 27,
1998, September 1, 1998, November 1, 1998, November 15, 1998,
December 13, 1998, December 20, 1998, December 27, 1998,
January 2, 1999, January 31, 1999, February 26, 1999, February
28, 1999, March 31, 1999, April 14, 1999, May 12, 1999, July
17, 1999, July 19, 1999, August 11, 1999, December 31, 1999,
January 29, 2000, October 19, 2000, December 31, 2000 and
December 31, 2001 are substantially identical to the form of
Common Stock purchase warrant filed (by incorporation by
reference) as Exhibit 10(aa) hereto except as to the name of
the holder, the expiration date and the exercise price and,
accordingly, pursuant to Instruction 2 to Item 601 of
Regulation S-K under the Securities Act are not individually
filed.
10(cc) Copy of Restricted Stock, Non-Qualified Option and Incentive
Stock Option Plan of USAT. (4)
10(cc)(1) Form of Stock Option expiring August 1, 2004 issued pursuant
to Exhibit 10(cc) hereto. (5)
</TABLE>
30
<PAGE> 31
<TABLE>
<CAPTION>
Number Exhibit
- ------ -------
<S> <C>
Number Exhibit
10(dd) Form of Common Stock purchase warrant expiring December 17,
1999. (13)
16 Letter dated November 16, 1995 from Wolinetz, Gottlieb &
Lafazan, P.C. to the Securities and Exchange Commission. (14)
21 Subsidiaries of USAT. (7)
</TABLE>
- -------
1. Filed as an exhibit to the Registration Statement on Form S-1, File No.
33-73494, of Good Ideas and incorporated herein by this reference.
2. Filed as an exhibit to U.S. Drug's Annual Report on Form 10-K for the
fiscal year ended March 31, 1996 and incorporated herein by reference.
3. Filed as an exhibit to Good Ideas' Annual Report on Form 10-K for the
fiscal year ended March 31, 1996 and incorporated herein by reference.
4. Filed as an exhibit to USAT's Registration Statement on Form S-18,
File No. 33- 29718, and incorporated herein by this reference.
5. Filed as an exhibit to USAT's Registration Statement on Form S-1,
File No. 33-43337, and incorporated herein by this reference.
6. Filed as an exhibit to USAT's Registration Statement on Form S-1, File
No. 33-47855, and incorporated herein by this reference.
7. Filed as an exhibit to USAT's Annual Report on Form 10-K for the fiscal
year ended March 31, 1995 and incorporated herein by this reference.
8. Filed as an exhibit to U.S. Drug's Registration Statement on Form SB-2,
File No. 33-61786, and incorporated herein by this reference.
8. Filed as an exhibit to USAT's Current Report on Form 8-K filed on
November 2, 1992 and incorporated herein by this reference.
10. Filed as an exhibit to USAT's Current Report on Form 8-K dated April
12, 1995 and incorporated herein by this reference.
11. Filed as an exhibit to USAT's Current Report on Form 8-K dated May 21,
1996 and incorporated herein by this reference.
12. Filed as an exhibit to USAT's Registration Statement on Form S-8, File
No. 333-2188, and incorporated herein by this reference.
13. Filed as an exhibit to USAT's Registration Statement on Form S-8, File
No. 333-1920, and incorporated herein by this reference.
14. Filed as an exhibit to USAT's Current Report on Form 8-K/A filed on
November 22, 1995 and incorporated herein by this reference.
31
<PAGE> 32
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereto duly authorized.
U.S. ALCOHOL TESTING OF AMERICA, INC.
------------------------------------
(Registrant)
By:/s/ Linda H. Masterson
---------------------------------
Linda H. Masterson, President
Date: September 18, 1996
32
<PAGE> 33
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
U.S. Alcohol Testing of America
We have audited the accompanying consolidated balance sheet of U.S. Alcohol
Testing of America Inc. and subsidiaries (the "Company") as of March 31, 1996,
and the statements of operations, stockholders' equity, and cash flows for year
then ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit. The financial statements of the Company for the
years ended March 31, 1995 and 1994, were audited by other auditors whose report
dated May 26, 1995, expressed an unqualified opinion on those statements.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the 1996 financial statements referred to above present fairly,
in all material respects, the consolidated financial position of the Company and
subsidiaries at March 31, 1996, and the consolidated results of their operations
and their cash flows for the year ended March 31, 1996, in conformity with
generally accepted accounting principles.
ERNST & YOUNG LLP
/s/ ERNST & YOUNG LLP
Riverside, California
May 20, 1996
F-1
<PAGE> 34
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors and Shareholders
U.S. Alcohol Testing of America, Inc.
Rancho Cucamonga, California
We have audited the accompanying consolidated balance sheet of U.S.
Alcohol Testing of America, Inc. and subsidiaries as of March 31, 1995, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the two years in the period ended March 31, 1995. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of U.S. Alcohol
Testing of America, Inc. and subsidiaries as of March 31, 1995, and the results
of their operations and their cash flows for each of the two years in the period
ended March 31, 1995 in conformity with generally accepted accounting
principles.
WOLINETZ, GOTTLIEB & LAFAZAN, P.C.
/s/ WOLINETZ, GOTTLIEB & LAFAZAN, P.C.
--------------------------------------
Rockville Centre, New York
May 26, 1995
F-2
<PAGE> 35
U.S. ALCOHOL TESTING OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31,
1996 1995
---- ----
ASSETS
<S> <C> <C>
Current Assets:
Cash and Cash Equivalents $ 1,204,646 $ 1,633,098
Trading Securities -- 3,307,543
Accounts Receivable (Net of Allowance For Bad Debts of $112,490
at March 31, 1996 and $125,149 at March 31, 1995) 278,874 771,107
Other Receivables 1,850 69,378
Inventories 681,839 2,212,566
Prepaid Expenses 255,787 242,069
Current Assets of Discontinued Operations, net 256,654 -
----------- ------------
Total Current Assets 2,667,650 8,235,761
----------- ------------
Property and Equipment (Net of Accumulated Depreciation of
$1,867,316 at March 31, 1996 and $1,081,606 at March 31, 1995) 2,691,979 3,742,986
----------- ------------
Other Assets:
Goodwill (Net of Accumulated Amortization of $ 93,912 at March 31,
1995 and $229,216 at March 31, 1995) 797,393 2,008,592
Patents (Net of Accumulated Amortization of $2,619 at March 31,
1996 and $1,317 at March 31, 1995) 35,214 20,830
Other Non-Current Assets 25,736 89,379
Non-Current Assets of Discontinued Operation, net 317,895 --
----------- ------------
Total Other Assets 1,166,211 2,118,801
----------- ------------
Total Assets $ 6,535,840 $ 14,097,548
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts Payable $ 487,320 $ 1,498,322
Accrued Expenses and Taxes 468,150 472,253
Current Portion of Long-Term Debt 29,395 53,727
Brokerage Loan Payable -- 1,569,592
Preferred Stock Dividend Payable 7,202 7,202
Current Liabilities of Discontinued Operations 208,170 --
----------- ------------
Total Current Liabilities 992,067 3,601,096
Long-Term Debt--Net of Current Portion 32,935 79,008
Total Liabilities 1,025,002 3,680,104
----------- ------------
Commitments and Contingencies (See Note 13) ----------- ------------
Minority Interest 1,478,508 2,723,502
----------- ------------
Stockholders' Equity:
Preferred Stock, Class "A", $.01 Par Value; 500,000 Shares Authorized, Issued
and Outstanding 41,157 Shares at March 31, 1996 and at March 31, 1995
(Liquidation Preference of
$205,785 at March 31, 1996 and at March 31, 1995) 412 412
Preferred Stock, Class "B", $.01 Par Value; 1,500,000 Shares
Authorized, Issued and Outstanding -0- Shares at March 31, 1996
and March 31, 1995 -- --
Common Stock, $.0l Par Value; 50,000,000 Shares Authorized, Issued
and Outstanding 32,480,000 Shares at March 31, 1996 and
28,141,041 Shares at March 31, 1995 324,800 281,411
Additional Paid-In Capital 45,176,619
38,421,034
Accumulated Deficit (41,469,501) (31,008,915)
----------- ------------
Total Stockholders' Equity 4,032,330 7,693,942
----------- ------------
Total Liabilities and Stockholders' Equity $ 6,535,840 $ 14,097,548
=========== ============
</TABLE>
The accompanying notes are an integral part of the
financial statements.
