<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 21, 1997
REGISTRATION NO. 333-3734
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
SUBSTANCE ABUSE TECHNOLOGIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 3810 22-2806310
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NO.) IDENTIFICATION NO.)
</TABLE>
4517 N.W. 31ST. AVENUE
FORT LAUDERDALE, FLORIDA 33309
(954) 739-9600
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
MR. ROBERT STUTMAN
SUBSTANCE ABUSE TECHNOLOGIES, INC.
4517 N.W. 31ST. AVENUE
FORT LAUDERDALE, FLORIDA 33309
(954) 739-9600
(NAME, ADDRESS AND TELEPHONE NUMBER OF AGENT FOR SERVICE)
------------------------
COPIES TO:
<TABLE>
<S> <C>
ROBERT W. BEREND, ESQ. EDWARD H. COHEN, ESQ.
GOLD & WACHTEL, LLP ROSENMAN & COLIN, LLP
110 EAST 59TH STREET 575 MADISON AVENUE
NEW YORK, NEW YORK 10022 NEW YORK, NEW YORK 10022
(212) 909-9500 (212) 940-8580
FAX (212) 371-0320 FAX (212) 940-8776
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF THE PROPOSED SALE OF THE SECURITIES TO
THE PUBLIC: As soon as practicable after the effective date of this Registration
Statement.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
================================================================================================================
PROPOSED MAXIMUM
PROPOSED MAXIMUM AGGREGATE AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE OFFERING REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED(1) PER UNIT(2) PRICE(2) FEE(2)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.01 par value................ 557,524 $1.625 $905,977 $275
- ----------------------------------------------------------------------------------------------------------------
Common Stock, $.01 par value issuable upon
exercise of warrant....................... 74,285 $12.115 $900,334 $273
- ----------------------------------------------------------------------------------------------------------------
Warrants expiring February 16, 1999......... 74,285 Total $548
================================================================================================================
</TABLE>
(1) The number of shares of Common Stock of Substance Abuse Technologies, Inc.
("SAT") being registered is based on an estimate as to (a) the number of SAT
shares to be issued to the minority stockholders of Good Ideas Enterprises,
Inc. ("Good Ideas") in connection with the merger of Good Ideas Acquisition
Corp., a wholly-owned subsidiary of SAT, with and into Good Ideas and (b) an
estimate as to the number of SAT shares to be issued upon the exercise of
SAT Warrants to be issued upon the merger in exchange for Good Ideas
Warrants, in both instances assuming that $1.625 per share is the market
price for the SAT shares, which is the assumed price by agreement.
(2) Estimated solely for the purpose of calculating the registration fee. The
proposed maximum offering price and the registration fee (a) for the shares
to be issued upon the merger are computed, pursuant to Rule 457(a), on the
basis of a $1.625 value per share estimate for the price to be determined in
accordance with the terms of the merger and (b) for the shares to be issued
upon exercise of the SAT Warrants are computed, pursuant to Rule 457(g), on
the basis of the assumed exercise price of the SAT Warrants if 74,285 shares
are subject thereto.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
================================================================================
<PAGE> 2
CROSS REFERENCE SHEET
TO FORM S-4 OF SUBSTANCE ABUSE TECHNOLOGIES, INC.
PART I
INFORMATION REQUIRED IN THE PROSPECTUS
<TABLE>
<CAPTION>
LOCATION IN CONSENT SOLICITATION
ITEM NUMBER AND CAPTION STATEMENT/PROSPECTUS
- ------------------------------------------------- --------------------------------------------
<S> <C> <C>
A. Information About the Transaction
1. Forepart of Registration Statement and
Outside Front Cover Page of Prospectus... Facing Page; Cross Reference Sheet; and
Outside Front Cover Page of Consent
Solicitation Statement/Prospectus.
2. Inside Front and Outside Back Cover
Pages.................................... Inside Front Cover Page of Consent
Solicitation Statement/Prospectus; and
Outside Back Cover Page of Consent
Solicitation/Prospectus.
3. Risk Factors, Ratio Earnings to Fixed
Charges and Other Information............ Summary; Summary Historical and Proforma
Combined Financial Data; and Risk Factors;
Computation of Ratio of Earnings to
Combined Fixed Charges and Preferred Stock
Dividends is not applicable.
4. Terms of the Transaction................. Summary; Terms of the Transaction; and The
Merger and Related Matters.
5. Proforma Financial Information........... Summary Historical and Proforma Financial
Data.
6. Material Contacts with the Company Being
Acquired................................. Material Contacts of SAT with Good Ideas;
and The Merger and Related Matters.
7. Additional Information Required for
Reoffering by Persons and Parties Deemed
to be Underwriters....................... Not Applicable.
8. Interests of Named Experts and Counsel... Experts and Legal Opinions.
9. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities.............................. Commission Position on Indemnification.
B. Information About the Registrant
10. Information with Respect to S-3
Registrants............................. Not Applicable.
11. Incorporation of Certain Information by
Reference............................... Not Applicable.
12. Information With Respect to S-2 or S-3
Registrants............................. Not Applicable.
13. Incorporation of Certain Information by
Reference............................... Not Applicable.
</TABLE>
<PAGE> 3
<TABLE>
<CAPTION>
LOCATION IN CONSENT SOLICITATION
ITEM NUMBER AND CAPTION STATEMENT/PROSPECTUS
- ------------------------------------------------- --------------------------------------------
<S> <C> <C>
14. Information with Respect to Registrants
Other Than S-3 or S-2 Registrants....... Business of the Company; SAT Market
Information; SAT Management; The Company's
Financial Statements; The Company's
Selected Financial Data; The Company's
Management's Discussion and Analysis of
Financial Condition and Results of
Operations; and Change in Accountants.
C. Information About the Company Being Acquired
15. Information with Respect to S-3
Companies............................... Not Applicable.
16. Information with Respect to S-2 or S-3
Companies............................... Not Applicable.
17. Information with Respect to Companies
Other Than S-2 or S-3 Companies........... Business of Good Ideas; Good Ideas Market
Information; Good Ideas' Financial
Statements; Good Ideas' Selected Financial
Data; and Good Ideas' Management's
Discussion and Analysis of Financial
Condition and Results of Operations.
D. Voting and Management Information
18. Information if Proxies, Consents or
Authorizations are to be Solicited...... Terms of the Transaction; The Merger and
Related Matters; SAT Principal
Stockholders; and Good Ideas Principal
Stockholders.
19. Information if Proxies, Consents or
Authorizations are not to be Solicited,
or in an Exchange Offer................. Not Applicable.
</TABLE>
<PAGE> 4
CONSENT SOLICITATION STATEMENT/PROSPECTUS
SUBSTANCE ABUSE TECHNOLOGIES, INC.
PROSPECTUS FOR 557,524 SHARES OF COMMON STOCK,
WARRANTS TO PURCHASE 74,285 SHARES OF COMMON STOCK
AND 74,285 SHARES OF COMMON STOCK ISSUABLE
UPON EXERCISE OF WARRANTS
AND
CONSENT SOLICITATION STATEMENT TO THE MINORITY
STOCKHOLDERS OF GOOD IDEAS ENTERPRISES, INC.
This Consent Solicitation Statement/Prospectus is being furnished to the
minority stockholders of Good Ideas Enterprises, Inc. ("Good Ideas"), a Delaware
corporation, in connection with the solicitation of consents by Substance Abuse
Technologies, Inc. ("SAT"), a Delaware corporation and a 60.8% stockholder of
Good Ideas, from the holders, other than SAT, of Good Ideas Common Stock, $.001
par value (the "Good Ideas Common Stock"), in order to adopt an Agreement and
Plan of Merger dated as of February 17, 1997 (the "Merger Agreement") by and
among Good Ideas, SAT and Good Ideas Acquisition Corp.("Acquisition Corp."), a
Delaware corporation and a wholly-owned subsidiary of SAT, pursuant to which
Acquisition Corp. will be merged with and into Good Ideas (the "Merger").
Whether or not Good Ideas receives the required consents to effectuate the
Merger, SAT intends to continue its efforts to implement a sale of the assets or
stock of Good Ideas, as to which sale there can be no assurance, and then to
liquidate Good Ideas (if no sale of the stock is to be effected) not later than
the date on which the results of the consent solicitation for the Merger are
known.
SAT is offering by this Consent Solicitation Statement/Prospectus (1) an
aggregate of 557,524 shares of SAT's Common Stock, $.01 par value (the "SAT
Common Stock"), on the basis set forth in the Merger Agreement, to the
stockholders of Good Ideas other than SAT (the "Good Ideas Minority
Stockholders") in exchange for their 1,548,680 shares of the Good Ideas Common
Stock (the "Minority Good Ideas Common Stock") and (2) an aggregate of 74,285
shares of the SAT Common Stock issuable upon the exercise of Common Stock
purchase warrants expiring February 16, 1999 (the "Merger Warrants") to be
issued by SAT on the basis set forth in the Merger Agreement in exchange for
Common Stock purchase warrants also expiring February 16, 1999 (the "Good Ideas
Warrants") to purchase up to 120,000 shares of the Good Ideas Common Stock. If
the Merger is consummated, the Good Ideas Minority Stockholders will receive .36
of a share of the SAT Common Stock for each share of the Good Ideas Common
Stock. Assuming that another merger is not consummated and there are no
exercises of outstanding SAT Common Stock purchase warrants or any conversions
of shares of SAT preferred stock or convertible notes between the date of this
Consent Solicitation Statement/Prospectus and the effective date of the Merger,
the existing SAT stockholders will own 98.5% of the outstanding shares of the
SAT Common Stock and the Good Ideas Minority Stockholders will own 1.5%.
Since January 2, 1992, the SAT Common Stock has been listed on the American
Stock Exchange. During the period January 2, 1992 through October 25, 1996, the
SAT Common Stock traded under the symbol "AAA." On October 28, 1996, SAT changed
its name from "U.S. Alcohol Testing of America, Inc." to "Substance Abuse
Technologies, Inc." As a result of such name change, commencing October 28,
1996, the SAT Common Stock has traded under the symbol "SAU." The closing price
of the SAT Common Stock as reported by such Exchange on April , 1997 was
$ .
GOOD IDEAS MINORITY STOCKHOLDERS SHOULD CONSIDER CERTAIN RISK FACTORS IN
CONNECTION WITH THE PROPOSED TRANSACTIONS. SEE "RISK FACTORS" ON PAGE 28.
NEITHER THIS TRANSACTION NOR THESE SECURITIES HAVE BEEN APPROVED OR DISAPPROVED
BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR
HAS THE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE FAIRNESS
OR MERITS OF THIS TRANSACTION NOR UPON THE ACCURACY OR ADEQUACY OF THE
INFORMATION CONTAINED IN THIS CONSENT SOLICITATION STATEMENT/PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
This Consent Solicitation Statement/Prospectus is dated , 1997.
<PAGE> 5
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
AVAILABLE INFORMATION................................................................. 2
SUMMARY............................................................................... 3
BACKGROUND OF THE COMPANY........................................................... 3
THE CONSENT PROCEDURE............................................................... 5
(1) STATUTORY BASIS................................................................. 5
(2) PROCEDURE TO CONSENT............................................................ 5
(3) REVOCATION...................................................................... 6
(4) MISCELLANEOUS................................................................... 6
(5) RECORD DATE, QUORUM AND REQUIRED VOTE........................................... 6
(6) APPRAISAL RIGHTS................................................................ 7
THE MERGER.......................................................................... 7
(1) GENERAL......................................................................... 7
(2) OPTIONS AND WARRANTS............................................................ 7
(3) RECOMMENDATIONS BY THE BOARDS OF DIRECTORS...................................... 7
(4) AFFILIATION OF GOOD IDEAS WITH SAT.............................................. 9
(5) FAIRNESS OPINION................................................................ 9
(6) THE MERGER AGREEMENT............................................................ 9
(7) CONDITIONS OF THE MERGER........................................................ 9
(8) AMENDMENT AND TERMINATION....................................................... 10
(9) MARKET PRICES................................................................... 10
(10) FEDERAL INCOME TAX CONSEQUENCES................................................ 10
(11) REGULATORY APPROVALS........................................................... 11
(12) ACCOUNTING TREATMENT........................................................... 11
RECENT DEVELOPMENTS................................................................. 11
PROSPECTIVE SALE OF GOOD IDEAS...................................................... 13
SUMMARY HISTORICAL AND PROFORMA COMBINED FINANCIAL DATA............................... 14
HISTORICAL FINANCIAL DATA........................................................... 15
THE COMPANY......................................................................... 15
GOOD IDEAS.......................................................................... 17
PROFORMA BALANCE SHEET.............................................................. 19
PROFORMA STATEMENT OF OPERATIONS.................................................... 20
NOTES TO PROFORMA CONDENSED FINANCIAL INFORMATION................................... 22
RISK FACTORS........................................................................ 23
1. SAT AFFILIATIONS OF GOOD IDEAS DIRECTORS......................................... 23
2. LOSS OF DIRECT OWNERSHIP OF GOOD IDEAS........................................... 23
3. OPERATING LOSSES................................................................. 23
4. NEED FOR FINANCING............................................................... 25
5. LACK OF FUNDING MAY END POSSIBLE DRUG TESTING PRODUCTS........................... 25
6. INSUFFICIENT AUTHORIZED SHARES................................................... 25
7. COMPETITION...................................................................... 26
ALCOHOL TESTING..................................................................... 26
DRUG TESTING........................................................................ 27
HUMAN RESOURCE PROVIDER OPERATIONS.................................................. 27
8. NO COMMON STOCK DIVIDENDS........................................................ 27
</TABLE>
i
<PAGE> 6
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
9. DEPRESSIVE EFFECT ON MARKET OF WARRANT OR OPTION EXERCISES, UNTIMELY SALES BY
SELLING SECURITY HOLDERS AND SALES OF
SHARES RECEIVED UPON MERGERS..................................................... 28
10. TECHNOLOGICAL CHANGES........................................................... 29
11. MARKET LIMITATION FOR ALCOHOL TESTING PRODUCTS.................................. 30
12. OTHER CONFLICTS OF INTEREST..................................................... 30
13. SALE OF GOOD IDEAS.............................................................. 30
14. FLUCTUATING MARKET PRICE........................................................ 30
TERMS OF THE TRANSACTION.............................................................. 31
CONSENT SOLICITATION STATEMENT/PROSPECTUS........................................... 31
THE MERGER.......................................................................... 31
VOTING RIGHTS....................................................................... 32
THE CONSENT PROCEDURE............................................................... 32
(1) STATUTORY BASIS................................................................. 32
(2) PROCEDURE TO CONSENT............................................................ 33
(3) REVOCATION...................................................................... 33
(4) MISCELLANEOUS................................................................... 33
(5) RIGHTS OF DISSENTING GOOD IDEAS STOCKHOLDERS.................................... 34
THE MERGER AND RELATED MATTERS........................................................ 35
REASONS FOR THE MERGER AND APPROVAL................................................. 35
(1) AUTHORIZATION................................................................... 35
(2) ATTEMPTS TO RESOLVE CONFLICT OF INTERESTS....................................... 38
(3) DETERMINATION OF TERMS.......................................................... 39
(4) SAT BOARD REASONS............................................................... 39
(A)THE COMPANY'S BEST OPPORTUNITY AT OBTAINING PROFITABILITY REQUIRES SYNERGISTIC
OPERATIONS....................................................................... 39
(B) GOOD IDEAS' OPERATIONS HAD BEEN DECLINING AND WOULD HAVE REQUIRED ENTIRELY NEW
TOY PRODUCTS TO EFFECT A TURNAROUND
AT A SUBSTANTIAL INVESTMENT OF TIME AND MONEY.................................. 40
(C) SAT'S OFFER HAS GREATER VALUE TO THE GOOD IDEAS MINORITY STOCKHOLDERS THAN GOOD
IDEAS' LIQUIDATION VALUE,
BOOK VALUE OR MARKET VALUE..................................................... 41
(D) THE GOOD IDEAS COMMON STOCK HAS BEEN DELISTED................................... 42
(E) GOING CONCERN VALUE OF GOOD IDEAS NOT CONSIDERED
SIGNIFICANT.................................................................... 42
(F) WAITING FOR AN UPTURN IN THE TOY INDUSTRY DID NOT SEEM ECONOMICALLY JUSTIFIED... 43
(G) SAT COULD CANCEL LOAN INDEBTEDNESS ON THE MERGER................................ 43
(H) ELIMINATING PUBLIC SUBSIDIARIES COULD LEAD TO ADDITIONAL
COST SAVINGS................................................................... 43
(5) REASON FOR SHARE OFFERING....................................................... 44
(6) REASON FOR USING MERGER FORM.................................................... 44
(7) GOOD IDEAS BOARD'S REASONS...................................................... 45
(8) EFFECT OF MERGER ON SAT......................................................... 45
(9) CONCLUSION...................................................................... 46
FAIRNESS OPINION.................................................................... 47
(1) CERTAIN FACTORS CONSIDERED IN THE EVALUATION OF GOOD IDEAS...................... 49
(2) WHALE SECURITIES' ANALYSIS ENCOMPASSED A NUMBER OF
VALUATION APPROACHES, INCLUDING:............................................... 50