F-3
<PAGE> 36
U.S. ALCOHOL TESTING OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For The Years Ended
March 31,
------------------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Continuing Operations:
Net Sales $ 1,165,661 $ 1,695,215 $ 442,728
------------ ----------- ------------
Costs and Expenses:
Cost of Sales
(Exclusive of Depreciation Shown Below) 1,208,726 1,397,034 389,830
Selling, General and Administrative Expenses
(Exclusive of Depreciation Shown Below) 5,720,592 5,284,405 3,759,858
Research and Development 1,005,832 1,248,962 947,811
Interest 81,450 46,069 1,534
Depreciation and Amortization 1,017,534 695,367 380,676
Loss from Settlement of Class Action Litigation - - 4,600,000
Loss From Settlement of Litigation 1,137,914 - 50,000
------------ ----------- ------------
Total Costs and Expenses 10,172,048 8,671,837 10,129,709
------------ ----------- ------------
Loss From Operations (9,006,387) (6,976,622) (9,686,981)
------------ ----------- ------------
Other Income (Expense):
Interest Income 116,075 250,486 94,443
Loss on Sale of Marketable Securities (1,889,216) (154,707) --
Unrealized Gain (Loss) on Marketable Securities 2,190,721 (579,991) (387,746)
Loss on Write-Down of Note Receivable (177,600)
Other Losses (8,704) (14,925) (2,338)
------------ ----------- ------------
Total Other Income (Expense) 408,876 (499,137) (473,241)
------------ ----------- ------------
Loss Before Minority Interest in Net Loss (Income)
of Subsidiaries (8,597,511) (7,475,759) (10,160,222)
Minority Interest in Net Loss (Income) of
Subsidiaries, Net of Subsidiary Preferred Stock
Dividends Paid 541,466 769,632 464,083
------------ ----------- ------------
Loss from Continuing Operations (8,056,045) (6,706,127) (9,696,139)
------------ ----------- ------------
Discontinued Operations:
Loss from Operations before Minority Interest (1,545,457) (857,575) (242,451)
Minority Interest in Net Loss 467,183 327,306 (127,445)
Loss on Disposal, Net of Minority Interest of $143.671 (1,326,267) - -
------------ ----------- ------------
Loss from Discontinued Operations (2,404,541) (530,269) (369,896)
------------ ----------- ------------
Net Loss $(10,460,586) $(7,236,396) $(10,066,035)
=========== ============
Weighted Average Common Shares Outstanding 29,834,502 25,691,674 22,027,068
============= =========== ============
Loss Applicable to Common Stock:
Net Loss $(10,460,586) $(7,236,396) $(10,066,035)
Preferred Stock Dividend--Class "A" (28,810) (39,179) (26,358)
Preferred Stock Dividend--Class "B" - (2,425) (13,826)
------------ ----------- ------------
Loss Applicable to Common Stock $(10,489,396) $(7,278,000) $(10,106,219)
============ =========== ============
Loss Per Common Share:
Loss from Continuing Operations $ (.27) $ (.26) $ (.44)
Loss from Discontinued Operations (.08) (.02) (.02)
------------ ----------- ------------
Net Loss $ (.35) $ (.28) $ (.46)
============ =========== ============
</TABLE>
The accompanying notes are an integral part of the
financial statements.
F-4
<PAGE> 37
U.S. ALCOHOL TESTING OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY--
FOR THE YEARS ENDED MARCH 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
CLASS "A" CLASS "B" ADDITIONAL
PREFERRED PREFERRED COMMON PAID-IN ACCUMULATED
STOCK STOCK STOCK CAPITAL DEFICIT TOTAL
---------- ---------- ---------- ------------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance--April 1, 1993 $502 $ 1,358 $168,407 $15,019,160 $(13,706,484) $ 1,482,943
Issuance of 571,500 Shares
of Common Stock Upon
Conversion of 127,000
Shares of Class "B"
Preferred Stock -- (1,270) 5,715 (4,445) -- --
Issuance of 4,444,469
Shares of Common Stock
Upon Conversion of
Class "A" Preferred
Shares of N.V.
Subsidiary--Net -- -- 44,445 3,738,544 -- 3,782,989
Issuance of 780,621
Shares of Common Stock
Upon Exercise of
Warrants--Net -- -- 7,806 1,230,174 -- 1,237,980
Dividend on Class "A"
Preferred Stock -- -- -- (26,358) -- (26,358)
Dividend on Class "B"
Preferred Stock -- -- -- (13,826) -- (13,826)
Issuance of 429,800
Shares of Common
Stock Upon Exercise
of Warrants in
Connection With a
Settlement with a
Former Consultant -- -- 4,298 1,068,202 -- 1,072,500
Issuance of 493,590
Shares of Common Stock
Upon Exercising of
Placement Agent's Option
in the N.V. Subsidiary and
Conversion to Common
Shares of the Company
in Connection With
Settlement With a
Former Consultant -- -- 4,936 572,564 -- 577,500
Additional Paid in
Capital Arising From
Investment in U.S. Drug
Testing, Inc. by
Minority Interest -- -- -- 4,756,288 -- 4,756,288
Additional Paid in
Capital Arising From
Investment in Good
Ideas Enterprises,
Inc. by Minority Interest -- -- -- 2,841,162 -- 2,841,162
Issuance of 7,077 Shares
of Common Stock in
Payment of Class "B"
Preferred Stock Dividend -- -- 70 13,756 -- 13,826
Issuance of 74,360
Shares of Common Stock in Payment of
Dividend on Class "A" Preferred
Shares of the N.V.
Subsidiary -- -- 745 194,255 -- 195,000
Issuance of 10,000 Shares
of Common Stock to
Directors For Directors' Fees -- -- 100 21,150 -- 21,250
Issuance of 400,000 Shares
of Common Stock Upon
Conversion of N.V.
Subsidiary Common Stock--Net -- -- 4,000 965,156 -- 969,156
Net Loss For The Year
Ended March 31, 1994 -- -- -- -- (10,066,035) (10,066,035)
---- ----- -------- ----------- ------------ ------------
Balance--March 31, 1994 502 88 240,522 30,375,782 (23,772,519) 6,844,375
(Carried Forward)
</TABLE>
F-5
<PAGE> 38
U.S. ALCOHOL TESTING OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY -- (CONTINUED)
FOR THE YEARS ENDED MARCH 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
CLASS "A" CLASS "B" ADDITIONAL
PREFERRED PREFERRED COMMON PAID-IN ACCUMULATED
STOCK STOCK STOCK CAPITAL DEFICIT TOTAL
---------- ---------- ---------- ------------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance--March 31, 1994 $502 $ 88 $240,522 $30,375,782 $(23,772,519) $ 6,844,375
(Brought Forward)
Issuance of 39,375 Shares
of Common Stock Upon
Conversion of 8,750
Shares of Class "B"
Preferred Stock -- (88) 394 (306) -- --
Issuance of 40,725 Shares
of Common Stock Upon
Conversion of 9,050
Shares of Class "A"
Preferred Stock (90) -- 407 (317) -- --
Issuance of 812,018
Shares of Common Stock
Upon Exercise of Warrants -- -- 8,121 1,762,397 -- 1,770,518
Dividend on Class "A"
Preferred Stock -- -- -- (39,179) -- (39,179)
Dividend on Class "B"
Preferred Stock -- -- -- (2,425) -- (2,425)
Issuance of 1,333,333
Shares of Common Stock
in Connection With
Settlement of Class
Action Litigation -- -- 13,333 2,986,667 -- 3,000,000
Additional Paid-In
Capital Arising From
Additional Investment
in Good Ideas
Enterprises, Inc. by
Minority Interest -- -- -- 165,977 -- 165,977
Issuance of 931 Shares
of Common Stock in
Payment of Class "B"
Preferred Stock Dividend -- -- 10 2,415 -- 2,425
Issuance of 30,000 Shares
of Common Stock to
Directors for
Directors' Fees -- -- 300 54,075 -- 54,375
Issuance of 782,321 Shares
of Common Stock in
Connection With
Acquisitions -- -- 7,823 1,556,819 -- 1,564,642
Issuance of 1,050,000
Shares of Common Stock
in Connection With a
Private Placement, Net
of Related Costs -- -- 10,500 1,584,343 -- 1,594,843
Expenses of Warrant Exercise -- -- -- (25,213) -- (25,213)
Other -- -- 1 (1) -- --
Net Loss For Year Ended
March 31, 1995 -- -- -- -- (7,236,396) (7,236,396)
---- ---- -------- ----------- ------------ -----------
Balance--March 31, 1995 412 0 281,411 38,421,034 (31,008,915) 7,693,942
(Carried Forward)
</TABLE>
F-6
<PAGE> 39
U.S. ALCOHOL TESTING OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY -- (CONTINUED)
FOR THE YEARS ENDED MARCH 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
CLASS "A" CLASS "B" ADDITIONAL
PREFERRED PREFERRED COMMON PAID-IN ACCUMULATED
STOCK STOCK STOCK CAPITAL DEFICIT TOTAL
---------- ---------- ---------- ------------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance - March 31, 1995 $412 $ - $281,411 $38,421,034 $(31,008,915) $7,693,942
(Brought Forward)
Dividend on Class "A" - - - (28,810) - (28,810)
Preferred Stock
Additional Paid-In Capital - - - 97,674 - 97,674
Arising From Surrender of
Capital in Good Ideas
Enterprises, Inc. by Minority
Shareholder
Issuance of 2,152,469 Shares - - 21,524 3,016,981 - 3,038,505
of Common Stock in Connection
with a Private Placement to
International Investors
Issuance of 116,500 Shares 1,165 165,440 - 166,605
of Common Stock upon Exercise
of Warrants
Issuance of 20,000 Shares of - - 200 37,300 - 37,500
Common Stock to Directors for
Director's Fees
Issuance of 2,000,000 Shares - - 20,000 3,730,000 - 3,750,000
of Common Stock in Connection
with a Private Placement
Under Regulation D
Expenses of Stock Offerings
and Warrant Exercises - - (362,500) - (362,500)
Issuance of 50,000 Shares - - 500 99,500 - 100,000
of Common Stock to Consultant
for Investor Relations and
Financial Consulting Services
Net Loss For Year Eended
March 31, - - - - (10,460,586) (10,460,586)
---- --- -------- ----------- ------------ -----------
Balance - March 31, 1996 $412 $ - $324,800 $45,176,619 ($41,469,501) $ 4,032,330
==== === ======== =========== ============ ===========
</TABLE>
The accompanying notes are an integral part of the
financial statements.
F-7
<PAGE> 40
U.S. ALCOHOL TESTING OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED MARCH 31,
-----------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Cash Flow From Operating Activities:
Net Loss $(10,460,586) $(7,236,396) $(10,066,035)
Adjustments to Reconcile Net Loss To Net Cash Used
By Operating Activities:
Provision For Bad Debts 131,551 50,675 59,029
Depreciation and Amortization 1,311,354 799,858 447,717
Loss on Disposal of Discontinued Operations 1,326,267 -- --
Minority Interest in Net (Loss) Income of
Subsidiary, Net of Subsidiary Preferred Stock
Dividends Paid (1,008,649) (1,096,938) (336,638)
Value of Common Stock Issued to Directors For
Services 37,500 54,375 21,250
Value of Common Stock Issued to Consultant 100,000 -- --
Value of Common Stock in Subsidiary Issued
to Officer for Services 5,000
Unrealized Loss on Marketable Securities (2,190,721) 579,991 387,746
Realized Loss on Marketable Securities 1,889,216 154,707
Amortization of Bond Discount (779) (3,116) (960)
Loss on Note Receivable -- 177,600
Loss on Disposition of Property and Equipment 22,335 40,400 2,338
Changes in Operating Assets and Liabilities:
(Increase) Decrease in Accounts Receivable 360,682 711,044 (897,187)
(Increase) Decrease in Other Receivables 67,528 (34,112) 155,143
(Increase) Decrease in Inventories 1,301,593 (833,681) 425,816
Increase in Prepaid Expenses (11,718) ( 45,742) (106,836)
Increase in Other Assets (11,025)
(Increase) Decrease in Funds in Escrow-
Restricted - 1,578,671 (1,578,671)
Increase (decrease) in Accounts Payable (1,011,022) 135,794 482,460
Increase in Accrued Expenses and Taxes (4,103) 24,492 14,504
Increase (Decrease) in Accrued Class Action
Settlement - (1,578,671) 4,578,671
Increase in Net Assets of Discontinued Operations (364,522)
--------- ---------- -----------
Net Cash Used By Operating Activities (8,710,699) (6,698,649) (6,234,053)
--------- ---------- -----------
Cash Flow From Investing Activities:
Sale of Marketable Securities 3,609,826 13,320 -
Purchase of Marketable Securities - -- (3,908,281)
Purchase of Property and Equipment (287,599) (2,555,133) (667,536)
Purchase of Patents and Related Costs - (9,633) (12,514)
Proceeds form Sales of Fixed Assets 59,438 - -
Other (23,221) 1,456 (33,408)
Dispositions of Property and Equipment - - 10,000
Repayment of Loan to Officer - - 50,000
Cash Acquired in Business Acquisitions - 593,261 -
Costs of Business Acquisitions - (5,120) -
--------- ---------- -----------
Net Cash Provided (Used) By Investing Activities 3,358,444 (1,961,849) (4,561,739)
--------- ---------- -----------
</TABLE>
F-8
<PAGE> 41
U.S. ALCOHOL TESTING OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED MARCH 31,
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Cash Flow From Financing Activities:
Sales and Issuances of Common and Preferred Stock 6,788,505 1,694,063 --
Proceeds of Long-Term Debt 17,843 81,151 141,511
Payments of Long-Term Debt (88,248) (93,584) (32,941)
Payments of Notes Payable -- -- (26,518)
Proceeds of Brokerage Loans Payable 1,000,000 1,674,683 --
Payments of Brokerage Loans Payable (2,569,592) (105,091) --
Proceeds From Sales of Common Stock by U.S.
Drug Testing, Inc. -- -- 8,609,600
Proceeds From Sale of Common Stock by Good Ideas
Enterprises, Inc. -- 326,000 6,000,000
Expenses of Stock Offerings of Subsidiaries -- (44,703) (2,775,792)
Proceeds From Exercising of Placement Agent's Option in Connection With
Acquisition of 21 Units in N.V.
Private Placement -- -- 577,500
Expenses of Stock Offering and Exercise of Warrants (362,500) (124,433) (38,157)
Payment of Dividend on Class "A" Preferred Stock (28,810) (31,977) (26,358)
Issuance of Common Stock Upon Exercise of Warrants 166,605 1,770,518 2,348,637
----------- ------------ ------------
Net Cash Provided By Financing Activities 4,925,803 5,146,627 14,777,482
----------- ------------ ------------
Increase (Decrease) in Cash and Cash Equivalents (428,452) (3,513,871) 3,981,690
Cash and Cash Equivalents--Beginning of the Year 1,633,098 5,146,969 1,165,279
----------- ------------ ------------
Cash and Cash Equivalents--End of the Year $ 1,204,646 $ 1,633,098 $ 5,146,969
=========== ============ ============
Supplemental Disclosure of Cash Information:
Cash Paid For Interest $ 81,450 $ 50,139 $ 7,215
=========== ============ ============
Income Taxes Paid $ -- $ -- $ --
=========== ============ ============
Non-Cash Financing Activities:
Preferred Stock Dividends Accrued $ 7,202 $ 7,202 $ --
=========== ============ ============
Issuance of Common Stock for Businesses Acquired--
Net of Cash Received $ -- $ 976,501 $ --
=========== ============ ============
Issuance of Common Stock as Payment for Preferred
"B" Dividend $ -- $ 2,465 $ 13,826
=========== ============ ============
Issuance of Common Stock as Payment of N.V.