</TABLE>
ii
<PAGE> 7
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
(A) MARKET VALUE OF GOOD IDEAS SHARES AND PREMIUMS TO
MARKET FOR ACQUISITIONS........................................................ 50
(B) ASSET BASED METHODS............................................................. 50
LIQUIDATION ANALYSIS OF GOOD IDEAS AS OF DECEMBER 31, 1996
BALANCE SHEET.................................................................... 51
(C) INCOME, CASH FLOW, AND DISCOUNTED CASH FLOW BASED METHODS....................... 52
(D) COMPARISON TO SIMILAR PUBLIC COMPANIES AND SIMILAR SALE TRANSACTIONS............ 52
(E) ANALYSIS OF THE SAT COMMON STOCK TO BE GIVEN AS
CONSIDERATION.................................................................. 52
TERMS OF THE MERGER AGREEMENT....................................................... 52
(1) CONVERSION OF SHARES............................................................ 52
(2) EFFECTIVE DATE.................................................................. 53
(3) CONDITIONS TO THE MERGER........................................................ 53
(4) AMENDMENT AND TERMINATION RIGHTS................................................ 54
SUMMARY OF THE TERMS OF THE SAT COMMON STOCK........................................ 54
(1) GENERAL......................................................................... 54
(2) ELECTION OF DIRECTORS........................................................... 55
(3) DIVIDENDS....................................................................... 55
(4) TRANSFER AGENT.................................................................. 55
(5) ACQUISITION SHARES.............................................................. 55
GOOD IDEAS' DIRECTORS AND EXECUTIVE OFFICERS........................................ 55
DIFFERENCES IN STOCKHOLDERS' RIGHTS................................................. 56
DIFFERENCES IN BY-LAWS.............................................................. 56
EXCHANGE OF CERTIFICATES............................................................ 56
GOOD IDEAS OPTIONS AND WARRANTS..................................................... 57
SALE OF GOOD IDEAS.................................................................. 57
REGULATORY APPROVALS................................................................ 58
ACCOUNTING TREATMENT................................................................ 58
FEES AND EXPENSES................................................................... 58
CERTAIN TAX CONSEQUENCES............................................................ 59
TRADING IN THE GOOD IDEAS COMMON STOCK.............................................. 60
RESALE OF SAT SECURITIES............................................................ 60
MATERIAL CONTACTS OF SAT WITH GOOD IDEAS.............................................. 61
GOOD IDEAS RELATIONSHIP WITH SAT.................................................... 61
NO LOANS TO GOOD IDEAS FROM SAT OUTSTANDING......................................... 61
LOANS FROM GOOD IDEAS TO SAT AND AFFILIATES......................................... 62
MANAGEMENT SERVICES AGREEMENT....................................................... 62
BUSINESS OF THE COMPANY............................................................... 63
GENERAL............................................................................. 63
ALCOHOL TESTING PRODUCTS MARKET..................................................... 64
ALCOHOL TESTING PRODUCTS............................................................ 65
ALCOPROOF TEST SYSTEM............................................................... 65
(1) EVIDENTIAL DEVICES.............................................................. 65
ALCO-ANALYZER....................................................................... 65
MOBILE ALCOHOL COLLECTION SYSTEM (MACS)............................................. 65
(2) SCREENING DEVICES............................................................... 66
(3) CALIBRATION DEVICES............................................................. 66
</TABLE>
iii
<PAGE> 8
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
(A) ALCO-SIMULATOR AND ALCO-SIMULATOR 2000.......................................... 66
(B) ALCO-EQUILIBRATOR............................................................... 66
ALCOHOL TESTING MARKETING........................................................... 66
(1) LAW ENFORCEMENT/CORRECTIONAL.................................................... 66
(2) INDUSTRIAL...................................................................... 67
(3) DRUG AND ALCOHOL TESTING SERVICES............................................... 67
LIABILITY INSURANCE................................................................. 68
COMPETITION......................................................................... 68
ALCOHOL TESTING..................................................................... 68
DRUG TESTING........................................................................ 68
HUMAN RESOURCE PROVIDER............................................................. 69
TOY PRODUCTS........................................................................ 70
RESEARCH AND DEVELOPMENT............................................................ 70
PATENTS AND TRADEMARKS.............................................................. 70
SUBSIDIARIES AND DIVISIONS.......................................................... 71
(1) GOOD IDEAS ENTERPRISES, INC..................................................... 71
(2) U.S. DRUG TESTING, INC.......................................................... 71
(3) EMPLOYER SERVICES DIVISION/ROBERT STUTMAN & ASSOCIATES CONSULTING DIVISION...... 73
(4) ALCONET, INC.................................................................... 74
(5) U.S. RUBBER RECYCLING, INC...................................................... 75
EMPLOYEES........................................................................... 75
DESCRIPTION OF PROPERTY............................................................. 75
LEGAL MATTERS....................................................................... 76
BUSINESS OF GOOD IDEAS................................................................ 77
OVERVIEW............................................................................ 77
SALES BY PRODUCTS................................................................... 78
WOODEN CONSTRUCTION TOYS............................................................ 78
EQUESTRIAN TOYS..................................................................... 78
COLORFORMS FLIP-TOP ACTIVITY CENTER................................................. 78
DESIGN AND DEVELOPMENT.............................................................. 79
SALES AND MARKETING................................................................. 79
MANUFACTURING....................................................................... 80
BACKLOG............................................................................. 80
PROPRIETARY TRADEMARKS.............................................................. 81
COMPETITION......................................................................... 81
GOVERNMENT REGULATION............................................................... 81
EMPLOYEES........................................................................... 81
SAT PRINCIPAL STOCKHOLDERS............................................................ 82
GOOD IDEAS PRINCIPAL STOCKHOLDERS..................................................... 86
SAT MARKET INFORMATION................................................................ 87
MARKET DATA......................................................................... 87
HOLDERS............................................................................. 87
DIVIDENDS........................................................................... 87
RECENT QUOTATIONS................................................................... 87
GOOD IDEAS MARKET INFORMATION......................................................... 88
MARKET DATA......................................................................... 88
</TABLE>
iv
<PAGE> 9
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
EXCHANGE LISTING.................................................................... 88
HOLDERS............................................................................. 89
DIVIDENDS........................................................................... 89
SAT MANAGEMENT........................................................................ 90
DIRECTORS AND EXECUTIVE OFFICERS.................................................... 90
BUSINESS HISTORY.................................................................... 90
FAMILY RELATIONSHIPS................................................................ 93
SUMMARY COMPENSATION TABLE.......................................................... 93
AGGREGATE OPTION EXERCISES IN FISCAL YEAR 1996 AND
OPTION VALUES AT MARCH 31, 1996.................................................. 94
OTHER COMPENSATION.................................................................. 94
EMPLOYMENT AGREEMENTS............................................................... 94
DIRECTORS' COMPENSATION............................................................. 96
CERTAIN TRANSACTIONS................................................................ 96
CHANGES IN MANAGEMENT OF SAT........................................................ 97
GOOD IDEAS MANAGEMENT................................................................. 99
DIRECTORS AND EXECUTIVE OFFICERS.................................................... 99
BUSINESS HISTORY.................................................................... 99
FAMILY RELATIONSHIPS................................................................ 100
SUMMARY COMPENSATION TABLE.......................................................... 100
STOCK OPTIONS....................................................................... 100
OTHER COMPENSATION.................................................................. 100
DIRECTOR COMPENSATION............................................................... 100
EMPLOYMENT CONTRACTS................................................................ 100
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...................................... 101
THE COMPANY'S SELECTED FINANCIAL DATA................................................. 102
THE COMPANY'S MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS....................................... 105
EFFECT OF U.S. DRUG MERGER.......................................................... 106
EFFECT OF MERGER.................................................................... 107
LIQUIDITY AND CAPITAL RESOURCES..................................................... 107
CHANGES IN FINANCIAL CONDITION...................................................... 107
OPERATING CASH FLOWS................................................................ 108
INVESTING CASH FLOWS................................................................ 108
FINANCING CASH FLOWS................................................................ 108
RESULTS OF OPERATIONS............................................................... 108
FISCAL 1996 VS. FISCAL 1995......................................................... 108
U.S. DRUG TESTING, INC. (SUBSTANCE ABUSE TESTING)................................... 109
DISCONTINUED OPERATIONS............................................................. 110
GOOD IDEAS ENTERPRISES, INC. (TOY).................................................. 110
U.S. RUBBER RECYCLING, INC. (RECYCLED RUBBER PRODUCTS).............................. 111
FISCAL 1995 VS. FISCAL 1994......................................................... 112
U.S. DRUG TESTING, INC. (SUBSTANCE ABUSE TESTING)................................... 112
DISCONTINUED OPERATIONS............................................................. 113
GOOD IDEAS ENTERPRISES, INC. (TOY).................................................. 113
U.S. RUBBER RECYCLING, INC. (RECYCLED RUBBER PRODUCTS).............................. 114
NINE MONTHS ENDED DECEMBER 31, 1996 AS COMPARED WITH
NINE MONTHS ENDED DECEMBER 31, 1995.............................................. 114
</TABLE>
v
<PAGE> 10
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
GOOD IDEAS SELECTED FINANCIAL DATA.................................................... 116
GOOD IDEAS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.......................................................................... 119
GENERAL............................................................................. 119
LIQUIDITY AND CAPITAL RESOURCES..................................................... 119
RESULTS OF OPERATIONS............................................................... 120
FISCAL 1996 VS. FISCAL 1995......................................................... 120
FISCAL 1995 VS FISCAL 1994.......................................................... 121
NINE MONTHS ENDED DECEMBER 31, 1996 AS COMPARED WITH
NINE MONTHS ENDED DECEMBER 31, 1995.............................................. 122
COMMISSION POSITION ON INDEMNIFICATION................................................ 122
LEGAL MATTERS......................................................................... 123
EXPERTS............................................................................... 123
CHANGE IN ACCOUNTANTS................................................................. 123
INDEX TO FINANCIAL STATEMENTS......................................................... F-1
</TABLE>
vi
<PAGE> 11
AVAILABLE INFORMATION
SAT and Good Ideas are each subject to the informational requirements of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and, in
accordance therewith, each files reports, proxy and information statements and
other information with the Securities and Exchange Commission (the
"Commission"). Reports, proxy and information statements and other information
filed with the Commission can be inspected and copied at the public reference
facilities of the Commission at Room 1024, 450 Fifth Street, N.W., Washington,
D.C. 20549, as well as at the following regional offices of the Commission: 7
World Trade Center, Suite 1300, New York, New York 10048 and Northwestern Atrium
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511.
Copies of this material relating to both SAT and Good Ideas can also be obtained
at prescribed rates from the Public Reference Section of the Commission at its
principal office at 450 Fifth Street, N.W., Washington, D.C. 20549. The
Commission maintains a Web site that contains reports, proxy and information
statements and information regarding registrants that file electronically with
the Commission at the following Web site address: http://www.sec.gov. Because
the SAT Common Stock is traded on the American Stock Exchange, reports, proxy
and information statements and other information concerning SAT can be inspected
by contacting the American Stock Exchange, Inc., 86 Trinity Place, New York, New
York 10006-1881. Because the Good Ideas Common Stock was traded on the Pacific
Stock Exchange until December 31, 1996, reports, proxy and information
statements and other information concerning Good Ideas for periods prior thereto
can be inspected by contacting The Pacific Stock Exchange, Incorporated, 301
Pine Street, San Francisco, California 94104. After the Merger is consummated,
SAT, but not Good Ideas, will be required to continue to file periodic reports,
proxy and information statements and other information with the Commission
pursuant to the Exchange Act.
SAT has filed with the Commission a Registration Statement on Form S-4,
File No. 333-3734 (the "Registration Statement"), under the Securities Act of
1933, as amended (the "Securities Act"), with respect to the shares of the SAT
Common Stock to be issued upon consummation of the Merger and thereafter upon
the exercise of the Merger Warrants. This Consent Solicitation
Statement/Prospectus, which is Part I of the Registration Statement, omits
certain information contained in the Registration Statement. For further
information with respect to SAT and Good Ideas and the shares of the SAT Common
Stock offered by this Consent Solicitation Statement/Prospectus, reference is
made to the Registration Statement, including the exhibits thereto. This Consent
Solicitation Statement/Prospectus describes the material terms and conditions of
all agreements and other documents which SAT deems material and a copy of each
such agreement or document, containing the full text, is filed as an exhibit to
the Registration Statement or is incorporated as an exhibit by reference
therein. Copies of the Registration Statement, with exhibits, may be obtained
from the Commission's Office in Washington, D.C. (at the address above) upon
payment of the fees prescribed by the rules and regulations of the Commission,
or examined there without charge.
The Registration Statement incorporates certain agreements or other
documents as exhibits by reference which are not presented herein or delivered
herewith. Copies of these exhibits incorporated by reference and the other
exhibits filed with this Registration Statement are available upon request to
Robert M. Stutman, Chairman and Chief Executive Officer, Substance Abuse
Technologies, Inc., at the following address: 4517 North West 31st Avenue, Ft.
Lauderdale, Florida 33309 or telephone number: (954) 739-9600. In order to
ensure timely delivery of the documents, any request should be made by
, 1997.
The information contained in this Consent Solicitation Statement/Prospectus
with respect to Good Ideas has been provided by Good Ideas and all other
information has been provided by SAT.
2
<PAGE> 12
SUMMARY
The following is a summary of certain information contained elsewhere in
this Consent Solicitation Statement/Prospectus. Reference is made to, and this
summary is qualified in its entirety by, the more detailed information contained
elsewhere herein and in the accompanying Appendices. Each Good Ideas Minority
Stockholder should read the entire Consent Solicitation Statement/Prospectus and
the Appendices hereto prior to taking any action with respect to the proposals
contained herein.
BACKGROUND OF THE COMPANY
SAT was incorporated on April 15, 1987 under the laws of Delaware to
design, manufacture and market instruments which measure blood alcohol
concentration by breath sample and analyzation. These operations are currently
being conducted by the Alcohol Testing Products Division of SAT. Effective
October 28, 1996, the name of SAT was changed from U.S. Alcohol Testing of
America, Inc. to Substance Abuse Technologies, Inc. SAT maintains its principal
executive offices at 4517 N.W. 31st Avenue, Fort Lauderdale, Florida 33309, and
its telephone number is (954) 739-9600. SAT, its subsidiaries and its divisions
will be collectively referred to herein as the "Company."