Preferred "A" Dividend $ -- $ -- $ 195,000
=========== ============ ============
Issuance of Common Stock Upon Conversion of N.V.
Preferred "A" Shares--Net $ -- $ -- $ 3,676,068
=========== ============ ============
Issuance of Common Stock Upon Conversion of N.V.
Common Shares--Net $ -- $ -- $ 969,156
=========== ============ ============
Issuance of Common Stock in Connection With
Settlement of Class Action Litigation $ -- $ 3,000,000 $ --
=========== ============ ============
Issuance of Common Stock Upon Conversion Of
Class "A" Preferred Stock $ -- $ 407 $ --
=========== ============ ============
Issuance of Common Stock Upon Conversion Of
Class "B" Preferred Stock $ -- $ 394 $ 5,715
=========== ============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-9
<PAGE> 42
U.S. ALCOHOL TESTING OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1996
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of U.S.
Alcohol Testing of America, Inc. (the "Company") and its wholly and majority
owned subsidiaries. All significant intercompany accounts and transactions are
eliminated in consolidation.
Industry Segment and Concentration of Risk
The Company, which operates in a single industry segment, designs,
manufactures, markets and services alcohol breath testing equipment, which is
either sold or placed on a cost per test basis with laboratories or other users,
and, through its ProActive Synergies Inc. ("ProActive") subsidiary designs and
administers drug testing and background checking services as a human resources
provider. Additionally, the Company's 67.0% owned subsidiary, U.S. Drug Testing,
Inc. ("U.S. Drug") (a development stage enterprise), is developing a saliva
based, on site drug testing system and, thereafter depending on the successful
completion, completing development of a urine based, on site drug testing
system. The Company performs ongoing credit evaluations of its customers and
generally does not require collateral. The Company maintains reserves for
potential credit losses, and such losses have been within management's
expectations. No customer accounted for 10% or more of net revenues in the years
ended March 31, 1996, 1995 or 1994.
Financial instruments that potentially subject the Company to
concentration of credit risk consist principally of cash investments and trade
receivables. The Company currently invests excess cash in short term commercial
paper with strong credit ratings and in money market accounts with commercial
banks.
The Company's operating results each quarter are subject to various
uncertainties, including uncertainties related to revenues from major customers,
actions of competitors and the risks inherent in the new product development
currently being undertaken by the Company's 67.0%-owned subsidiary, U.S. Drug.
One of the significant risks potentially affecting the Company's
operating results is the effect of the history of operating losses on its
ability to secure additional capital resources. Management continues to believe
that the Company will have the cash resources to meet all of its operating
requirements for the next 12 months as a result of the exercise of warrants to
purchase its Common Stock, the anticipated growth of the human resource provider
portion of its business which is expected to benefit from the acquisition of
Robert Stutman & Associates, Inc. ( See Note 16-Subsequent Events), increased
sales of breath alcohol testing machines and cost per test revenue, the
discontinuance of the operations of its subsidiaries, U.S. Rubber Recycling,
Inc. ("USRR") and Good Ideas Enterprises, Inc. ("Good Ideas"), and significant
budgeted reductions in general and administrative costs.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles required management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid cash investments with an
original maturity of three months or less when purchased to be cash equivalents.
Trading Securities
Trading securities at March 31, 1995 consisted of mortgage-backed debt
and corporate equity securities. The Company adopted the provisions of Statement
of Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain
Investments in Debt and Equity Securities", effective April 1, 1994. Pursuant to
SFAS No. 115, the provisions of the Statement were not applied retroactively.
The change had no material cumulative effect on the Company's financial position
or results of operations. Prior to the adoption of SFAS No. 115, equity and debt
securities were carried at the lower of aggregate cost or market and on an
amortized cost basis, respectively.
Under SFAS No. 115, the Company classified all of its debt and marketable equity
securities held at March 31, 1995 as trading securities and recorded them at
fair market value. Management determines the appropriate classification of all
securities at the time of purchase and reevaluates such designation as of each
balance sheet date. Unrealized holding gains and losses, net of the related tax
effect, are included in earnings.
F-10
<PAGE> 43
U.S. ALCOHOL TESTING OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1996
NOTE 1 (CONTINUED)--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Inventories
Inventories are stated at the lower of cost or market. Cost is determined by the
first-in, first-out method.
Property and Equipment
Property and equipment is stated at cost. Depreciation is computed by both
straight-line and accelerated methods over the estimated useful lives of the
related assets. Expenditures for maintenance and repairs are charged to expense
as incurred whereas major betterments and renewals are capitalized.
The Company's property and equipment is depreciated using the following
estimated useful lives:
<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 Life of Lease
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 15 years.
The Company continually monitors events and changes in circumstances
that could indicate carrying amounts of goodwill may not be recoverable. When
events or changes in circumstances are present that indicate the carrying amount
of goodwill many not be recoverable, the Company assesses the recoverability of
goodwill by determining whether the carrying value of such goodwill will be
recovered through undiscounted expected future cash flows after interest charges
associated with the business acquired. No impairment losses were recorded by the
Company in the years ended March 31, 1995 or 1994. Goodwill relating to the
acquisition of Good Ideas in the amount of $1,013,304 was included in the loss
on disposal of its discontinued operation in fiscal 1996.
Impairments would be recognized in operating results if a permanent
dimimution in value were to occur.
Impairment of Long-Lived Assets
In March 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of"
("SFAS 121"), which is required to be adopted by the year ending March 31, 1997.
SFAS 121 establishes the accounting standards for the impairment of long-lived
assets, certain intangible assets and cost in excess of net assets acquired to
be held and used, and for long-lived assets and certain intangible assets to be
disposed of. The Company does not expect the adaption of SFAS 121 to have a
material impact on its financial statement.
Patents
The cost of patents are amortized over their expected useful lives
(approximately 17 years) using the straight-line method.
Revenue Recognition
Sales are recorded as products are shipped. Per test revenues are
recognized in the period that such tests are performed.
Research and Development Costs
Research and development costs are expensed as incurred.
F-11
<PAGE> 44
U.S. ALCOHOL TESTING OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1996
NOTE 1 (CONTINUED)--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Income Taxes
The Company accounts for income taxes under Statement of Financial
Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes". In
accordance with SFAS No. 109, deferred tax assets and liabilities are
established for the temporary differences between the financial reporting basis
and the tax basis of the Company's assets and liabilities at enacted tax rates
expected to be in effect when such amounts are realized or settled.
Common Stock Issued for Services
The Company accounts for Common Stock issued for services other than
employment by charging income in the period of grant with the market value of
the Common Stock.
Accounting for Stock Based Compensation
The Company accounts for Common Stock and warrants issued to employees
as compensation in accordance with the provisions of the Accounting Principles
Board Opinion No. 25 (APB 25) "Accounting for Stock Issued to Employees." In
1995, the Financial Accounting Standards Board released SFAS No. 123,
"Accounting for Stock-Based Compensation." SFAS No. 123 provides an alternative
to APB 25 and is effective for fiscal years beginning after December 15, 1995.
The Company expects to continue to account for its grants of Common Stock or
warrants to employees in accordance with the provisions of APB 25. Accordingly,
SFAS No. 123 is not expected to have any material impact on the Company/s
financial position or results of operations.
Net Loss Per Common Shares
Loss per common share is based upon the weighted average number of
common shares outstanding during the periods reported. Common stock equivalents
have not been included in this calculation since their inclusion would be
antidilutive.
Reclassification
The Company has reclassified certain prior year balances to conform
with the current year's presentation.
NOTE 2--CASH AND CASH EQUIVALENTS
Cash and cash equivalents are summarized as follows:
<TABLE>
<CAPTION>
MARCH 31,
---------
1996 1995
---- ----
<S> <C> <C>
Cash in Banks $ 450,845 $ 160,939
Money Market Funds 933 1,472,159
Commercial Paper 752,868 -
---------- ----------
$1,204,646 $1,633,098
========== ==========
</TABLE>
NOTE 3--TRADING SECURITIES
Trading securities at March 31, 1995 are summarized below. The Company
owned no trading securities at March 31, 1996.
<TABLE>
<CAPTION>
MARCH 31,
---------
1995
----
<S> <C>
Marketable Equity Securities $1,585,906
Federal Home Loan Mortgage Corporation REMIC Bonds 3,428,998
Federal National Mortgage Association REMIC Bonds 483,360
----------
5,498,264
Less: Unrealized Losses 2,190,721
----------
Trading Securities at Aggregate Market Value $3,307,543
==========
</TABLE>
At March 31, 1995, the trading securities were collateral for the
brokerage loan payable. The REMIC Bonds were sold for proceeds of $3,285,625
during July 1995 and the brokerage loan was paid off (See Note 6). The Company
recorded a gain of $76,441, net of amortization of bond discount, over the
carrying value on the March 31, 1995 Balance Sheet. The Company realized an
overall loss of $627,512 on its investment in REMIC bonds. Management will make
no further investments in any high risk trading securities.
F-12
<PAGE> 45
U.S. ALCOHOL TESTING OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1996
NOTE 4--INVENTORIES
Inventories are summarized as follows:
<TABLE>
<CAPTION>
MARCH 31,
---------
1996 1995
---- ----
<S> <C> <C>
Finished Goods $ 64,437 $ 538,677
Work in Process 334,699 497,583
Raw Materials 282,703 1,176,306
---------- ----------
$ 681,839 $2,212,566
========== ==========
</TABLE>
NOTE 5--PROPERTY AND EQUIPMENT
Property and equipment is summarized as follows:
<TABLE>
<CAPTION>
MARCH 31,
---------
1996 1995
---- ----
<S> <C> <C>
Furniture and Fixtures $ 453,609 $ 411,965
Equipment 811,333 1,339,602
Equipment--Network/Per Test 2,327,553 2,030,918
Test Equipment 476,765 460,978
Leasehold Improvements 343,692 397,567
Vehicles 124,042 183,562
---------- ----------
4,536,994 4,824,592
Less: Accumulated Depreciation 1,845,015 1,081,606
---------- ----------
$2,691,979 $3,742,986
========== ==========
</TABLE>
NOTE 6--BROKERAGE LOAN PAYABLE
At March 31, 1995, the brokerage loan payable consisted of demand loans
from a major national stock brokerage firm, bearing interest at 8.5% per annum
and secured by certain trading securities held by the brokerage firm. The
purpose of these loans was for working capital. These loans could not exceed 75%
of the current market value of the REMIC Bonds (see Note 3). The loan was repaid
during the second quarter of the year ended March 31, 1996 from the proceeds of
the sale of the REMIC bonds.
NOTE 7-LONG-TERM DEBT
<TABLE>
<CAPTION>
March 31,
Long-term debt is summarized as follows: ---------
1996 1995
---- ----
<S> <C> <C>
Capitalized lease obligations, secured by certain equipment, payable in
various monthly installments due from July 1995 to January 1999 $ 62,330 $112,735
Note payable, bearing interest at 6% per annum from January 15, 1995,
payable in semi-annual payments including principal and interest of
$1,771 from July 15, 1995 and due January 15, 2002 -- 20,000
-------- --------
62,330 132,735
Less: Current Portion 29,395 53,727
-------- --------
$32,935 $ 79,008
======= ========
</TABLE>
F-13
<PAGE> 46
U.S. ALCOHOL TESTING OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1996
NOTE 7 (CONTINUED)--LONG-TERM DEBT
Long-term debt matures as follows:
<TABLE>
<CAPTION>
MARCH 31,
---------
<S> <C>
1997 $ 29,395
1998 15,460
1999 9,324
2000 4,512
2001 3,639
-------
$62,330
=======
</TABLE>
NOTE 8--MINORITY INTEREST
The Company's consolidated financial statements at March 31, 1995
include 100% of the assets, liabilities and losses of U.S. Drug, a 67.0%-owned
publicly traded subsidiary, and 100% of the assets, liabilities and losses of
Good Ideas, a 59%- owned publicly traded subsidiary. The percentage ownership in
Good Ideas decreased by 1% during the year ended March 31, 1995 by virtue of an
additional 65,200 shares of common shares of the subsidiary sold pursuant to the
overallotment provision of its initial public offering. The $2,723,502 minority
interest reported on the balance sheet represents the minority stockholders'
interest in the equity of these subsidiaries.
At March 31, 1996, the Company's consolidated statements reflect an
increase in the minority interest in Good Ideas as a 60.8%-owned subsidiary as a
result of the surrender of 126,520 shares of common stock of Good Ideas in
connection with the resignation of Keith Parten, formerly Chief Operating
Officer, President and a director of Good Ideas, and the issuance of 10,000
shares of common stock of Good Ideas to an officer for compensation.
See Note 16 for information regarding the Company's registration
statements under the Securities Act of 1933, as amended (the "Securities Act"),
in connection with the offer to purchase the minority shares of U.S. Drug and
Good Ideas.
NOTE 9 - STOCKHOLDERS' EQUITY
Directors' Stock
In February 1994, the Company authorized the issuance of 10,000 shares
of Common Stock valued at $21,250 to its directors for annual directors' fees.
In June 1994, the Company authorized the issuance of 30,000 shares of Common
Stock valued at $54,375 as directors' compensation. The values of these shares
were charged to operations in the respective periods.
In September 1995, the Company authorized the issuance of 20,000 shares
of Common Stock valued at $37,500 to two of its directors for directors' fees.
The value of these shares was charges to operations in the current period.
Preferred Stock
Each share of Class "A" Preferred Stock is convertible into 4.5 shares
of Common Stock and pays dividends at the rate of 14% per annum on the
liquidation preference of $5 per share (or $.70 per share). Dividends are
payable semi-annually.
Each share of Class "B" Preferred Stock is convertible into 4.5 shares
of Common Stock and pays dividends at the rate of 10% per annum on the
liquidation preference of $4 per share (or $.40 per share). Dividends are
payable semi-annually in cash or Common Stock at the Company's election. All
Class "B" Preferred Stock was converted into Common Stock prior to March 31,
1995.
Registration of Warrants
A Registration Statement of the Company filed under the Securities Act
was declared effective during May 1994. The filing registered 81,250 shares of
Common Stock underlying an equal amount of warrants expiring between May 17,
1997 and September 1, 1998 and at exercise prices ranging from $1.06 to $4.00.
During the year ended March 31, 1994, a total of 1,210,421 shares
registered under the Securities Act were issued upon the exercise of warrants
for proceeds of approximately $2,348,000 before deducting expenses of
approximately $38,000.
During the year ended March 31, 1995, a total of 812,018 shares
registered under the Securities Act were issued upon the exercise of warrants
for proceeds of approximately $1,770,000.
During the year ended March 31, 1996, a total of 116,500 shares
registered under the Securities Act were issued upon the exercise for proceeds
of approximately $167,000.
F-14
<PAGE> 47
U.S. ALCOHOL TESTING OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1996
NOTE 9 (CONTINUED)--STOCKHOLDERS' EQUITY
Initial Public Offering of Good Ideas
In February 1994, the initial public offering of Good Ideas was
completed and 1,200,000 shares of the common stock of Good Ideas was sold to the
public at $5 per share for gross proceeds of $6,000,000. Net proceeds to the
subsidiary amounted to approximately $4,735,000 after deducting expenses of
approximately $1,265,000. The offering represented the sale of 30% of the
outstanding stock and the Company holds a 60% interest in the subsidiary. In
connection with the offering, the underwriter was granted, for nominal
consideration, common stock purchase warrants entitling the underwriter to
purchase up to 120,000 shares of common stock of Good Ideas at $6 per share.