SAT's subsidiaries, which include Good Ideas, and its divisions conduct the
following operations:
1. Good Ideas, which is 60.8% owned by SAT and whose Good Ideas Common
Stock trades in the over-the-counter market, designed, marketed and
distributed a variety of traditional toy products for children of various
ages.
2. U.S. Drug Testing, Inc. ("U.S. Drug"), which is 67.0% owned by SAT
and whose common stock, $.001 par value (the "U.S. Drug Common Stock"),
trades on the Pacific Stock Exchange, is developing proprietary systems
that will test for drug use.
3. ProActive Synergies, Inc. ("ProActive"), which was a wholly-owned
subsidiary of SAT incorporated in June 1995, provided single source
services to assist corporations in their hiring practices ranging from
substance abuse testing and background screening to total program
management. ProActive was merged into SAT on December 31, 1996 and its
operations are now conducted as the Employer Services Division of SAT.
4. On May 21, 1996, SAT completed its acquisition of Robert Stutman &
Associates, Inc. ("RSA"), a provider of corporate drug-free work place
programs. Since January 1996, RSA had been designing policies and programs
on substance abuse prevention for customers of the ProActive subsidiary.
RSA was merged into SAT on December 31, 1996 and its operations are now
conducted as the Robert Stutman & Associates Consulting Division of SAT.
5. Alconet, Inc. ("Alconet"), which was a wholly-owned subsidiary
acquired by SAT in March 1995, has developed an alcohol testing network to
upload test results and information from various alcohol breath testing
devices. Alconet was merged into SAT on December 31, 1996 and its
operations are now conducted as part of the Alcohol Testing Products
Division of SAT.
6. SAT currently operates a division called Biochemical Toxicology
Laboratories ("BioTox") which serves as a clinical laboratory performing
drug and alcohol testing.
U.S. Rubber Recycling, Inc. ("USRR"), which was a wholly-owned subsidiary
of SAT, manufactured and marketed floor covering products for office and
industrial use from used truck and bus tires. On April 30, 1996, USRR sold its
assets to an unaffiliated third party and discontinued operations. See "Business
of the Company -- Subsidiaries and Divisions -- U.S. Rubber Recycling, Inc."
USRR was dissolved on December 31, 1996.
Acquisition Corp. was incorporated on December 18, 1995 under the laws of
Delaware as a wholly-owned subsidiary of SAT for the sole purpose of acquiring
or being acquired by Good Ideas and, under the terms of the Merger Agreement,
will engage in no business operations. Acquisition Corp.'s Board of Directors
consists of three SAT directors who have no direct affiliation with Good Ideas.
3
<PAGE> 13
All other subsidiaries of SAT, which were inactive, have been dissolved
except for U.S. Drug Acquisition Corp. (see the seventh succeeding paragraph).
The SAT Common Stock is currently traded on the American Stock Exchange
under the symbol "SAU". See "SAT Market Information -- Market Data."
Good Ideas Enterprises, Inc. ("Good Ideas Texas") was incorporated under
the laws of the State of Texas on December 18, 1987. Pursuant to a Stock
Exchange Agreement and Plan of Reorganization dated May 7, 1992 (the "Good Ideas
Acquisition Agreement"), SAT through a subsidiary acquired a 55% interest in
Good Ideas Texas for which SAT's subsidiary issued shares of its stock valued at
$5,844 and received 1,533,125 shares of Good Ideas Common Stock effective June
29, 1992. On June 5, 1992, Good Ideas was incorporated under the laws of the
State of Delaware. On December 17, 1992, Good Ideas Texas was merged with and
into Good Ideas and a 27,871-for-1 stock split was effected for the previously
issued shares of Good Ideas Texas (all references herein to the number of shares
of the Good Ideas Common Stock being adjusted to reflect this stock split on a
retroactive basis). In August 1993, SAT acquired its subsidiary's interest in
Good Ideas, which acquisition included the issuance of 400,000 shares of the SAT
Common Stock valued at $2.4375 per share to two officer-stockholders, which
transaction gave effect to the $5,844 previously paid. During the fiscal year
ended March 31, 1993 ("fiscal 1993"), SAT settled litigation against SAT by a
person who was also an investor in Good Ideas and, as part of the settlement,
received from such investor 696,875 shares of the Good Ideas Common Stock. As a
result of these transactions, SAT owned 2,230,000 shares of the Good Ideas
Common Stock for which it had paid for in shares of the SAT Common Stock or of
its subsidiary having an aggregate value of $975,000. On December 15, 1993, SAT
received 170,000 shares of the Good Ideas Common Stock as payment for $748,682
in indebtedness owed by Good Ideas to SAT. In addition, also on December 15,
1993, the two officer-stockholders surrendered 157,500 shares of the Good Ideas
Common Stock to Good Ideas in consideration of receiving new employment
agreements. As a result of this reduction in the outstanding shares of the Good
Ideas Common Stock, SAT's ownership was increased to 2,400,000 or 85.7% of the
2,800,000 shares of the Good Ideas Common Stock then outstanding. In February
and March 1994, Good Ideas had a public offering of Good Ideas Common Stock in
which an aggregate of 1,320,000 shares were sold. As of March 31, 1997, SAT
owned 2,400,000 or 60.8% of the 3,948,680 shares of the Good Ideas Common Stock
outstanding.
As a result of certain of the transactions described in the preceding
paragraph, SAT acquired 2,400,000 shares of the Good Ideas Common Stock for an
aggregate cost, without attempting to value the shares surrendered in the
settlement, of $1,723,682 or $.72 per share of the Good Ideas Common Stock. The
.36 of a share of the SAT Common Stock being offered hereby to the Good Ideas
Minority Stockholders for each share of the Minority Good Ideas Common Stock has
a value of $1.625 per share based upon the market value assumed with respect
thereto in the Merger Agreement.
Good Ideas currently has four directors, two of whom are directors and
executive officers of SAT, one of whom is a director of SAT (formerly a
consultant to the SAT Board of Directors) and all four of whom are
securityholders of SAT. See "Risk Factors -- SAT Affiliations of Good Ideas
Directors" and "Material Contacts of SAT with Good Ideas."
Good Ideas designed, marketed and distributed a variety of traditional toy
products for children of various ages. Good Ideas' sales historically had been
derived from a line of traditional wooden construction toys. Good Idea's
principal product line included 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
Log Builders(TM) and brightly-painted, multi-colored combination log and block
sets marketed under the trademark Paul Bunyan Wood Builders(TM). In addition to
its line of wooden construction toys, Good Ideas marketed one other line of
traditional toys which was a line of equestrian toys consisting of various
styles and sizes of flocked plastic horses and related accessories marketed
under the trademark Black Beauty and Friends(TM). Good Ideas currently shares
office space and a telephone number with SAT at the latter's California office.
See "Business of Good Ideas."
The Good Ideas Common Stock is currently traded in the over-the-counter
market under the symbol "KID." Prior to January 1, 1997, it traded on the
Pacific Stock Exchange under the symbol "KID." See
4
<PAGE> 14
"Good Ideas Market Information -- Market Data." If the Merger is consummated,
trading in the Good Ideas Common Stock will cease on the effective date thereof
and the registration of such security under Section 12(b) of the Exchange Act
will be terminated.
SAT is also currently seeking to acquire the minority stock interests in
U.S. Drug by an offer of shares of the SAT Common Stock to the minority
stockholders of U.S. Drug as consideration for their consent to a merger (the
"U.S. Drug Merger") of U.S. Drug with and into U.S. Drug Acquisition Corp., a
wholly-owned subsidiary of SAT. See "Business of the Company -- Subsidiaries and
Divisions -- U.S. Drug Testing, Inc." There can be no assurance that any such
merger will be successfully consummated. The acquisition of U.S. Drug is not a
condition to the Merger. If the U.S. Drug Merger is consummated, the surviving
subsidiary will be merged into SAT and thereafter the operations will be
conducted as the Drug Testing Products Division of SAT.
THE CONSENT PROCEDURE
(1) Statutory Basis
Unless a corporation's certificate of incorporation otherwise provides,
Section 228 of the Delaware General Corporation Law (the "GCL") permits
stockholders' actions without a meeting of stockholders and without prior notice
if a consent or consents in writing, setting forth the action so taken, is or
are signed by the holders of the outstanding voting stock having not less than
the minimum number of votes that would be necessary to take such action at a
meeting at which all shares entitled to vote thereon were present. Good Ideas'
certificate of incorporation does not otherwise provide, so that a consent
procedure pursuant to Section 228 of the GCL may be utilized by SAT. Under such
section of the GCL, an action taken by consent is effective when written
consents from the holders of record of the minimum number of outstanding shares
of the voting stock necessary to authorize the action are executed and delivered
to the corporation within 60 days of the earliest dated consent delivered in
accordance with the GCL to the corporation. Under Section 251 of the GCL, a
domestic corporation may be merged with and into another domestic corporation by
the affirmative vote of the record holders of a majority of the outstanding
shares of the voting stock acting without a meeting and without prior notice.
Accordingly, SAT as the owner of 60.8% of the Good Ideas Common Stock, which is
the sole voting stock in Good Ideas, could adopt the Merger Agreement without
any other stockholder voting in favor of the adoption of the Merger Agreement.
Notwithstanding the foregoing, the Merger Agreement provides that it is a
condition to the consummation of the Merger that the record holders of more than
50% of the outstanding shares of the Good Ideas Common Stock owned by Good Ideas
stockholders other than SAT (i.e., the Good Ideas Minority Stockholders) consent
to the adoption of the Merger Agreement. (SAT intends not to include an
aggregate of 210,000 shares of the Good Ideas Common Stock held by two current
directors (one of whom was also an executive officer) of Good Ideas in
determining whether it has obtained a majority of the outstanding shares of the
Minority Good Ideas Common Stock. See "Terms of the Transaction -- The Consent
ProcedureMiscellaneous.") SAT will execute and deliver a consent to the adoption
of the Merger Agreement as a stockholder of Good Ideas after the holders of more
than 50% of the outstanding shares of the Minority Good Ideas Common Stock have
consented in order to permit the filing of a Certificate of Merger in Delaware
pursuant to the GCL and the terms of the Merger Agreement. SAT will not execute
and deliver its consent if the consents of the holders of more than 50% of the
outstanding shares of the Minority Good Ideas Common Stock are not obtained, in
which event Good Ideas will continue to pursue the sale or liquidation of its
assets.
(2) Procedure to Consent
UNDER THE GCL, ONLY HOLDERS OF RECORD ON THE RECORD DATE (AS DEFINED BELOW)
ARE ELIGIBLE TO GIVE THEIR CONSENT TO THE ADOPTION OF THE MERGER AGREEMENT.
ANYONE OWNING SHARES BENEFICIALLY (BUT NOT OF RECORD), SUCH AS A PERSON WHOSE
OWNERSHIP OF SHARES IS THROUGH A BROKER, BANK OR OTHER FINANCIAL INSTITUTION,
WHO WISHES TO GIVE THEIR CONSENT SHOULD CONTACT THAT BROKER, BANK OR FINANCIAL
INSTITUTION WITH INSTRUCTIONS TO EXECUTE
5
<PAGE> 15
THE WHITE FORM OF CONSENT ON HIS OR HER BEHALF OR TO HAVE THE BROKER, BANK OR
FINANCIAL INSTITUTION'S NOMINEE EXECUTE THE CONSENT.
SAT is soliciting the written consents referred to herein and, if a
stockholder wishes to consent, the white consent card should be returned to
Georgeson & Company Inc., Wall Street Plaza, New York, New York 10005, in the
enclosed envelope or to Good Ideas Enterprises, Inc., 10410 Trademark Street,
Rancho Cucamonga, California 91730, Attention: Secretary.
(3) Revocation
An executed consent card may be revoked at any time before expiration by
marking, dating, signing and delivering a written revocation before the time
that sufficient unrevoked consents have been received to authorize the action
for which consents are solicited. As indicated above, consents must be received
within 60 days after the first consent is delivered to Good Ideas. A revocation
may be in any written form validly signed by the record holder as long as it
clearly states that the consent previously given is no longer effective. The
delivery of a subsequently dated consent card which is properly completed will
constitute a revocation of any earlier consent. The revocation may be delivered
to Georgeson & Company Inc., Wall Street Plaza, New York, New York 10005, or to
Good Ideas Enterprises, Inc., 10410 Trademark Street, Rancho Cucamonga,
California 91730, Attention: Secretary.
(4) Miscellaneous
ABSTAINING FROM GIVING A CONSENT OR NOT RETURNING A SIGNED CONSENT WILL
HAVE THE SAME EFFECT AS WITHHOLDING CONSENT TO THE PROPOSED ACTION. IF YOU ARE
THE STOCKHOLDER OF RECORD AND WISH TO GIVE YOUR CONSENT, PLEASE SIGN, DATE AND
RETURN THE ENCLOSED WHITE CONSENT CARD PROMPTLY IN THE ENVELOPE PROVIDED.
IF YOUR SHARES OF GOOD IDEAS COMMON STOCK ARE HELD IN THE NAME OF A
BROKERAGE FIRM, BANK OR NOMINEE, ONLY THEY CAN CONSENT TO THE MERGER AND ONLY
UPON RECEIPT OF YOUR SPECIFIC INSTRUCTIONS. ACCORDINGLY, IF YOU WISH TO GIVE
YOUR CONSENT, PLEASE CONTACT THE PERSON RESPONSIBLE FOR YOUR ACCOUNT AND GIVE
INSTRUCTIONS WITH RESPECT TO SUCH SHARES IMMEDIATELY.
(5) Record Date, Quorum and Required Vote
Only holders of record of shares of the Good Ideas Common Stock on April
, 1997 (the "Record Date") will be entitled to consent to adoption of the
Merger Agreement.
On the Record Date, there were 3,948,680 shares of the Good Ideas Common
Stock outstanding, of which 1,548,680 shares were the Minority Good Ideas Common
Stock and were not owned by SAT. The affirmative consent of the holders of more
than 50% of the outstanding shares of the Minority Good Ideas Common Stock is
necessary to adopt the Merger Agreement. Thus, the holders of at least 774,341
shares of the 1,548,680 shares of the Minority Good Ideas Common Stock must
consent to the adoption of the Merger Agreement. (SAT intends to exclude an
aggregate of 210,000 shares held by two current directors (one of whom was also
an executive officer) of Good Ideas in determining whether it has a majority of
the outstanding shares of the Minority Good Ideas Common Stock; however, if the
necessary consents are obtained, these holders will receive shares of the SAT
Common Stock on the same basis as the other Good Ideas Minority Stockholders.
See "Terms of the Transaction -- The Consent Procedure -- Miscellaneous.") SAT
will execute and deliver a consent to such adoption only after the holders of
more than 50% of the outstanding shares of the Minority Good Ideas Common Stock
(excluding the aforesaid 210,000 shares from such computation) have consented in
order to permit filing of a Certificate of Merger in Delaware pursuant to the
GCL and the terms of the Merger Agreement.
6
<PAGE> 16
(6) Appraisal Rights
The Good Ideas Minority Stockholders will have rights of appraisal under
Section 262 of the GCL with respect to the consummation of the Merger. See
"Terms of the Transaction -- The Consent Procedure -- Rights of Dissenting Good
Ideas Stockholders."
THE MERGER
(1) General
Pursuant to the Merger Agreement, Acquisition Corp. will be merged with and
into Good Ideas (i.e., the Merger) and each outstanding share of the Minority
Good Ideas Common Stock will be converted into .36 of a share of the SAT Common
Stock. Such exchange ratio reflected a share of the SAT Common Stock having an
assumed value of $1.625 per share, which assumed value was set in the Merger
Agreement. If the Merger is consummated, an aggregate of 557,524 shares of the
SAT Common Stock will be issued to the Good Ideas Minority Stockholders, subject
to adjustment for fractional shares. Assuming that the U.S. Drug Merger is not
consummated and there are no exercises of outstanding Common Stock purchase
warrants or any conversions of SAT preferred stock or convertible notes between
the date of this Consent Solicitation Statement/Prospectus and the effective
date of the Merger, the existing SAT stockholders will own 98.5% of the
outstanding shares of the SAT Common Stock and the Good Ideas Minority
Stockholders will own 1.5%. If the U.S. Drug Merger is also consummated, the
Good Ideas Minority Stockholders will own 1.4% of the outstanding shares of the
SAT Common Stock. The shares of the Good Ideas Common Stock owned by SAT, except
for ten shares, will be canceled upon the Merger becoming effective. The shares
of Acquisition Corp. owned by SAT will be canceled upon the Merger becoming
effective because Good Ideas will be the surviving corporation.