In April 1994, an additional 65,200 shares of common stock of Good
Ideas were sold pursuant to its initial public offering's overallotment
provision and the subsidiary grossed $326,000 before deducting expenses of
approximately $45,000.
As a result of the initial public offering and overallotment,
approximately $2,800,000 was added to the additional paid-in-capital of the
Company. After completion of the overallotment, the Company's ownership of Good
Ideas was reduced to 59%.
Initial Public Offering of U.S. Drug Testing, Inc.
U.S. Drug completed its initial public offering of 1,500,000 shares of
common stock at $5 per share on October 13, 1993 and the subsequent
overallotment of 221,900 shares in November 1993. U.S. Drug realized gross
proceeds of $8,609,500 and incurred expenses of $1,501,500, yielding net
proceeds of $7,108,000. In connection with the offering, the underwriter was
granted, for nominal consideration, common stock purchase warrants entitling the
underwriter to purchase up to 150,000 shares of common stock of U.S. Drug at $6
per share.
As a result of the initial public offering and overallotment,
approximately $4,800,000 was added to the additional paid-in-capital of the
Company. After completion of the transaction, the Company holds a 67.0% interest
in the subsidiary.
Alconet and Dakotanet Acquisitions
On March 30, 1995, the Company acquired 100% of the outstanding capital
stock of Alconet, Inc., a privately held North Dakota corporation ("Alconet"),
and 100% of the net equity of Dakotanet, LLC, a privately held North Dakota
Limited Liability company ("Dakotanet"). The transactions provided for the
issuance of 782,321 shares of the Common Stock valued at $1,565,000. In
connection with the transaction certain of the shares issued by the Company to
the selling shareholders of Alconet were used as payment of obligations of
Alconet in the approximate amount of $109,000. Concurrent with the acquisitions,
the Company contributed the net assets of Dakotanet to Alconet. The purchase
price of the acquisitions exceeded the net book value of the assets acquired,
which included cash of $593,000, by $818,000 and this has been assigned to
goodwill. The acquisitions have been accounted for as a purchase.
Private Placements
In August 1995, the Company completed a private placement to
international investors, who were not related to the Company, in accordance with
the provisions of Regulation S under the Securities Act in which it sold
2,152,469 shares of its common stock and realized gross proceeds of $3,038,505.
In February 1996, the Company completed a private placement under
Regulation D under the Securities Act in which it sold 2,000,000 shares of its
common stock and realized gross proceeds of $3,750,000.
NOTE 10--INCENTIVE COMPENSATION PLAN AND OUTSTANDING COMMON STOCK PURCHASE
WARRANTS
The Company has adopted an Employees' Incentive Compensation Plan ("the
Plan"). The Plan provides for the issuance of restricted stock to employees
under certain conditions, as well as non-qualified stock options and Incentive
Stock Options.
There are reserved 450,000 shares of Common Stock for issuance upon the
exercise of non-qualified and incentive options and the grant of restricted
stock under the plan. During August 1994, stock options to purchase all of the
450,000 shares of Common Stock reserved for issuance under the Plan were granted
to key officers and directors of the Company in recognition for services
rendered to the Company. These options are immediately exercisable at $2.38 per
share, which represented the market value at the date of grant. The options
expire after ten years.
F-15
<PAGE> 48
U.S. ALCOHOL TESTING OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1996
NOTE 10 (CONTINUED)--INCENTIVE COMPENSATION PLAN AND OUTSTANDING COMMON STOCK
PURCHASE WARRANTS
Common shares reserved for stock options and for outstanding stock purchase
warrants are presented in the following table:
<TABLE>
<CAPTION>
Incentive Stock Options Non Qualified Options Warrant Agreements
------------------------- ------------------------- -----------------------
Number Price Range Number of Price Range Number Price Range
of Shares Per Share of Shares Per Share of Shares Per Share
--------- ----------- --------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding - April 1 1993 -0- $ -0- -0- $ -0- 5,345,875 $ .44-4.00
Granted -0- -0- -0- -0- 53,250 1.81-3.00
Exercised -0- -0- -0- -0- (1,210,442) 1.33
------ ------ ----------
Outstanding - March 31, 1994 -0- -0- -0- -0- 4,188,683 1.06-4.00
Granted 420,000 2.38 30,000 2.38 869,750 1.81-2.50
Canceled -0- -0- -0- -0- (6,000) 2.19
Exercised -0- -0- -0- -0- (812,018) 1.33-3.00
------- ------ ---------
Outstanding March 31, 1995 420,000 -0- 30,000 -0- 4,240,415 1.06-4.00
Granted -0- -0- -0- -0- 3,951,000) 1.88-4.00
Exercised -0- -0- -0- -0- (116,500) 1.06-1.87
------- ------ ------ ------ --------- ----------
Outstanding March 31, 1996 420,000 $ 2.38 30,000 $ 2.38 8,074,915 $1.06-4.00
======= ====== ====== ====== ========= ==========
</TABLE>
During October 1995, the Company issued five-year warrants for the purchase of
100,000 shares of common stock at $2.17 to the placement agents for a private
placement pursuant to Regulation S under the Securities Act.
During November 1995, the Board of Directors authorized the issuance of
three-year warrants for the purchase of 60,000 shares of Common Stock at $1.94
to five new directors of the Company and to a consultant to the Board of
Directors.
During November 1995, the Board of Directors authorized the issuance of three
warrants to purchase an aggregate of 700,000 shares of the Common Stock to a new
director of the Company in connection with his services in a capacity other than
as a director, including those related to the private placement pursuant to
Regulation D under the Securities Act. The warrants were issued for three to
five-year periods at exercise prices ranging from $1.94 to $4.00.
During December 1995, the Board of Directors authorized the issuance of
four-year warrants to purchase 2,000,000 shares of Common Stock at $2.00 in
connection with the private placement completed pursuant to Regulation D under
the Securities Act.
During December 1995, the Board of Directors authorized the issuance of
three-year warrants for the purchase of 400,000 shares of Common Stock at $2.00
pursuant to a consulting agreement with ProActive Synergies, Inc. Pursuant to
this agreement, a Common Stock purchase warrant for 200,000 shares was issued on
December 14, 1995 to Robert Stutman and a warrant for the remaining 200,000
shares was issued to Robert Stutman & Associates, Inc. on April 1, 1996.
During January 1996, the Company issued four-year warrants for the purchase of
150,000 shares of Common Stock at $2.25 to an individual in connection with the
settlement of litigation against the Company.
During February 1996, the Board of Directors authorized the issuance of
three-year warrants for the purchase of 700,000 shares of Common Stock at $2.44
to a consultant to the Company for financial public relations services.
During the year ended March 31, 1996, the Company granted three-year warrants to
employees to acquire 41,000 shares of Common Stock at prices ranging from $1.88
to $2.81.
F-16
<PAGE> 49
U.S. ALCOHOL TESTING OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1996
NOTE 11--SETTLEMENT OF LITIGATION
In November 1993, the Company and Jeffrey Brooks Securities, Inc., its
former investment banker, and Jeffrey Brooks individually (collectively
"Brooks") resolved a dispute which provided, in pertinent part, that Brooks
exercise an option to purchase 21 Units of securities issued by the Company's
international subsidiary ("NV") for $577,500 and thereafter convert those shares
to Common Stock at the same conversion price of $1.17. As a result, Brooks was
issued 493,590 shares of the Common Stock.