(2) Options and Warrants
As of the Record Date, there were no outstanding stock options to purchase
any shares of the Good Ideas Common Stock and there were outstanding Common
Stock purchase warrants expiring February 16, 1999 (the "Good Ideas Warrants")
to purchase an aggregate of 120,000 shares of Good Ideas Common Stock.
Accordingly, no SAT securities will be issued in lieu of Good Ideas stock
options upon the consummation of the Merger.
The Good Ideas Warrants are owned by Baraban Securities, Inc. ("Baraban"),
the underwriter of the initial public offering of the Good Ideas Common Stock,
and Baraban's designees. The exercise price of the Good Ideas Warrants is $7.50
per share and was initially negotiated by Baraban with Good Ideas at 150% of the
public offering price of $5.00 per share of the Good Ideas Common Stock in Good
Ideas' initial public offering. If the Merger is consummated, as a result of the
anti-dilution provisions of the Good Ideas Warrants, the Good Ideas Warrants
will be converted into SAT Common Stock purchase warrants expiring February 16,
1999 (the "Merger Warrants") to purchase an aggregate of 74,285 shares of the
SAT Common Stock, which is the same number of shares which the holders of the
Good Ideas Warrants would have been entitled to receive after the consummation
of the Merger had the Good Ideas Warrants been exercised immediately prior to
the consummation of the Merger. The exercise price will be proportionately
adjusted to $12.115 per share in accordance with the anti-dilution provisions of
the Good Ideas Warrants. The same anti-dilution provisions as were applicable to
the Good Ideas Warrants will be applicable to the Merger Warrants. For further
information, see "The Merger and Related Matters -- Good Ideas Options and
Warrants."
(3) Recommendations by the Boards of Directors
On November 16, 1995, the Board of Directors of SAT approved in principle
seeking the acquisition of the minority stockholder interests in Good Ideas, on
February 6, 1996, authorized a merger of Acquisition Corp. with and into Good
Ideas on certain terms and conditions and, on December 3, 1996, authorized
execution of a merger agreement, which authorization included an offer by SAT to
be determined on the basis of the following formula: (a) if the Market Value of
the SAT Common Stock (as hereinafter defined) had been $1.50 per share, SAT
would have offered .375 of a share of the SAT Common Stock for each share of
7
<PAGE> 17
the Minority Good Ideas Common Stock; (b) if the Market Value of the SAT Common
Stock had been above $1.50 and not more than $1.75 per share, SAT would have
offered .34375 of a share of the SAT Common Stock for each share of the Minority
Good Ideas Common Stock; (c) if the Market Value of the SAT Common Stock had
been above $1.75 and not more than $2.00 per share, SAT would have offered .3125
of a share of the SAT Common Stock for each share of the Minority Good Ideas
Common Stock; (d) if the Market Value of the SAT Common Stock had been above
$2.00 and not more than $2.25 per share, SAT would have offered .28125 of a
share of the SAT Common Stock for each share of the Minority Good Ideas Common
Stock; (e) if the Market Value of the SAT Common Stock had been above $2.25 and
not more than $2.50 per share, SAT would have offered .25 of a share of the SAT
Common Stock for each share of the Minority Good Ideas Common Stock; (f) if the
Market Value of the SAT Common Stock had been more than $2.50 per share, SAT
would have offered .25 of a share of the SAT Common Stock for each share of the
Minority Good Ideas Common Stock, but reserved the right to withdraw the offer;
and (g) if the Market Value of the SAT Common Stock had been below $1.50 per
share, SAT would have offered .375 of a share of the SAT Common Stock for each
share of the Minority Good Ideas Common Stock, but reserved the right to
withdraw the offer. The Market Value of the SAT Common Stock was to be the
average of the closing sales prices of the SAT Common Stock during the 30
calendar days prior to the Record Date. In determining this exchange ratio, the
SAT Board considered, based on an application of the formula, that SAT would
issue to the Good Ideas Minority Stockholders a maximum of 580,755 shares and a
minimum of 387,170 shares of the SAT Common Stock. The SAT Board considered the
maximum number not to be above the level which the SAT Board would not want to
proceed with the Merger because it would, in the SAT Board's opinion, be unfair
to the SAT stockholders and the minimum number not to be below the level which
the offer would, in the opinion of the SAT Board, probably be unacceptable to
the Good Ideas Minority Stockholders.
On February 17, 1997, in order to avoid continuing speculation as to the
number of shares to be issued, the SAT Board determined that the market value
for determining the value of an SAT share should be assumed to be $1.625 per
share (i.e., the closing sales price on the prior trading date) and eliminated
the previously approved method of determining the value based on the average of
the closing sales prices during the 30 days prior to the Record Date. This fixed
the aggregate number of shares to be issued by SAT at 557,524 or .36 of a share
of the SAT Common Stock for each share of the Minority Good Ideas Common Stock.
The SAT Board then authorized execution of the Merger Agreement on this basis.
On December 3, 1996 and reaffirmed on February 17, 1997, the Good Ideas
Board of Directors authorized execution of, and submission to the Good Ideas
Minority Stockholders for approval of, the Merger Agreement. Also in making its
determination as to the exchange ratio, the Good Ideas Board made an analysis
similar to the one by the SAT Board. Based on this analysis, each of the Good
Ideas directors reasonably believed that the offer was fair to the Good Idea
Minority Stockholders from a financial point of view (a conclusion also reached
by each of the SAT directors) and recommended to the Good Ideas Minority
Stockholders adoption of the Merger Agreement. The Good Ideas Board directs
attention to the affiliation of the directors of Good Ideas with SAT. See the
section "The Merger -- Affiliation of Good Ideas with SAT" under this caption
"Summary," "Risk Factors -- SAT Affiliations of Good Ideas Directors" and
"Material Contacts of SAT with Good Ideas."
For a review of the factors each of the SAT Board and the Good Ideas Board
considered in making its decision, see "The Merger and Related
Matters -- Reasons for the Merger and Approval." On April , 1997 when the
Record Date was set, each Board satisfied itself that the number of shares to be
issued to the Good Ideas Minority Stockholders determined in accordance with the
exchange ratio set on December 3, 1996 and February 17, 1997 still was within
the range of fairness.
On February 17, 1997, the Board of Directors of SAT, acting on behalf of
SAT as the sole stockholder of Acquisition Corp., adopted the Merger. On
February 17, 1997, the Acquisition Board authorized execution of the Merger
Agreement. Accordingly, Acquisition Corp. has approved the Merger.
8
<PAGE> 18
(4) Affiliation of Good Ideas with SAT
SAT owns 60.8% of the outstanding shares of the Good Ideas Common Stock. Of
the four directors of Good Ideas who approved the Merger Agreement on December
3, 1996, two are executive officers, directors and employees of SAT, one is a
director of SAT, the fourth was an employee of Good Ideas until December 31,
1996 and all four are securityholders of SAT. As of December 31, 1996, there was
a note receivable from SAT to Good Ideas in the amount of $1,972,000, which, as
extended, is due the earliest of (a) five business days after the end of the
consent solicitation period, which period ends 60 days from the Record Date, (b)
five business days after the Effective Date (as hereinafter defined -- see the
subsection "The Merger Agreement" of this section "The Consent Procedure" under
this caption "Summary") or (c) April 30, 1997. The Merger Agreement provides
that the note receivable will be forgiven if the Merger is consummated and that
the term thereof will be extended, if the consent solicitation is still in
progress on April 30, 1997, until the earlier of (a) five business days after
the end of the consent solicitation period for the Merger or (b) the Effective
Date of the Merger. SAT also has been performing management services for Good
Ideas. See "Material Contacts of SAT with Good Ideas."
Because of the foregoing relationships with SAT, the Good Ideas Board has
never been independent of SAT and at least a majority of the directors have owed
fiduciary duties to both SAT and Good Ideas, creating a conflict of interests.
This condition has existed since SAT acquired a majority interest in Good Ideas
in June 1992. As a result of these conflicts of interests, the Good Ideas Board
has approved, with respect to the Merger, certain safeguards for the Good Ideas
Minority Stockholders, i.e, a majority of them must approve the Merger for it to
be consummated, a fairness opinion from an investment bank has been obtained and
Rosenman & Colin LLP was engaged as independent counsel for Good Ideas with
respect to the Merger. Such independent counsel reviewed the Registration
Statement and the Merger Agreement, advised the Good Ideas Board as to the
foregoing documents and as to their fiduciary duties prepared an opinion as to
certain tax consequences of the Merger. See "The Merger and Related
Matters -- Reasons for the Merger and Approval."
(5) Fairness Opinion
The Board of Directors of Good Ideas has received an opinion from Whale
Securities Co., L.P. ("Whale Securities") as to the fairness of the Merger to
the Good Ideas Minority Stockholders from a financial point of view as of the
date of the opinion. A copy of such opinion is annexed as Appendix B hereto and
should be read in its entirety. See "The Merger and Related Matters -- Fairness
Opinion."
(6) The Merger Agreement
Following the satisfaction or waiver of the conditions of the Merger, the
Merger will become effective upon the filing in the State of Delaware of a
Certificate of Merger in accordance with Sections 103 and 251 of the GCL. (The
date of such filing in Delaware is referenced to herein as the "Effective
Date.") As soon as practical after the Effective Date, a notice of consummation
of the Merger, together with a letter of transmittal for use in surrendering
certificates for shares of the Good Ideas Common Stock, will be mailed to the
holders of record as of the Effective Date of the shares of the Minority Good
Ideas Common Stock. The Good Ideas Minority Stockholders are requested not to
surrender their certificates for shares of the Minority Good Ideas Common Stock
until they receive such a letter of transmittal. See "The Merger and Related
Matters -- Exchange of Certificates."
(7) Conditions of the Merger
The obligations of SAT, Good Ideas and Acquisition Corp. to consummate the
Merger are subject to the satisfaction of the following conditions, among
others: (1) the Merger Agreement shall have been adopted by the holders of at
least 50% of the outstanding shares of the Minority Good Ideas Common Stock,
even though the consent of SAT alone would have been sufficient to have adopted
the Merger Agreement in accordance with the GCL, and (2) this Registration
Statement shall have been declared effective by the Commission under the
Securities Act and no stop order suspending such effectiveness shall have been
issued or a
9
<PAGE> 19
proceeding for such purpose shall have been instituted. No party to the Merger
Agreement may waive either of the foregoing conditions. There exist other
conditions to consummation of the Merger that may be waived (other than the
requirement of a fairness opinion, which condition has been satisfied) if the
respective Board of SAT or Good Ideas considers such waiver to be in the best
interest of the stockholders of its respective corporation. See "The Merger and
Related Matters -- Conditions to the Merger" and the Merger Agreement attached
as Appendix A hereto for additional information as to the conditions of the
Merger.
(8) Amendment and Termination
The Merger Agreement may be amended in writing at any time prior to the
Effective Date by the Boards of Directors of the parties thereto, whether before
or after the adoption by the Good Ideas Minority Stockholders of the Merger
Agreement, but, after such adoption, no amendment may, without further approval
by such stockholders, alter or change the amount or kind of consideration to be
received in exchange for the shares of the Minority Good Ideas Common Stock.
The Merger Agreement may be terminated and the Merger may be abandoned at
any time prior to the Effective Date, whether before or after the adoption of
the Merger Agreement by the Good Ideas Minority Stockholders: (1) by mutual
written consent of the Boards of Directors of SAT and Good Ideas, (2) by either
SAT or Good Ideas if the respective Board of Directors, based on the opinion of
its outside counsel, determines that making a recommendation to the Good Ideas
Minority Stockholders to adopt the Merger Agreement could reasonably be deemed
to cause the members of such Board of Directors to breach their fiduciary duties
under applicable law to their respective stockholders, or (3) by either SAT or
Good Ideas if there is any statute, rule or regulation which makes consummation
of the Merger illegal or otherwise prohibited or any order, decree, injunction
or judgment enjoining SAT, Good Ideas or Acquisition Corp. from consummating the
Merger and such order, decree, injunction or judgment has become final and non-
appealable. The obligations automatically terminate if the Merger has not been
consummated by September 30, 1997.
For additional information relating to the Merger Agreement, see "The
Merger and Related Matters" and Appendix A hereto.
(9) Market Prices
The following table sets forth the closing sales prices per share for the
SAT Common Stock and the Good Ideas Common Stock on February 5, 1996, the last
full day on which these stocks were traded prior to the initial public
announcement of the then principal terms of the proposed Merger, and on April
, 1997, the latest available date. The price quotations of SAT Common Stock
are as reported by the American Stock Exchange and the price quotations for the
Good Ideas Common Stock are as reported by the Pacific Stock Exchange and the
National Quotation Bureau, Inc., respectively. See "SAT Market Information" and
"Good Ideas Market Information" for a historical comparison of market prices of
the SAT Common Stock and the Good Ideas Common Stock, respectively.
<TABLE>
<CAPTION>
SAT GOOD IDEAS
COMMON STOCK COMMON STOCK
------------ ------------
<S> <C> <C>
February 5, 1996................................ $2.375 $ .375
April , 1997.................................. $ $
</TABLE>
(10) Federal Income Tax Consequences
If the Merger is consummated, there will be no federal income tax
consequences to SAT, Acquisition Corp. or the stockholders of SAT. It is
expected that there will be Federal income tax consequences to the Good Ideas
Minority Stockholders in that they may recognize income or loss on the exchange
of the Minority Good Ideas Common Stock for the SAT Common Stock. Additionally,
stockholders of Good Ideas receiving cash in lieu of fractional shares may
recognize income as to such cash payment. See "The Merger and Related
Matters -- Certain Tax Consequences."
10
<PAGE> 20
(11) Regulatory Approvals
As of the date hereof, the Merger requires no approval by any federal or
state governmental agency, except for compliance with the Securities Act, the
Exchange Act and state "blue sky" or securities laws. Without limiting the
foregoing, no compliance is necessary under the Hart-Scott-Rodino Antitrust
Improvement Act of 1976, as amended, and the rules and regulations thereunder.
See "The Merger and Related Matters -- Regulatory Approvals."
(12) Accounting Treatment
The Merger will be accounted for as a "purchase" as such term is used under
generally accepted accounting principles. See "The Merger and Related
Matters -- Accounting Treatment."
RECENT DEVELOPMENTS
On November 8, 1996, SAT entered into a Convertible Loan and Warrant
Agreement (the "Loan Agreement") with Steven A. Cohen and S.A.C. Capital
Associates, LLC, an Anguilla limited liability company (collectively the
"Lenders"), pursuant to which SAT borrowed $5,000,000 from the Lenders (the
"Loan"). See "SAT Principal Stockholders" for information as to the prior
beneficial ownership by the Lenders of an aggregate of 2,246,200 shares of the
SAT Common Stock. The Loan is evidenced by promissory notes (the "Convertible
Notes") which are due and payable on November 8, 1999 and bear interest at the
rate of seven percent per annum, payable quarterly. The Convertible Notes may
not be prepaid without the consent of the Lenders and may not be assigned or
negotiated without the consent of SAT. The Convertible Notes are convertible
into shares of the SAT Common Stock at any time after July 1, 1997 at a
conversion price (the "Conversion Price") of $2.00 per share. The Conversion
Price is subject to a downward adjustment (the "Market Price Adjustment") during
the period from May 1, 1997 through May 1, 1998 based on the average market
price for shares of the SAT Common Stock over the preceding 65 trading days
excluding the date that either Lender sold shares of the SAT Common Stock in an
Open Market Transaction (as hereinafter defined) and the trading days that are
within 21 days of such date, provided that the Conversion Price will not be
reduced below $1.375 as a result of this adjustment.