In November 1993, the Company executed a stipulation of settlement in
the securities class action litigation which was subject to Court approval. The
Company agreed to pay $1,600,000 in cash to the class and $3,000,000 worth of
its Common Stock, or a total consideration of $4,600,000 to completely settle
both class actions then pending against the Company and all defendants. This
amount was charged to operations during the year ended March 31, 1994. The
Company funded the $1,600,000 cash portion through exercised warrants and
options of certain co-defendants in the class action.
On April 4, 1994, the Court approved the stipulation of settlement
entered into by the Company in November 1993. The Court chose March 31, 1994 as
the valuation date for the $3,000,000 stock portion of the settlement.
Accordingly 1,333,333 shares of Common Stock were issued based upon the $2.25
closing price at March 31, 1994. These shares have not been included in the
computation of earnings (loss) per share for the year ended March 31, 1994
because the number of shares were not determinable until the date of the court
approval. If these shares were outstanding for the entire year ended March 31,
1994, the effect on loss per share would have been to decrease the net loss per
share by $.03.
In November 1993, as part of a dispute resolution with its former
consultant, David Brooks, the Company received all of Mr. Brooks' 25% equity
interests in both NV and Good Ideas for nominal consideration. As a result, the
Company's interests became 100% of NV and 60% percent of Good Ideas.
In September 1995, the Company settled litigation relating to a consent
solicitation filed against it by a group of stockholders. Term of the settlement
included the payment of legal costs of the stockholder group. The costs incurred
by the Company and the stockholder group totaled approximately $1,000,000 and
are included in the caption "Loss from Settlement of Litigation."
In January 1996, the Company settled litigation with a former
consultant, Jonathan J. Pallin, with the payment of $175,000 cash and the
issuance of warrants to purchase 150,000 shares of the Common Stock at a price
of $2.25 per share though January 30, 2000. Warrants to purchase 200,000 shares
of the Common Stock at $2.625 were returned to the Company and canceled as part
of the settlement. The cash payment related to this settlement is included in
Additional Paid In Capital.
In March 1996, the Company settled litigation with two former officers
of Alconet. The settlement resulted in payments by the Company of $250,000.
These costs are included in the caption "Loss from Settlement of Litigation."
NOTE 12--COMMITMENTS AND CONTINGENCIES
Employment Agreements
The Company entered into new employment agreements with four of its
senior officers which became effective January 1, 1994 and terminate on December
31, 1996. The agreements provide for aggregate annual minimum salaries in the
amount of $638,000, as well as for reimbursement of related business expenses
incurred.
F-17
<PAGE> 50
U.S. ALCOHOL TESTING OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1996
NOTE 12 (CONTINUED)--COMMITMENTS AND CONTINGENCIES
The Company and its subsidiaries have entered into employment
agreements with certain of its officers and employees which will terminate at
various dates through the end of December 1997. The agreements provide for
aggregate annual minimum salaries of approximately $707,000 as well as
reimbursement of related business expenses incurred.
Royalty Agreement
As part of the acquisition of certain assets of Luckey Laboratories,
Inc., during June 1988 and a covenant not to compete provision by Manley Luckey,
principal of Luckey Laboratories, Inc. the Company was obligated to pay
royalties equal to 5% of the first $1,000,000 in sales, 3% of the second
$1,000,000 in sales and 2% of sales exceeding $2,000,000, with a maximum
guaranteed annual royalty of $120,000. Guaranteed minimum royalties of $30,000
per year were payable at the rate of $2,500 per month, through June 30, 1993, as
amended. The royalty terms extend for Manley Luckey's lifetime with no minimum
guarantee after June 1993, but were limited to $120,000 per year or 3% of gross
sales, whichever is less. In anticipation of increased revenues which would
result in the payment of the maximum royalty under the existing agreement, in
September 1994, the Company renegotiated the terms of the agreement to provide
monthly payments of $5,000 for the period from September through December, 1994
and $10,000 per month from January 1, 1995. The agreement also provides for a
CPI adjustment every six months starting June 1, 1995. Had the terms of the
revised royalty agreement been in effect for the last three years, royalty
expense would have increased by $57,500 for the year ended March 31, 1995 and
$90,000 for each of the years ended March 31, 1994 and 1993. Royalties charged
to operations under this agreement amounted to $122,700,$62,500 and $30,000 for
the fiscal years ended 1996, 1995 and 1994, respectively.
Lease Commitments
The Company has entered into a lease that commenced July 1, 1991 and
terminates on January 31, 1997 as amended, for new office and factory facilities
in Rancho Cucamonga, California. The lease as amended provides for annual rental
payments commencing November 1, 1991. Two of the Company's subsidiaries maintain
facilities under leases expiring over periods through June 1999. In addition to
rent, the leases provide for payment of real estate taxes and other occupancy
costs.
Approximate future minimum payments under these leases are summarized
as follows:
<TABLE>
<CAPTION>
Fiscal year ending March 31:
<S> <C>
1997 $167,200
1998 26,800
1999 20,300
--------
$214,300
========
</TABLE>
Rent expense was approximately $293,000, $276,000, and $283,000 for the
years ended March 31, 1996, 1995 and 1994, respectively.
Although the purchaser of the discontinued USRR business has assumed
the lease of the building the business occupied, the landlord did not release
USRR from liability on the lease if the purchaser does not perform. Approximate
future lease payments under this lease are $58,418 in fiscal 1997, $60,243 in
fiscal 1998, $65,036 in fiscal 1999 and $16,658 in fiscal 2000.
Material Contracts
The Company and the Department of the Navy, on January 24, 1992,
entered into a ten-year agreement granting the Company a partial exclusive
patent license to products for drug testing in the United States and certain
foreign countries. In June 1995, USAT's License Agreement with the Department of
Navy was renegotiated and amended to provide for minimum royalties of $100,000
per year commencing October 1, 1995 and terminating September 30, 2005.
Additional royalties will be paid pursuant to a schedule based upon sales of
products. U.S. Drug is a sub-licensee under this agreement from USAT and,
accordingly, has an obligation to USAT for the royalty payments required by the
License Agreement. Royalties paid under the License Agreement by the Company
amounted to $50,000 for the year ended March 31, 1996, $375,000 for the year
ended March 31, 1995 and $228,750 for the year ended March 31, 1994.
F-18
<PAGE> 51
U.S. ALCOHOL TESTING OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1996
NOTE 12 (CONTINUED)--COMMITMENTS AND CONTINGENCIES
Network/Per Test Equipment Agreements
In December 1994, the Company entered into Equipment, Licensing,
Service and Maintenance Agreements with two national laboratories ("the
Customers") for three and five- year terms, respectively. Under the terms of
these agreements, the Company delivered its Alco Analyzer 2100 Unit, together
with related software and equipment, to various testing sites of the Customers,
as outlined in the agreements. The Company granted to the Customers a
nonexclusive, nontransferable license to use the equipment as specified in the
agreements. In addition, the Company shall provide to the Customers technical
services, disposable supplies and maintenance as specified in the agreements.
The Company will be compensated under the terms of the agreements by receiving a
fee for each test performed on its equipment.
NOTE 13--INCOME TAXES
The Company and its subsidiaries file their corporation income tax
returns on an unconsolidated basis and have net operating loss carryforwards at
March 31, 1996 of approximately $35,600,000, expiring from March 31, 2004 to
March 31, 2011 if not offset against future federal taxable income.
Pursuant to Section 382 of the Internal Revenue Code, due to changes in
the ownership of the Company and its subsidiaries, the utilization of these loss
carryforwards may be subject to an annual limitation.