In addition, the Conversion Price is subject to reduction pursuant to
certain anti-dilution provisions, if SAT sells shares at less than the
Conversion Price, or issues options or convertible securities which can be
exercised at a price less than the Conversion Price.
Under the Loan Agreement, as long as any portion of the Convertible Notes
are outstanding and thereafter as long as certain conditions are met, the
Lenders may designate one person to be nominated by SAT for election to SAT's
Board of Directors or may exercise observer rights at meetings of the Board of
Directors. The Agreement also imposes certain negative and affirmative covenants
on SAT as long as any balance remains outstanding under the Convertible Notes.
These covenants, among other matters, restrict SAT's ability to engage in
acquisitions (other than the proposed acquisitions of SAT's two majority owned
subsidiaries, Good Ideas and U.S. Drug) of companies that are not engaged
exclusively in, or engaged in a business directly related to, the business of
substance abuse testing, to pay dividends, to incur indebtedness (as defined in
the Loan Agreement) senior to the Convertible Notes, to engage in certain
related party transactions, to assign the rights in certain intellectual
property, to terminate the employment of SAT's chief executive officer, to incur
other indebtedness (as defined in the Loan Agreement) in excess of $1,000,000,
to sell or otherwise dispose of any subsidiary or division of the corporation
(with the exception of Good Ideas), to engage in other transactions with a value
in excess of $1,000,000, and to amend SAT's Certificate of Incorporation or
By-Laws or enter into any agreement that would adversely affect the rights and
priorities of the Lenders. The Lenders also have the right to purchase
additional shares of the Common Stock in any capital raising transaction through
any public or private sale of shares of the SAT Common Stock effected by SAT and
to acquire additional shares under certain other circumstances.
In addition, pursuant to the Loan Agreement, the Lenders purchased for
$1,000 Common Stock purchase warrants expiring June 30, 2000 (the "June 30
Warrants") to purchase an aggregate of 2,500,000 shares of the SAT Common Stock
at an exercise price of $2.00 per share. The June 30 Warrants are not
11
<PAGE> 21
exercisable before July 1, 1997 and thereafter are exercisable only to the
extent that, when added together with any other shares beneficially owned by the
Lenders, would not result in the Lenders being deemed to be greater than ten
percent stockholders subject to Section 16 of the Exchange Act. Notwithstanding
the foregoing, the Warrants become fully exercisable on July 1, 1997. The number
of shares of the SAT Common Stock which may be purchased pursuant to the June 30
Warrants is subject to a downward adjustment, but not less than 2,000,000
shares, in the event that the Conversion Price of the Notes is reduced, such
that the number of shares purchasable pursuant to the June 30 Warrants will be
reduced at a rate of one share for each 2.2727 additional shares of the SAT
Common Stock which may be obtained upon conversion of the Convertible Notes as a
result of any Market Price Adjustment. In addition, the exercise price is
subject to reduction and the number of shares that may be purchased under the
June 30 Warrants is subject to increase pursuant to certain antidilution
provisions if SAT sells shares at less than the exercise price. The June 30
Warrants are transferable subject to compliance with the Securities Act.
Under the Loan Agreement, SAT agreed promptly to register under the
Securities Act the shares issuable upon the conversion of the Convertible Notes
and the exercise of the June 30 Warrants. A Registration Statement on Form S-3,
File No. 333-19979 (the "January Registration Statement"), was filed on January
17, 1997 to fulfill such commitment. In the event the registration statement had
not been filed and SAT did not use its best efforts to have the registration
statement declared effective by February 6, 1997, SAT would have had to pay the
Lenders a cash penalty equal to ten percent of the outstanding principal under
the Convertible Notes. In addition, during times (if any) when SAT has not
maintained the registration statement in effect for a specified period or has
failed to keep current any prospectus forming a part of such registration
statement, SAT must pay the Lenders a cash penalty equal to ten percent of the
outstanding principal under the Convertible Notes. Furthermore, the exercise
price of the June 30 Warrants may be paid by using shares otherwise issuable
thereunder if SAT does not comply with certain registration requirements. SAT
and the Lenders entered into a Registration Rights Agreement, pursuant to which
the Lenders have "piggyback" rights to include shares in any registration
statement filed by SAT, and on one occasion to demand registration of shares if
the shares issued upon conversion of the Convertible Notes or exercise of the
June 30 Warrants are not freely tradable. The right to demand registration may
be assigned to a transferee of the securities.
The Lenders have, as part of the Loan Agreement, agreed with SAT to certain
volume restrictions on Open Market Transactions (as defined below) involving
sales of the shares of the SAT Common Stock owned by them as of the date of the
Agreement after the first 1,000,000 owned shares have been sold in Open Market
Transactions. After the sale of such 1,000,000 owned shares in Open Market
Transactions, the Lenders have agreed that, unless waived by SAT, they will not
sell any of the remaining owned shares in Open Market Transactions unless: (i)
the sales price for such shares (before any fees or commissions) is equal to, or
greater than, the "Limit Price" (defined in the Loan Agreement as $2.00 per
share subject to certain adjustments), (ii) the volume of shares sold by the
Lenders on any trading day at a price below the Limit Price (before any fees or
commissions) does not exceed 25% of the average daily trading volume of the SAT
Common Stock reported for the five trading days immediately preceding the date
of such sale, provided that any sales by the Lenders during the immediately
preceding five trading days at a price below the Limit Price shall be excluded
from the calculation of the average daily trading volume, or (iii) such shares
are sold at the best offer price. For purposes of the Loan Agreement, the term
"Open Market Transactions" means transactions that are reported on the
consolidated quotation system other than block trades (as defined under Exchange
Act Rule 10b-18). These volume sales limitations do not extend to any other
transactions in the shares of the SAT Common Stock or to any shares of the SAT
Common Stock that the Lenders may acquire after November 8, 1996.
As a result of the five non-employee directors receiving Common Stock
purchase warrants expiring November 15, 1999 (the "Directors Warrants") each to
purchase 10,000 shares of the SAT Common Stock at $1.825 per share, the Lenders
each received a Common Stock purchase warrant also expiring November 15, 1999
(the "Lenders Warrant") to purchase 5,000 shares of the SAT Common Stock at
$1.825 per share. For information as to the recipients of the Directors
Warrants, see "Management -- Directors' Compensation." Pursuant to the Loan
Agreement, so long as the Convertible Notes are outstanding, whenever the
directors receive Common Stock purchase warrants to purchase shares of the SAT
Common Stock as compensation for
12
<PAGE> 22
serving in such capacity, each of the Lenders is entitled to receive a Common
Stock purchase warrant to purchase one half of the shares of the SAT Common
Stock subject to the director's warrant.
Effective as of August 1, 1996, SAT relocated its executive offices from
Rancho Cucamonga, California to Ft. Lauderdale, Florida. On November 14, 1996,
Linda H. Masterson agreed to relinquish the title and duties as SAT's Chief
Operating Officer while retaining the title and duties of President of SAT. Ms.
Masterson will remain based in California with primary responsibility for
bringing U.S. Drug's products to market, restructuring SAT's Alcohol Testing
Products Division and supervising the day-to-day operations of SAT's BioTox
Division. Ms. Masterson is a member of a management committee formed in November
1996 whose other members are SAT's Chief Executive Officer, its Chief Financial
Officer, its Vice President, Sales and Marketing and two other designated
persons.
As a condition precedent to making its loans, the Lenders required that
Robert M. Stutman, the Chairman of the Board, the Chief Executive Officer and a
director of SAT, and Brian Stutman, Vice President, Sales and Marketing of SAT
since December 3, 1996, surrender their secured position with respect to their
promissory notes due May 21, 1997 (the "Promissory Notes") in the principal
amount of $239,760 and $160,240, respectively, which they had received on May
21, 1996 as partial payment for their share ownership in RSA, and agree that the
Promissory Notes would not be paid prior to the Convertible Notes except through
the issuance of shares of the SAT Common Stock. In consideration of this
sacrifice, the Board of Directors of SAT authorized on December 3, 1996 that the
exercise price of $3.135 per share be reduced to $2.125 per share on Robert M.
Stutman's Common Stock purchase warrant expiring May 20, 1999 to purchase
474,750 shares of the SAT Common Stock and on Brian Stutman's Common Stock
purchase warrant also expiring May 20, 1999 to purchase 317,250 shares of the
SAT Common Stock. On the same day, the Messrs. Stutman surrendered their
Promissory Notes, the principal amount and interest thereon being used to allow
Robert M. Stutman to exercise his Common Stock purchase warrant expiring
December 13, 1998 for 127,500 shares as to 124,375 shares and Brian Stutman to
exercise his Common Stock purchase warrant also expiring December 13, 1998 as to
all 72,500 shares subject thereto and his Common Stock purchase warrant expiring
March 31, 1999 for 70,500 shares as to 10,624 shares, thereby permitting SAT to
cancel an aggregate of $415,000 in indebtedness to them ($400,000 in principal
and $15,000 in interest).
PROSPECTIVE SALE OF GOOD IDEAS
On February 26, 1996, the SAT Board determined to sell or liquidate Good
Ideas as soon as possible after the Merger is consummated. On December 3, 1996,
the SAT Board determined that Good Ideas should continue its efforts to
implement a sale of Good Ideas' remaining assets or its stock, as to which sales
there can be no assurance, and then, once the results of the solicitation for
the Merger are known, to liquidate Good Ideas (assuming no sale of its stock) as
soon thereafter as is practicable. However, management was authorized on
February 17, 1997 to accept an offer to purchase the Good Ideas assets for
$225,000 (from which offer will be deducted payments aggregating $112,870 for
inventory already purchased) if no better offer was made by March 31, 1997 and
if the prospective offer was still open. Good Ideas is seeking to close on such
offer in the month of April 1997. See "The Merger and Related Matters -- Sale of
Good Ideas" and the section "Results of Operations -- Good Ideas Enterprises,
Inc." under the caption "The Company's Management's Discussion and Analysis of
Financial Condition and Results of Operations."
13
<PAGE> 23
SUMMARY HISTORICAL AND PROFORMA COMBINED FINANCIAL DATA
The following summary historical financial data of the Company for the five
years ended March 31, 1996 and the nine months ended December 31, 1996 and 1995
is derived from the consolidated financial statements of the Company. The
following summary historical financial data of Good Ideas for the three years
ended March 31, 1996, the three months ended March 31, 1993 and the year ended
December 31, 1992, and for the nine months ended December 31, 1996 and 1995 is
derived from the financial statements of Good Ideas. The proforma condensed
consolidated balance sheet of the Company as of December 31, 1996 gives effect
to the following:
1. The effect of the proposed Merger of a wholly owned subsidiary of
SAT into Good Ideas.
2. The effect of the proposed Merger of U.S. Drug into a wholly owned
subsidiary of SAT.
The proforma condensed consolidated statement of operations for the year
ended March 31, 1996 and the nine months ended December 31, 1996 give effect to
the following:
1. The effect of the proposed Merger of a wholly owned subsidiary of
SAT into Good Ideas.
2. The effect of the proposed Merger of U.S. Drug into a wholly owned
subsidiary of SAT.
3. The acquisition of RSA, combining the audited financial statements
of RSA for the year ended December 31, 1995 with the audited consolidated
financial statements of SAT for the fiscal year ended March 31, 1996.
Outstanding common shares have been adjusted to reflect the Common Stock
issued in the transaction and the related warrant exercises between March
31, 1996 and the acquisition date of May 21, 1996 to the extent necessary
to generate the $2,100,000 of cash used in the acquisition transaction. The
nine-month period ending December 31, 1996 includes the operations of RSA
from the acquisition date of May 21, 1996. The results of operations of RSA
from April 1, 1996 through May 20, 1996 have been omitted as their effect
is not material.
The proforma statements have been prepared by SAT based upon the financial
statements included elsewhere in this Consent Solicitation Statement/Prospectus
and should be read in conjunction therewith. These proforma statements may not
be indicative of the results that actually would have occurred if the
transactions would have been in effect on the date indicated and should not be
understood to project the results of operations for any future date or period.
14
<PAGE> 24
HISTORICAL FINANCIAL DATA
THE COMPANY
<TABLE>
<CAPTION>
FOR THE YEAR ENDED MARCH 31,
-----------------------------------------------------------------------------
1996 1995 1994 1993 1992
------------ ----------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED INCOME STATEMENT DATA:
Continuing Operations:
Total Revenues.................. $ 1,165,661 $ 1,695,215 $ 442,728 $ 611,739 $ 688,412
============ =========== ============ =========== ===========
Loss from Continuing
Operations.................... $ (8,056,045) $(6,706,127) $ (9,696,139) $(7,623,615) $(3,490,024)
Loss on Discontinued
Operations.................... (2,404,541) (530,269) (369,896) (373,638) --
------------ ----------- ------------ ----------- -----------
Net Loss........................ $(10,460,586) $(7,236,396) $(10,066,035) $(7,997,253) $(3,490,024)
============ =========== ============ =========== ===========
CONSOLIDATED LOSS APPLICABLE TO COMMON STOCK:
Net Loss........................ $(10,460,586) $(7,236,396) $(10,066,035) $(7,997,253) $(3,490,024)
Preferred Stock Dividend Class
A............................. (28,810) (39,179) (26,358) (39,992) (199,362)
Preferred Stock Dividend Class
B............................. -- (2,425) (13,826) (331,767) (277,083)
------------ ----------- ------------ ----------- -----------
Loss Applicable to Common
Stock......................... $(10,489,396) $(7,278,000) $(10,106,219) $(8,369,012) $(3,916,469)
============ =========== ============ =========== ===========
Net Loss per Common Share....... $ (.35) $ (28) $ (.46) $ (.68) $ (.66)
------------ ----------- ------------ ----------- -----------
Weighted Average Common Share
Outstanding................... 29,834,502 25,691,674 22,027,068 12,317,743 5,938,747
============ =========== ============ =========== ===========
</TABLE>
<TABLE>
<CAPTION>
AS OF MARCH 31,
-----------------------------------------------------------------------------
1996 1995 1994 1993 1992
------------ ----------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED SUMMARY BALANCE SHEET DATA:
Working Capital................. $ 1,685,583 $ 4,634,665 $ 7,489,655 $ 3,172,817 $11,778,216
============ =========== ============ =========== ===========
Total Assets.................... $ 6,952,284 $14,097,548 $ 16,848,773 $ 6,300,602 $12,904,801
============ =========== ============ =========== ===========
Stockholders' Equity............ $ 4,032,330 $ 7,693,942 $ 6,844,375 $ 1,482,943 $ 8,301,977
============ =========== ============ =========== ===========
</TABLE>
15
<PAGE> 25
THE COMPANY
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
DECEMBER 31,
---------------------------
1996 1995
----------- -----------
<S> <C> <C>
CONSOLIDATED INCOME STATEMENT DATA:
Continuing Operations:
Total Revenues.............................................................. $ 2,070,206 $ 901,439
=========== ===========
Loss from Continuing Operations............................................. $(6,856,526) $(5,209,224)
Loss on Discontinued Operations............................................. $ (150,877) $ (641,491)
----------- -----------
Net Loss.................................................................... $(7,007,403) $(5,850,715)
=========== ===========
Consolidated Loss Applicable to Common Stock:
Net Loss.................................................................... $(7,007,403) $(5,850,715)
Preferred Stock Dividend Class A............................................ (21,606) (21,606)
----------- -----------
Loss Applicable to Common Stock............................................. $(7,029,009) $(5,872,321)
=========== ===========
Net Loss per Common Share
Loss from Continuing Operations............................................. $ (0.20) $ (0.18)
Loss from Discontinued Operations........................................... -- (0.02)
----------- -----------
Net Loss.................................................................... $ (0.20) $ (0.20)
Weighted Average Common Shares Outstanding.................................. 34,978,113 29,248,777
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
---------------------------
1996 1995
----------- -----------
<S> <C> <C>
CONSOLIDATED SUMMARY BALANCE SHEET DATA:
Working Capital............................................................. $ 3,158,782 $ 2,204,198
=========== ===========
Total Assets................................................................ $11,258,892 $ 8,987,126
=========== ===========
Stockholders' Equity........................................................ $ 5,112,141 $ 5,320,299
=========== ===========
</TABLE>
16
<PAGE> 26
GOOD IDEAS
<TABLE>
<CAPTION>
FOR THE
THREE FOR THE
FOR THE YEAR ENDED MARCH 31, MONTHS ENDED YEAR ENDED
----------------------------------------- MARCH 31, DECEMBER 31,
1996 1995 1994 1993 1992
----------- ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net Sales......................... $ 1,508,819 $4,606,039 $5,544,221 $ 436,015 $3,773,232
=========== ========== ========== ========== ==========
Net Loss.......................... $(1,566,292) $ (798,307) $ (582,331) $ (317,443) $ (321,648)
=========== ========== ========== ========== ==========
Net Loss per Common Share......... $ (.39) $ (.20) $ (.20) $ (.11) $ (.12)
=========== ========== ========== ========== ==========
Weighted Average Common Shares
Outstanding..................... 3,968,372 4,065,200 2,942,000 2,787,500 2,787,500
=========== ========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
AS OF MARCH 31,
--------------------------------------------------------- DECEMBER 31,
1996 1995 1994 1993 1992
---------- ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
SUMMARY BALANCE SHEET DATA:
Working Capital (Deficit).......... $2,174,525 $3,572,405 $4,113,710 $ (769,409) $ (421,507)
========== ========== ========== ========== ==========
Total Assets....................... $2,422,732 $3,950,982 $5,604,295 $1,908,633 $1,857,435
========== ========== ========== ========== ==========
Net Assets in Liquidation.......... $2,174,525 -- -- -- --
========== ========== ========== ========== ==========
Shareholders' Equity (Deficit)..... -- $3,735,816 $4,252,854 $ (650,156) $ (332,213)
========== ========== ========== ========== ==========
</TABLE>
17
<PAGE> 27
GOOD IDEAS
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED DECEMBER 31,
-------------------------
1996 1995
---------- ----------
<S> <C> <C>
INCOME STATEMENT DATA:
Net Sales..................................................................... $ 48,868 $1,473,416
========== ==========
Net Loss...................................................................... $ (50,000) $ (932,259)
========== ==========
Net Loss per Common Share..................................................... $ (.01) $ (.23)
========== ==========
Weighted Average Common Shares Outstanding.................................... 3,948,680 3,974,936
========== ==========
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-------------------------
1996 1995
---------- ----------
<S> <C> <C>
SUMMARY BALANCE SHEET DATA:
Working Capital............................................................... $2,117,717 $2,733,137
Total Assets.................................................................. $2,203,661 $3,022,906
========== ==========
Net Assets In Liquidation..................................................... $2,124,525 --
========== ==========
Stockholders' Equity.......................................................... -- $2,808,558
========== ==========
</TABLE>
18
<PAGE> 28
SUBSTANCE ABUSE TECHNOLOGIES, INC.
PROFORMA BALANCE SHEET
AS OF DECEMBER 31, 1996
<TABLE>
<CAPTION>
MERGER AND MERGER WITH
PROPOSED SALE ACQUISITION
CONSOLIDATED OR LIQUIDATION OF CORP. CONSOLIDATED
HISTORICAL GOOD IDEAS U.S. DRUG PROFORMA
12/31/96 DR(CR) DR(CR) 12/31/96
------------ ----------------- ----------- ------------
<S> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and Cash Equivalents............. $ 2,346,443 $ 2,346,443
Accounts Receivable (net of Allowance
for Bad Debts of $94,201).......... 974,031 974,031
Other Receivable...................... 50,000 50,000
Inventories........................... 717,078 717,078
Prepaid Expenses...................... 373,129 373,129
Net Current Assets of Discontinued
Operations(1)...................... 139,667 139,667
------------ --------- ----------- ------------
Total Current Assets............... 4,600,348 4,600,348
------------ --------- ----------- ------------
Property and Equipment (Net of
Accumulated Depreciation of
$2,334,630)........................... 2,297,955 2,297,955
Excess of Cost over Fair Value on Net
Assets Acquired (net of amortization
of $145,890).......................... 4,110,589 4,110,589
Notes Receivable-Non Current............ 250,000 250,000
------------ --------- ----------- ------------
$ 11,258,892 $ 11,258,892
============ ========= =========== ============
Current Liabilities:.................... CR(DR) CR(DR)
Accounts Payable...................... $ 646,185 $ 646,185
Accrued Liabilities................... 753,960 753,960
Current Portion Long Term Debt........ 27,016 27,016
Pref. Stock Dividend Payable.......... 14,404 14,404
------------ --------- ----------- ------------
Total Current Liabilities.......... 1,441,565 1,441,565
------------ --------- ----------- ------------
Senior Convertible Notes (net of
$1,236,204 in unamortized discount)... 3,763,796 3,763,796
Long Term Debt-Net of Current Portion... 86,951 86,951
Minority Interest....................... 854,439 $(854,439)(2) $ --(3) --
Stockholders' Equity
Preferred Stock Class "A"............. 412 412
Common Stock $.01..................... 360,306 5,575(2) 27,895(3) 393,776
Additional Paid In Capital............ 53,228,326 900,403(2) 4,505,007(3) 58,633,736
Accumulated Deficit................... (48,476,903) (51,539)(2) (4,532,902)(3) (53,061,344)
------------ --------- ----------- ------------
Total Stockholders' Equity......... 5,112,141 854,439 -- 5,966,580
------------ --------- ----------- ------------
Total Liabilities and
Equity...................... $ 11,258,892 $ -- $ -- $ 11,258,892
============ ========= =========== ============
</TABLE>
19
<PAGE> 29
SUBSTANCE ABUSE TECHNOLOGIES, INC.
PROFORMA STATEMENT OF OPERATIONS
FOR THE FISCAL YEAR ENDED 3/31/96
<TABLE>
<CAPTION>
MERGER AND
PROPOSED MERGER WITH
SALE OR ACQUISITION PURCHASE
CONSOLIDATED LIQUIDATION OF CORP. ADJUSTMENTS CONSOLIDATED
HISTORICAL GOOD IDEAS U.S. DRUG RSA PROFORMA
------------ ----------------- ----------- ----------- ------------
HISTORICAL
FINANCIAL
STATEMENTS
RSA
----------
4.)
<S> <C> <C> <C> <C> <C> <C>
Continuing Operations:
Net Sales.................... $ 1,165,661 $1,101,599 $ 2,267,260
Costs and Expenses
Cost of Sales (Exclusive of
Depreciation Shown
Below)................... 1,208,726 845,663 2,054,389
Selling, General and
Administrative Expenses
(Exclusive of
Depreciation Shown
Below)................... 5,720,592 275,485 5,996,077
Research and Development... 1,005,832 1,005,832
Interest................... 81,450 81,450
Depreciation and
Amortization............. 1,017,534 $ 283,000 5.) 1,300,534
Loss on Settlement of
Litigation............... 1,137,914 1,137,914
----------- ------- ---------- ---------- ---------- -----------
Total Costs and
Expenses............. 10,172,048 1,121,148 283,000 11,576,196
----------- ------- ---------- ---------- ---------- -----------
Loss from Operations......... (9,006,387) (19,549) (283,000) (9,308,936)
----------- ------- ---------- ---------- ---------- -----------
Other Income (Expense)
Interest Income............ 116,075 116,075
Loss on Sale of Marketable
Securities............... (1,889,216) (1,889,216)
Unrealized Gain on
Marketable Securities.... 2,190,721 2,190,721
Other Losses............... (8,704) (8,704)
----------- ------- ---------- ---------- ---------- -----------
Total Other Income
(Expense)............ 408,876 408,876
----------- ------- ---------- ---------- ---------- -----------
Loss before Minority Interest
in Net Loss of
Subsidiaries............... (8,597,511) (19,549) (283,000) (8,900,060)
Minority Interest in Net Loss
of Subsidiaries............ 541,466 $ (541,466) --
----------- ------- ---------- ---------- ---------- -----------
Loss from Continuing
Operations................... $(8,056,045) $ (541,466) $ (19,549) $ (283,000) $(8,900,060)
=========== ======= ========== ========== ========== ===========
Weighted Average Common Shares
Outstanding.................. 29,834,502 557,5252.) 2,789,478 3.) 1,445,946 6.) 34,627,451
=========== ======= ========== ========== ========== ===========
Loss from Continuing Operations
Applicable to Common Stock:
Net Loss from Continuing
Operations................. $(8,056,045) $ (541,466) $ (19,549) $ (283,000) $(8,900,060)
Preferred Stock
Dividend -- Class "A"...... (28,810) (28,810)
----------- ------- ---------- ---------- ---------- -----------
Loss from Continuing Operations
Applicable to Common Stock... $(8,084,855) $ (541,466) $ (19,549) $ (283,000) $(8,928,870)
=========== ======= ========== ========== ========== ===========
Loss from Continuing Operations
per Common Share............. $ (0.27) $ (0.26)
=========== ===========
</TABLE>
20
<PAGE> 30
SUBSTANCE ABUSE TECHNOLOGIES, INC.
PROFORMA STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED 12/31/96
<TABLE>
<CAPTION>
MERGER AND
PROPOSED MERGER WITH
SALE OR ACQUISITION
CONSOLIDATED LIQUIDATION OF CORP. CONSOLIDATED
HISTORICAL GOOD IDEAS U.S. DRUG PROFORMA
------------ ----------------- ----------- ------------
<S> <C> <C> <C> <C>
Continuing Operations:
Net Sales............................ $ 2,070,206 $ 2,070,206
Costs and Expenses
Cost of Sales (Exclusive of
Depreciation Shown Below)....... 1,628,825 1,628,825
Selling, General and
Administrative Expenses
(Exclusive of Depreciation Shown
Below).......................... 4,978,592 4,978,592
Research and Development.......... 1,273,822 1,273,822
Interest.......................... 143,855 143,855
Depreciation and Amortization..... 787,291 787,291
Write off of Goodwill............. 714,377 714,377
----------- ------- ---------- ------------
Total Costs and Expenses..... 9,526,762 -- 9,526,762
----------- ------- ---------- ------------
Loss from Operations................. (7,456,556) -- (7,456,556)
----------- ------- ---------- ------------
Other Income (Expense)............... (4,540) (4,540)
----------- ------- ---------- ------------
Loss before Minority Interest in Net
Loss of Subsidiaries.............. (7,461,096) (7,461,096)
Minority Interest in Net Loss of
Subsidiaries...................... 604,570 $ (604,570)
----------- ------- ---------- ------------
Loss from Continuing Operations........ $ (6,856,526) -- $ (604,570) $ (7,461,096)
=========== ======= ========== ============
Weighted Average Common Shares
Outstanding.......................... 34,978,113 557,525(2) 2,789,478(3) 38,325,116
=========== ======= ========== ============
Loss from Continuing Operations
Applicable to Common Stock:
Net Loss from Continuing
Operations........................ $ (6,856,526) $ (604,570) $ (7,461,096)
Preferred Stock Dividend -- Class
"A"............................... (21,606) (21,606)
----------- ------- ---------- ------------
Loss from Continuing Operations
Applicable to Common Stock........... $ (6,878,132) $ (604,570) $ (7,482,702)
=========== ======= ========== ============
Loss from Continuing Operations per
Common Share...................... $ (0.20) $ (0.20)
=========== ============
</TABLE>
21
<PAGE> 31
NOTES TO PROFORMA CONDENSED FINANCIAL INFORMATION
<TABLE>
<S> <C> <C> <C>
1.) Net assets of discontinued business to be sold or liquidated excluding intercompany
receivables.
2.)
Purchase of Minority Interest in Good Ideas
Calculation of number of shares assumed in Merger Transaction with Good Ideas
SAT Shares to be issued for each Good Ideas
Share.............................................................. 0.36
Good Ideas Minority Shares Outstanding............................. 1,548,680
----------
Estimated Number of SAT Shares to be Issued........................ 557,525
=========
Value of SAT shares issued for minority interest at interest market
price of $1.625 per share.......................................... $ 905,978
Book Value of Minority Interest.................................... 854,439
----------
Excess of fair value of SAT shares over book value of Minority
Interest........................................................... $ 51,539
=========
The difference between the value of shares issued in the transaction and the book value of
the minority interest will be treated as an additional loss on discontinued operations and
such amount has been reflected as a charge to retained earnings (accumulated deficit) in
the proforma balance sheet, but has not been reflected in the proforma statements of
operations as it is directly attributable to the merger transaction.
3.)
Purchase of Minority Interest in U.S. Drug
Calculation of number of shares assumed in Merger Transactions with U.S. Drug
SAT Shares to be issued for each U.S. Drug Share................... 1.62
U.S. Drug Minority Shares Outstanding.............................. 1,721,900
----------
Estimated Number of SAT Shares to be issued........................ 2,789,478
=========
Value of SAT shares to be issued for Minority Interest at estimated
market price of $1.625 per share................................... $4,532,902
Book value of Minority Interest.................................... --
----------
Excess of fair value of SAT shares over book value of Minority
Interest........................................................... $4,532,902
=========
The difference between the fair value of shares issued in the transaction and the book
value of the minority interest will be treated as incomplete research and development
because U.S. Drug is a development stage enterprise and such amount is reflected as a
charge to retained earnings (accumulated deficit) in the proforma balance sheet, but has
not been reflected in the proforma statements of operations as it is directly attributable
to the merger transaction.
4.)
RSA was acquired May 21, 1996. RSA results of operations for the calendar year 1995 are
included in the results of operations for the fiscal year ended March 31, 1996. The
results of operations for the nine months ended December 31, 1996 include RSA operations
from May 22 through December 31, 1996. The results of operations of RSA from April 1, 1996
through May 21, 1996 have been omitted as their effect is not material.
5.)
The purchase of RSA generated approximately $4,250,000 of purchase price in excess of net
asset value. This excess is being amortized based on a 15-year life and amounts to
$283,000 per year.
6.)
Outstanding shares have been adjusted to reflect the 500,000 shares issued in the RSA
acquisition and 945,946 common shares issued in the exercise of Common Stock Purchase
Warrants at an average price of $2.22 subsequent to March 31, 1996 to the extent necessary
to provide the cash portion of the purchase price, $2,100,000.
</TABLE>
22
<PAGE> 32
RISK FACTORS
1. SAT Affiliations of Good Ideas Directors. Of the four directors of
Good Ideas who initially approved the Merger on April 12, 1996, three were then
executive officers (two of whom were also then directors and the other a former
director) of SAT, all three were then employees of SAT, the fourth director was
then an employee of Good Ideas and all four directors were stockholders of SAT.
All four had served in such capacities since Good Ideas commenced operations. Of
the current four directors of Good Ideas who approved the Merger on December 3,
1996 and February 17, 1997, two are executive officers, directors and employees
of SAT, one is a director of SAT and formerly served as a consultant to SAT
Board of Directors, the fourth was an employee of Good Ideas until December 31,
1996 and all four are securityholders of SAT.