Income tax benefit attributable to net loss differed from the amounts
computed by applying the statutory Federal Income tax rate applicable for each
period as a result of the following:
<TABLE>
<CAPTION>
MARCH 31,
---------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Computed "Expected" Tax Benefit $ 2,550,000 $ 4,080,000 $ 1,906,000
Decrease in Tax Benefit Resulting from:
Net Operating Loss For Which no Benefit is Currently
Available (2,550,000) (4,080,000) (1,906,000)
----------- ----------- -----------
$ -- $ -- $ --
=========== =========== ===========
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the net deferred tax asset are presented below:
<TABLE>
<CAPTION>
MARCH 31,
---------
1996 1995
---- ----
<S> <C> <C>
Deferred tax assets:
Net Operating Loss Carryforwards $12,800,000 $ 9,520,000
Allowances for Unrealized Losses on Marketable Securities -- 745,000
----------- -----------
12,800,000 10,265,000
Less:
Valuation Allowance Under SFAS 109 12,800,000 10,265,000
----------- -----------
Net Deferred Tax Assets $ -- $ --
=========== ===========
</TABLE>
NOTE 14 RELATED TRANSACTIONS
In February 1996, Lee S. Rosen, a director of the Company, received
$100,000 and warrants to purchase 700,000 shares of Common Stock for services
performed in connection with the Company's offering of 2,000,000 shares of
Common Stock pursuant to Regulation D under the Securities Act. These warrants
consist of (a) a Common Stock purchase warrant expiring November 15, 1998 to
purchase 400,000 shares of Common Stock at $1.9375 per share, (b) a Common Stock
purchase warrant expiring November 14, 2000 to purchase 150,000 shares of Common
Stock at $3.00 per share and (c) a Common Stock purchase warrant to purchase
150,000 shares of Common Stock at $4.00 per share. The latter two warrants can
only be exercised as to 50,000 shares of Common Stock subject thereto in
proportion to the shares issued upon the exercise of Common Stock purchase
warrants expiring December 17, 1999 to purchase 2,000,000 shares of Common Stock
at $2.00 per share issued to the purchasers in such prior placement. Subsequent
to year end, during May and June 1996, Mr. Rosen received an additional $400,000
for services rendered to the Company in connection with the exercise of Common
Stock purchase warrants (see Note 16 to the Financial Statements). The payments
to Mr. Rosen are directly related to raising capital for the Company and have
been charged to Additional Paid-In Capital.
F-19
<PAGE> 52
U.S. ALCOHOL TESTING OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1996
NOTE 15 DISCONTINUED OPERATIONS
On February 26, 1996, the Board of Directors approved a strategic
decision to focus on the Company's core alcohol, drug and human resource
provider businesses and to dispose of its non core rubber recycling and toy
operations, namely USRR and Good Ideas. These business units are accounted for
as discontinued operations and, accordingly, their operations are segregated in
the accompanying income statements. Sales, operating costs and expenses, other
income and expense and applicable minority share of losses for the years March
31, 1995 and 1994 have been reclassified for amounts associated with
discontinued units. All operations for USRR and Good Ideas have been classified
as Loss from Discontinued Operations.
Discontinued operations include management's best estimates of the
amounts expected to be realized from the sale or liquidation of its toy
operations. The amounts the Company will ultimately realize could differ in the
near term from the amounts assumed in arriving at the loss on disposal of the
discontinued operations.
Sales, related losses and minority share of losses associated with the
discontinued business units are as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED MARCH 31,
----------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Sales $ 2,400,750 $ 6,741,935 $ 6,739,689
=========== =========== ===========
Loss from operations before minority interests (1,545,457) (857,575) (242,451)
Minority interest in loss $ 467,183 327,306 (127,445)
Loss from disposal, net of Minority interest of $143,671 (1,326,267) -- --
----------- ----------- -----------
Total Loss from Discontinued Operations $(2,404,541) $ (530,269) $ (369,896)
=========== =========== ===========
</TABLE>
The sale of certain of the net assets of USRR was completed on April 30, 1996
(See Note 16). The disposition of Good Ideas, either through the sale of assets
or liquidation, is expected to be completed during the year ending March 31,
1997.
F-20
<PAGE> 53
U.S. ALCOHOL TESTING OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1996
NOTE 16--SUBSEQUENT EVENTS
Management Changes
On April 18, 1996, James C. Witham and Karen B. Laustsen both submitted their
resignations from their respective positions as executive officers and directors
of the Company.
On the same date the following executive appointments were announced:
Robert Stutman was elected to the Board of Directors, elected Chairman of the
Board and designated as Chief Executive Officer of the Company. Terms of
compensation for Mr. Stutman include a base salary of $225,000 plus cash bonuses
based upon attainment of business objectives. Terms of employment include a
provision that, in the event of termination without cause prior to April 17,
1999, Mr. Stutman receives severance pay in the amount of his current base pay
on the effective termination date through April 17,1999.
Linda H. Masterson was elected President and designated its Chief Operating
Officer of the Company effective May 13, 1996. Terms of employment include a
base salary of $175,000 and a grant of warrants to purchase 600,000 shares of
the Common Stock at $3.125 exercisable over a four-year period. Terms of
employment include a provision that, in the event of termination without cause,
Ms. Masterson receives severance pay in the amount of one-year's base pay in
effect on the termination date.
Discontinued Operations
On April 30, 1996, the Company's subsidiary, USSR, completed the sale of certain
of its assets, net of trade payables of $79,000, to Reclamation Resources, Inc.,
a private California corporation, for $150,000 cash and a $300,000 secured
promissory note bearing interest at the rate of 7% per annum, with annual
payments of $50,000 plus interest. The note contains a prepayment clause that
enables USRR to receive 12 1/2% of product sales in excess of $1,400,000.
Filing of S-4 Forms
During April and May, 1996, the Company filed two Registration Statements on
Form S-4 under the Securities Act in an attempt, through consent solicitations,
to acquire the common shares owned by the minority interests of U.S. Drug, its
67.0% owned public subsidiary, and Good Ideas, its 60.8% owned public
subsidiary. If the Company is successful, it will own 100% of these
subsidiaries. There is no assurance that either consent solicitation will be
successfully completed.
Acquisition of Robert Stutman & Associates, Inc.
On April 18, 1996, the Board of Directors approved, in principle, the
acquisition of Robert Stutman & Associates, Inc. ("RSA"), a provider of
corporate "Drug Free Workplace" programs. Robert Stutman served as President of
RSA and was its largest stockholder. The acquisition was completed May 21, 1996.
The purchase price was comprised of $2,100,000 in cash, $400,000 in notes,
500,000 shares of the Company's Common Stock and Common Stock purchase warrants
to acquire 900,000 shares of the Company's Common Stock at $ 3.125 per share,
which was the closing sales price of the Common Stock on April 17, 1996.
The following unaudited proforma information presents a summary of
consolidated results of operations of the Company and RSA as if the acquisition
had occurred at the beginning of fiscal 1995, with proforma adjustments to give
effect to amortization of good will and certain other adjustments, together with
related income tax effects.
<TABLE>
<CAPTION>
March 31,
---------
1996 1995
---- ----
<S> <C> <C>
Net Sales $ 2,267,260 $ 2,341,643
Loss from Continuing Operations (8,371,579) (6,985,418)
Net Loss (10,776,120) (7,515,687)
Loss from Continuing Operations per Common Share $ (0.27) $ (0.26)
Net Loss per Common Share $ (0.35) $ (0.28)
</TABLE>
Pursuant to the acquisition of RSA, Brian Stutman, who is the son of
Robert Stutman and was a shareholder of RSA, has been employed by USAT as its
Director of Sales and Marketing. Brian Stutman's compensation agreement provides
for an annual salary is of $130,000, a bonus of upon achievement of goals for
the year ending March 31, 1997 and a one-time cash bonus of $30,000 upon
ProActive satisfying certain performance standards. In the event that Brian
Stutman is terminated without cause (as defined) during the first three years
that he is employed by the Company, he shall receive severance pay in an amount
equal to the base salary that would have been paid to him after the date of
termination had he not been terminated and had he been employed by USAT for a
period of three years ending May 20, 1999.
F-21
<PAGE> 54
Exercise of Warrants and Options
From April 1, 1996 through June 5, 1996, the Company has received gross
proceeds of $4,242,000 from the exercise of warrants and options to purchase
2,353,449 shares of the Common Stock. The cash portion of the RSA acquisition
agreement was paid from the proceeds of the warrant exercises.
F-22