Consequently, the Good Ideas Board of Directors has never been independent
of SAT and at least a majority of the directors have owed fiduciary duties to
both SAT and Good Ideas, creating a conflict of interest, which has existed
since SAT, through a subsidiary, acquired a majority interest in the predecessor
of Good Ideas in June 1992. However, specifically with respect to the Merger,
the Good Ideas Board approved certain safeguards in an effort to assure fairness
to the Good Ideas Minority Stockholders. First, the Merger Agreement must be
adopted by the holders of at least 50% of the outstanding shares of the Minority
Good Ideas Common Stock (excluding from such calculation the 210,000 shares in
the aggregate held by two directors of Good Ideas), even though the consent of
SAT alone is sufficient to adopt the Merger Agreement in accordance with the
GCL. Second, a major firm (Rosenman & Colin LLP) was engaged as independent
counsel for Good Ideas. Lastly, the Board of Directors of Good Ideas has
received an opinion from Whale Securities as to the fairness of the Merger to
the Good Ideas Minority Stockholders from a financial point of view as of the
date of the opinion. The Merger Agreement provides that the first and second
protections cannot be waived by any party.
The SAT Board considered adding independent directors to Good Ideas, but
rejected the idea because of what it considered the virtual impossibility,
especially in light of potential director liability concerns, of finding a
person or persons to accept a directorship in a public company knowing that it
is in the process of going private and that SAT has majority control of the Good
Ideas Common Stock (63.6% of the outstanding shares as of March 31, 1997 if the
directors' shares are included). Although SAT could have attempted to cause Good
Ideas to make it financially attractive for a potential director to accept a
directorship, SAT believed that this would not be a prudent use of Good Ideas'
money and that any such payment or payments could be perceived as an improper
inducement to such person to favor the Merger.
2. Loss of Direct Ownership of Good Ideas. If the Merger is consummated,
the Good Ideas Minority Stockholders will lose their direct, although minority,
ownership interest in Good Ideas. As a result, if Good Ideas is sold for an
amount greater than the amount offered by SAT, which event the SAT Board of
Directors and the Good Ideas Board of Directors believe is highly unlikely to
occur, such holders will share in such sale only to the extent of their diluted
interest in SAT. In addition, to the extent any Good Ideas Minority Stockholder
wanted to be an investor solely in a toy company, such stockholder has lost such
opportunity as the result of the SAT Board's decision to close down the Good
Ideas operations, attempt to sell the assets or stock of Good Ideas, as to which
sale there can be no assurance, and ultimately liquidate Good Ideas if no sale
of stock is made. As a result of the SAT Board's decisions, the Good Ideas
Minority Stockholders will receive shares of the SAT Common Stock if a majority
approves the Merger and the cash liquidation value of their shares if the Merger
is not approved.
3. Operating Losses. The Company has sustained losses of $48,476,903 from
inception through December 31, 1996. Management initiated cost reduction actions
to reduce general and administrative expenses in fiscal 1996, which prospective
savings were offset by the $903,000 in combined legal and other expenses
incurred by both parties in the consent solicitation contest (see
"Management -- Changes in Management of SAT"), $250,000 in settlement of a claim
by two then Alconet officers relating to their then employment and $397,000 of
expenses incurred prior to its acquisition by Alconet, a then subsidiary
acquired in March 1995 and not included in the Company's operating results for
the fiscal year ended March 31, 1995 ("fiscal 1995"). Without the expenses of
the consent solicitation, management had hoped that the general and
administrative expenses could be reduced in the fiscal year ending March 31,
1997 ("fiscal 1997"). During the
23
<PAGE> 33
nine months ended December 31, 1996, such expenses increased by $350,000 to
$4,120,000 from the $3,770,000 in the comparable period in fiscal 1996. The
increase was due primarily to the issuance of shares of the SAT Common Stock
valued at $575,000 for financial public relations services. The Company also
incurred approximately $353,000 of legal expenses related to the taking private
transactions and a registration statement under the Securities Act primarily
relating to the shares underlying warrants, relocation and plant closure costs
of approximately $100,000 and costs associated with the transition of management
of approximately $253,000. However, there can be no assurance that management's
expectations as to cost reductions will be realized in the fiscal year ending
March 31, 1998 ("fiscal 1998") or thereafter. In addition, management has
initiated an effort through SAT's Employer Services Division (formerly
ProActive, a subsidiary) to tap the human resource provider market which it
believes can result in substantial revenues; however, selling and marketing
expenses increased to $859,000 in the nine months ended December 31, 1996 as
compared to $772,000 for the same period of the prior year reflecting such
increased marketing efforts. In addition, management caused SAT to acquire RSA
on May 21, 1996, which company had been designing drug-free workplace policies
and programs for ProActive clients since January 1996; will continue to attempt
to sell the Company's toy operations; and had sold on April 30, 1996 the assets
of the Company's rubber recycling operations, so that the Company can
concentrate on alcohol and drug testing and the related operations of the Robert
Stutman & Associates Consulting Division and the Employer Services Division as
its core businesses. However, there can be no assurance that management will
receive what it considers to be a more acceptable offer for Good Ideas than a
current offer of $225,000 for its remaining inventory. The Good Ideas Board will
attempt to close on such offer as soon as possible (Good Ideas is seeking a
closing in April 1997) and, whether or not such sale is consummated, will
liquidate Good Ideas as soon as possible after the date on which the results of
this consent solicitation for the Merger are known. In addition, the decision to
develop a saliva based drug testing product, rather than complete first the
urine based drug testing product for marketing, will, in the opinion of
management, enhance the Company's future growth, but has delayed the receipt of
any revenues from U.S. Drug until the first quarter of 1999 at the earliest,
assuming successful consummation of the research and development program, as to
which there can be no assurance. If the saliva based testing product reaches a
certain stage of development, which currently is not anticipated until March
1998 at the earliest, management will consider the feasibility of obtaining a
marketing partner, which partner could fund the later stages of product
development, but also would decrease future marketing revenues for the Company.
In addition, because the bulk of the research and development expenses will have
been occurred at that stage of the program, seeking a development partner may
not be a desirable action to take at that time. Management believes, therefore,
that it is currently too speculative to project any revenues from this source.
See the section "Lack of Funding May End Possible Drug Testing Products" under
this caption "Risk Factors." Accordingly, it is management's belief, especially
in view of the significant losses in the fiscal year ended March 31, 1994
("fiscal 1994"), fiscal 1995, fiscal 1996 and the first nine months of fiscal
1997 that, despite these management programs, the Company will not turn
profitable in fiscal 1997. There can be no assurance as to when the Company,
without giving effect to the results of operations of U.S. Drug, will turn
profitable, if at all, or when U.S. Drug will turn profitable. See "Business of
the Company," "The Company's Financial Statements" and "The Company's
Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Good Ideas reported net losses of $1,566,000 for fiscal 1996, $798,000 for
fiscal 1995 and $582,000 for fiscal 1994. Good Ideas reported a net loss of
$50,000 for the nine months ended December 31, 1996 as compared to a net loss of
$932,000 for the comparable period in fiscal 1995. Because SAT's Board of
Directors believes that the SAT stockholders will derive the most benefit if the
Company's core businesses were solely the alcohol and drug testing operations,
the human resource provider business and the business of developing substance
abuse prevention programs and policies and because of Good Ideas' history of
losses, questions as to the future marketability of its current toy products and
what it perceives to be the problems in the toy industry generally, SAT has been
seeking a purchaser for Good Ideas; however, there can be no assurance that any
such sale will be effected. Whether or not a sale is effected, the Board would
seek instead to liquidate Good Ideas as soon after the date on which the results
of the consent solicitation are known as is possible. See "The Merger and
Related Matters -- Sale of Good Ideas."
24
<PAGE> 34
4. Need for Financing. Management believes that, as a result of (1) its
recently consummated sale of Convertible Notes in the principal amount of
$5,000,000 (see "Summary -- Recent Developments"), (2) the exercise of Common
Stock purchase warrants and a stock option during the period January 1996
through September 30, 1996 resulting in gross proceeds to SAT of $4,770,621, (3)
the closing of a private placement pursuant to Regulation D under the Securities
Act in December 1995 through February 1996 resulting in gross proceeds of
$3,750,000, (4) the contemplated future exercises of outstanding Common Stock
purchase warrants and (5) management's belief that, except for the cash
requirements of U.S. Drug, the Company will begin to have a positive cash flow
from operations possibly in the quarter ending December 31, 1997 and more
probably in the quarter ending March 31, 1998,the Company will be able to meet
its cash requirements other than those for U.S. Drug (which will require
additional financing) during the next 12 months. However, there can be no
assurance that this objective will be achieved, particularly as to the estimate
as to the Company achieving a positive cash flow from its operations other than
U.S. Drug. Such estimate is based primarily on SAT continuing to develop new
customers for its Employer Services Division, taking into account that it
generally takes 90 to 120 days from contract signing to implement procedures and
begin to receive revenues. Such estimate also assumes that SAT will not incur
significant non-recurring costs as it has in recent years, that SAT has
eliminated its significant losses in the Alcohol Products Division and will
continue to derive from its Robert Stutman & Associates Consulting Division
increasing revenues and sources of potential business for the Company's other
operations. In the event warrant exercises are not achieved at the levels
expected and the Company's cash flow from operations (other than U.S. Drug) does
not turn positive, the Company in such event would have to seek new financing
even for its non-U.S. Drug operations, which financing may not be available or,
if available, may not be on acceptable terms. In addition, depending on market
and other conditions relating to the individual holder, there can be no
assurance that the outstanding SAT Common Stock purchase warrants will be
exercised and, if exercised, when.
In the event that the Company is unable to generate sufficient cash flow
from operations or from sources other than operations as described in the
preceding paragraph (which event, in SAT's management's opinion, is not likely
to occur based upon the Company's past experience; however, there can be no
assurance that management will be successful in its financing efforts), then the
Company may have to reduce operations in order to survive, thereby not only
resulting in less cash from operations currently, but also delaying future
revenue growth. In such event the market price of the SAT Common Stock is likely
to drop, not only discouraging the future exercises of SAT's warrants and
possibly discouraging potential new investors, but also increasing the risk that
a current investor in SAT may lose the value of his, her or its investment.
Good Ideas' management believes that, pending consummation of a sale of
Good Ideas, as to which sale there can be no assurance, or liquidation, Good
Ideas' cash resources, as a result of (1) initially its cost reduction actions
(such as not renewing the lease for office and warehouse facilities) and (2)
finally its cessation of operations, will be sufficient to allow Good Ideas to
meet its cash requirements for at least the next 12 months, if such time is
required to sell or liquidate. In addition, Good Ideas' cash resources could be
supplemented by repayment of all or part of SAT's indebtedness to Good Ideas
($1,972,000 as of December 31, 1996) or by consummating the existing informal
offer for inventory which would result in gross proceeds of $112,130. Because
the Good Ideas Board will seek to liquidate Good Ideas as soon after the date on
which the results of the consent solicitation are known as is practicable and
because of these two other potential sources of cash, management expects to have
Good Ideas' cash requirements met as stated. See the sections "Reasons for the
Merger and Approval" and "Sale of Good Ideas" under the caption "The Merger and
Related Matters," "The Company's Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Good Ideas' Management's
Discussion and Analysis of Financial Condition and Results of Operations."
5. Lack of Funding May End Possible Drug Testing Products. U.S. Drug will
require approximately $12,000,000 during the period from April 1, 1997 to
December 31, 1998, to complete development of a saliva based testing product.
Such estimate reflects both product development and manufacturing build-out
costs, as well as general and administrative expenses. U.S. Drug will attempt to
reduce such estimated costs to approximately $10,500,000 by leasing rather than
purchasing certain items, but there can be no assurance as to the extent, if
any, that leasing will be a viable option. Although SAT's management believes
that SAT can
25
<PAGE> 35
raise the necessary funds to complete this project, failure to raise the funds
will result in no drug testing operations by the Company based on use of its own
products. U.S. Drug would, as a result, have to cease operations because it has
no other product to market or service to furnish. In addition, the Employer
Services Division would, in such circumstances, have to continue to use external
sources for its drug testing services, thereby risking increased costs when and
if the laboratories performing such services increase their charges.
Prior management had considered, as an alternative to SAT's financing of
U.S. Drug, seeking a development partner which would share the costs. However,
current management is of the opinion that use of one of the major pharmaceutical
or medical diagnostic companies to assist in the product development at this
stage of development risks giving confidential data to potential competitors
that will not be fully protected by confidentiality agreements and also may
result in marketing rights demands that would later reduce the revenues to the
Company assuming successful consummation of the development program. Current
management also believes that a potential marketing partner cannot be obtained
on acceptable terms until there is a working prototype for the instrument and
the disposables and certain preliminary clinical data is obtained. Current
management does not believe that the prototype will be produced until March 1998
at the earliest and that, at that stage of development, the greater part of the
estimated $10,500,000 in development and manufacturing build-out expenses will
already have been incurred, making it less beneficial to obtain a development
partner at that time. There can be no assurance that a development/marketing
partner can be obtained upon acceptable terms, whether at that later date or at
all.
6. Insufficient Authorized Shares. As of March 31, 1997, there were
50,000,000 shares of the SAT Common Stock authorized, of which 36,030,591 shares
were outstanding and the SAT Board of Directors had authorized for issuance up
to an additional 17,788,712 shares, including the 557,524 shares to be issued to
the Good Ideas Minority Stockholders and the 2,789,478 shares to be issued to
the U.S. Drug minority stockholders assuming that the Merger and the U.S. Drug
Merger are consummated. Were all of such shares to be issued, there would be
53,819,303 shares outstanding or 3,819,303 shares in excess of the authorized
number. However, as of March 31, 1997, Common Stock purchase warrants to
purchase an aggregate of 4,394,500 shares and the Convertible Notes as to
2,500,000 shares included in the reserved shares are not currently exercisable
or convertible, of which an aggregate of 5,000,000 shares may not be issued
until July 1, 1997 at the earliest. All of the foregoing amounts as to the
shares authorized to be issued do not give effect to anti-dilution or other
adjustment provisions in certain of the Common Stock purchase warrants and in
the Convertible Notes. Even though there are currently a sufficient number of
authorized shares of the SAT Common Stock to consummate the Merger and the U.S.
Drug Merger, SAT has authorized the calling of a Special Meeting of Stockholders
(currently scheduled for May 5, 1997) for the purpose of increasing the
authorized number of shares of the SAT Common Stock from 50,000,000 to
65,000,000. There can be no assurance that the SAT Stockholders will approve
this increase, which event would not only adversely impact the issuance of the
"excess" shares described above, but also negatively affect the possible
financings which SAT intends to initiate to raise the funds for developing the
drug testing products.
7. Competition. The Company has a variety of competitors depending on the
particular aspect of its business, many of which have far greater financial
resources and marketing staffs than the Company. There can be no assurance that
the Company will be able to compete successfully with these companies. See
"Business of the Company -- Competition."
Alcohol Testing
The alcohol detection equipment industry is highly competitive. The Alcohol
Testing Products Division of SAT competes with other small companies such as CMI
Inc., Intoximeters, Inc. and Lifeloc, Inc., which also offer alcohol testing
equipment. Although all of these competitors are believed currently to have
greater revenues than SAT from sales of alcohol testing devices, management is
of the opinion that only CMI, Inc., which is a subsidiary of MPD, Inc., may have
greater financial resources than SAT. In addition, several companies, including
Hoffman-LaRoche, Inc. ("Roche") and STC Technologies, Inc., offer an on-site
screening saliva based alcohol test. Roche has, and several of these other
companies may have, greater revenues and financial resources than the Company.
26
<PAGE> 36
Drug Testing
The Company has not received any revenues from U.S. Drug because its
products are still in the developmental stage. Currently U.S. Drug is developing
two products which will screen for the presence of drugs of abuse, one which
will utilize flow immunosensor technology with urine samples as a medium of
testing and another which will utilize flow immunosensor technology with saliva
samples as a medium of testing. If the products are developed, U.S. Drug will
compete with many companies which currently utilize urine samples as a medium of
testing, such as Syva, a division of Behring Diagnostics ("Syva"), Roche, Marion
Laboratories, Inc. ("Marion"), Abbott Laboratories, Inc. ("Abbot"), Editek, Inc.
("Editek"), Hycor Biomedical, Inc. ("Hycor"), Princeton Biomedical, Inc.
("Princeton") and BioSite, Inc. ("BioSite"), major pharmaceutical or medical
diagnostic companies which also provide substance abuse screening methods.
Currently, to management's knowledge, no competitor is offering a saliva based
testing product on an "on site" basis for drugs of abuse. However, management
has been advised that at least two and possibly more companies may have such
product under development and, accordingly, there can be no assurance that a
competitor will not offer such a product in the future. Even if no such product
is offered, U.S. Drug anticipates competition from other substance abuse
detection methods provided by the major companies mentioned in this paragraph.
If U.S. Drug successfully completes development of first its saliva sample
testing method and second its urine sample testing method, as to which there can
be no assurance, it is not certain whether U.S. Drug will have the financial
resources to compete successfully with other companies which have greater
financial resources available to them without the assistance of a major
pharmaceutical or other company possessing such resources. There can be no
assurance that the assistance of such a company can be obtained, especially
because none is currently being sought. In addition, U.S. Drug's delay in
bringing a drug testing product to market may adversely affect its future
marketing efforts because of the name recognition gained by competitors actively
marketing a product during this interim period.
Human Resource Provider Operations
The Employer Services Division (formerly the ProActive subsidiary) is a
single source service provider, meaning that it is a provider of both substance
abuse testing services and background screening services. A single source
service provider is a relatively new concept. Additionally, the Company, through
the acquisition in May 1996 of RSA (now the Robert Stutman & Associates
Consulting Division), can also provide customized risk management loss
prevention services specifically designed to reduce the negative effect of
workplace substance abuse. The competition from single source providers which
the Employer Services Division currently encounters is primarily from smaller
local and regional companies. To management's knowledge, currently there is no
single source provider on a national level, which is what the Employer Services
Division provides, and there are no other providers of customized programs and
policies like the Robert Stutman & Associates Consulting Division. However,
Laboratory Corporation of America ("Lab Corp."), through Med-Express, is
currently offering background screening services to corporations on a limited
basis. Although the Employer Services Division has experienced personnel in both
the drug testing and investigative arena, there can be no assurance that the
Employer Services Division will become successful in marketing its services as a
single source provider on a national level. In addition, the Employer Services
Division faces 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 "Risk Factors" as it relates to
substance abuse testing providers (including the laboratories which are vendors
to the Employer Services Division), and local or regional investigative firms or
private investigators (including vendors to the Employer Services Division) as
it relates to background investigative services. Assuming that the combined
operations of the Robert Stutman & Associates Consulting Division and the
Employer Services Division 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 these SAT operations.
8. No Common Stock Dividends. SAT has not paid any cash dividends on the
SAT Common Stock and, based on the Company's cash requirements and continuing
losses, does not anticipate paying cash dividends on the SAT Common Stock in the
foreseeable future. See "The Merger and Related Matters -- Summary of the Terms
of the SAT Common Stock -- Dividends."
27
<PAGE> 37
9. Depressive Effect on Market of Warrant or Option Exercises, Untimely
Sales by Selling Securityholders and Sales of Shares Received upon Merger. Any
exercise of the outstanding Common Stock purchase warrants of SAT will increase
the shares available for public trading, which may depress the public market
price for the SAT Common Stock. Pursuant to a Prospectus dated October 4, 1996
(the "October 4 Prospectus"), SAT is offering an aggregate of 2,000,000 shares
of the SAT Common Stock issuable upon the exercise of Common Stock purchase
warrants expiring December 17, 1999 (the "December 17 Warrants"), all of which
shares could be reoffered by the holders thereof. Because none of the holders is
an "affiliate" of SAT (as such term is defined in Rule 405 under the Securities
Act), Gold & Wachtel, LLP, general counsel to SAT, is of the opinion that such
holders will not require for resale of the underlying shares a prospectus naming
them as selling stockholders and otherwise complying with Section 10(a)(3) of
the Securities Act. In addition, as of March 31, 1997, selling stockholders
named in the October 4 Prospectus were offering an aggregate of 4,051,746 shares
of the SAT Common Stock when and if Common Stock purchase warrants expiring
between May 17, 1997 and July 18, 2003 are exercised. The October 4 Prospectus
also relates to the resale by selling stockholders named therein (including the
Chairman of the Board and Chief Executive Officer of SAT) of an aggregate of
500,000 shares of the SAT Common Stock issued upon the acquisition of RSA (which
were part of 3,000,000 shares of the SAT Common Stock (the "Acquisition Shares")
registered by SAT under the Securities Act in its Registration Statement on Form
S-1, File No. 33-43337 (the "January 1992 Registration Statement"), for future
acquisitions) and an aggregate of 1,165,174 other shares previously issued upon
the exercise of Common Stock purchase warrants and a stock option. SAT has also
filed the January 1997 Registration Statement, which relates to the issuance by
SAT of (a) up to an aggregate of 3,402,500 shares of the SAT Common Stock
issuable upon the exercise of the June 30 Warrants, most of the Common Stock
purchase warrants expiring three years from the effective date of the January
1997 Registration Statement (the "April Warrants") and most of Common Stock
purchase warrants granted or to be granted to employees of the Company (the
"Employee Warrants") and (b) up to an aggregate of 2,500,000 shares upon the
conversion of the Convertible Notes, all of which 5,902,500 shares could be
reoffered by the holders thereof. Because none of the holders of the Common
Stock purchase warrants to purchase an aggregate of 3,045,000 shares and neither
of the holders of the Convertible Notes is an "affiliate" of SAT (as such term
is defined in Rule 405 under the Securities Act), Gold & Wachtel, LLP, general
counsel to SAT, is of the opinion that each such holders will not require for
resale of the underlying shares a prospectus naming him or it as a selling
stockholder and otherwise complying with Section 10(a)(3) of the Securities Act.
The January 1997 Registration Statement also relates to the offer by the selling
stockholders named therein of an aggregate of 637,500 shares when and if two of
the April Warrants, a Common Stock purchase warrant expiring December 2,
1999 (the "December 2 Warrant"), the Directors Warrants and the Lenders Warrants
are exercised. Accordingly, because the last of these SAT warrants do not expire
until July 18, 2003, the potential exercises of these warrants and conversions
of the Convertible Notes and the subsequent sales thereof may act as an overhang
on the market for the SAT Common Stock for a long period. With the filing of the
January 1997 Registration Statement, SAT has fulfilled the last of its
registration rights commitments. Such commitments relate to an aggregate of
16,256,920 shares of the SAT Common Stock. In addition, SAT may, under certain
circumstances, be required to amend the January 1992 Registration Statement so
that the holders may reoffer an aggregate of 967,321 shares of the Acquisition
Shares already issued (other than to the former RSA shareholders) and an
aggregate of 1,532,679 shares of the Acquisition Shares to be issued with
respect to future acquisitions by SAT. (See "The Merger and Related Matters --
Summary of the Terms of the SAT Common Stock -- Acquisition Shares.")
As of March 31, 1997, the 4,051,756 shares described in the preceding
paragraph were reserved for issuance upon the exercise of the following Common
Stock purchase warrants: (a) 175,495 shares of SAT Common Stock issuable upon
the exercise at exercise prices ranging between $1.87 and $4.00 per share of
Common Stock purchase warrants expiring between September 16, 1997 and December
31, 1997; (b) 61,250 shares issuable upon the exercise at exercise prices
ranging between $1.0625 and $4.00 per share of Common Stock purchase warrants
expiring between May 17, 1997 and September 1, 1998; (c) 77,500 shares issuable
upon the exercise at exercise prices ranging between $2.00 and $2.50 per share
of Common Stock purchase warrants expiring between September 1, 1998 and
December 31, 2001; (d) 60,000 shares issuable upon the exercise at $1.9375 per
share of Common Stock purchase warrants expiring November 15, 1998 issued to
non-
28
<PAGE> 38
employee directors of SAT and a consultant (who is now a director); (e) 500,000
shares issuable upon the exercise of three Common Stock purchase warrants
expiring November 15, 1998 (as to 200,000 shares at $1.9375 per share), November
15, 2000 (as to 150,000 shares at $3.00 per share) and November 15, 2000 (as to
150,000 shares at $2.00 per share) issued to a director in connection with his
services in a capacity other than as a director, including those related to the
then pending private placement pursuant to Regulation D under the Securities
Act; (f) 300,000 shares issuable upon the exercise at $2.125 per share of a
Common Stock purchase warrant expiring April 17, 1999 issued to the same
director for other services not in his capacity as a director; (g) 235,000
shares issuable upon the exercise at exercise prices ranging between $1.875 and
$2.8175 per share of Common Stock purchase warrants expiring between August 27,
1998 and July 18, 2003 issued to employees of the Company; (h) 189,376 shares
issuable upon the exercise of $2.00 per share of a Common Stock purchase warrant
expiring March 31, 1999 issued to RSA as a consultant to ProActive in
consideration of its services rendered to ProActive operations (the warrant
being divided among the RSA shareholders after the acquisition of RSA by SAT);
(i) 3,125 shares issuable upon the exercise at $2.00 per share of a Common Stock
purchase warrant expiring December 13, 1999 issued to the Chief Executive
Officer of SAT for his prior services as a consultant to SAT and ProActive; (j)
792,000 shares issuable upon the exercise at $2.125 per share and 108,000 shares
issuable upon the exercise at $3.125 per share of Common Stock purchase warrants
expiring May 20, 1999 issued to the RSA shareholders as part of the RSA purchase
price; (k) 200,000 shares issuable upon the exercise at $2.125 per share and
400,000 shares issuable upon the exercise at $3.125 per share of a Common Stock
purchase warrant expiring May 12, 2003 issued to the President of SAT; (l)
700,000 shares issuable upon the exercise at $2.00 per share of a Common Stock
purchase warrant expiring February 26, 1999 issued to a consultant to SAT for
financial public relations services; (m) 100,000 shares issuable upon the
exercise at $2.17 per share of Common Stock purchase warrants expiring October
19, 2000 issued to the placement agents for a private placement pursuant to
Regulation S under the Securities Act; and (n) 150,000 shares issuable upon the
exercise at $2.25 per share of a Common Stock purchase warrant expiring January
29, 2000 issued to an individual in connection with settlement of a litigation
against SAT. The 4,051,746 shares of the SAT Common Stock issuable upon the
exercise of the warrants described in this paragraph have all been registered
under the Securities Act for resale by the holders thereof as described in the
preceding paragraph. All of the foregoing Common Stock purchase warrants were
granted at or above the fair market value of the SAT Common Stock on the
respective date of grant. There was also reserved, as of March 31, 1997, 185,207
shares issuable upon the conversion of the shares of the Class A Preferred
Stock, $.01 par value (the "Class A Preferred Stock"). If all of the 4,051,746
shares issuable upon the exercises of the foregoing Common Stock purchase
warrants, the 185,207 shares issuable upon the conversion of the Class A
Preferred Stock, the aggregate of 500,000 and other outstanding shares and the
aggregate of 3,540,000 shares issuable upon the exercise of the December 17
Warrants, the April Warrants, the Employee Warrants, the December 2 Warrant, the
Directors Warrants and the Lenders Warrants as described in the preceding
paragraph and, after July 1, 1997, the aggregate of 5,000,000 shares that could
be issued upon the conversions of the Convertible Notes and the exercises of the
June 30 Warrants, or a substantial number of the foregoing shares, publicly sold
over a short time period, the market price of the SAT Common Stock could decline
significantly because the market might lack the capacity to absorb a large
number of shares during a brief period. Such a decline in market price may make
the terms of any future financing more difficult for SAT to consummate on a
favorable basis.
To the extent that the Merger is consummated, an aggregate of 557,524
shares of the SAT Common Stock will be issued to the Good Ideas Minority
Stockholders. To the extent that the U.S. Drug Merger is consummated, an
aggregate of 2,789,478 shares of the SAT Common Stock will be issued to the
minority stockholders of U.S. Drug. The aggregate of 3,347,002 shares of the SAT
Common Stock issued on such transactions will, with limited exceptions, be
freely tradeable and, if a substantial number of these shares were offered for
sale at the same time, such offerings could have a similar adverse impact as
described in the second preceding paragraph.
10. Technological Changes. The substance abuse testing industry is a
technologically sensitive industry in that companies are constantly developing
new methods and making changes to current methods for substance abuse detection
in order to remain competitive. SAT competes, and, when its development stage
for a saliva based test and a urine based test are completed, U.S. Drug will
compete, with larger companies such
29
<PAGE> 39
as those named under "Business of the Company -- Competition," many of which
have substantially greater financial resources available to them to invest in
the research and development of their products than SAT and U.S. Drug. These
competitors may develop products in the future which may render SAT's and U.S.
Drug's products obsolete or non-competitive from a pricing point of view. To
remain competitive, SAT and U.S. Drug may require substantial financial
resources for personnel and other costs to conduct research and update current
products to reflect the technological advances; however, such financial
resources may not be available. See the section "Need for Financing" under this
caption "Risk Factors" and "Business of the Company-Competition."
11. Market Limitation for Alcohol Testing Products. The potential markets
for SAT's alcohol testing products may be substantially limited to the ones in
which it currently sells -- law enforcement, correctional facilities, medical
and clinical facilities, alcohol treatment centers and emergency rooms. This
market insofar as alcohol testing is concerned may be saturated and the
opportunity for growth limited; however, management of SAT believes that the
demand for alcohol testing could grow in the industrial market, in which SAT
does some current selling, on a broader basis as did the demand for drug testing
at an earlier date. There can be no assurance that such growth will occur or
that, if the growth occurs, SAT will successfully penetrate the industrial
market. See the sections "Marketing" and "Competition" under the caption
"Business of the Company."
12. Other Conflicts of Interest. As of February 28, 1997, 60.8% of the
outstanding shares of Good Ideas Common Stock were held by SAT. Since July 1992,
SAT has provided certain management and administrative services to Good Ideas.
As of December 31, 1996, there was a note receivable from SAT to Good Ideas in
the amount of $1,972,000, which is due on the earliest of (a) five business days
after the end of the consent solicitation period for the Merger, which ends 60
days from the Record Date, (b) five business days after the Effective Date or
(c) April 30, 1997. For additional information relating to the relationships
between SAT and Good Ideas, see the section "SAT Affiliations of Good Ideas
Directors" under this caption "Risk Factors;" "Material Contacts of SAT with
Good Ideas;" "SAT Principal Stockholders;" "Good Ideas Principal Stockholders;"
and "SAT Management."
13. Sale of Good Ideas. As indicated under "Summary -- The
Merger -- Prospective Sale of Good Ideas," SAT has been trying to sell the
assets or stock of Good Ideas and is attempting to close on an offer to purchase
Good Ideas inventory for $225,000 (less amounts previously purchased) and
intends to liquidate Good Ideas not later than the date on which the results of
the consent solicitation for the Merger are known (assuming no sale of stock,
which management deems unlikely). Even if Good Ideas is sold in addition to the
contemplated sale of inventory, it is highly likely that SAT will realize less
than the $1,723,682 for which consideration SAT received its shares of the Good
Ideas Common Stock. See "Summary -- Background of the Company." Since March 31,
1996, Good Ideas has been reported in the Company's financial statements as a
discontinued operation and, accordingly, any such loss on sale will not impact
the Company's financial statements unless the actual losses exceed those
provided by the Company through December 31, 1996. See "The Company's Financial
Statements" and Good Ideas' Financial Statements."
14. Fluctuating Market Price. Because SAT has up to 60 days to solicit
the requisite consents of the Good Ideas Minority Stockholders, the market price
of the SAT Common Stock could fluctuate between the Record Date and the date on
which the requisite consents are received, thereby making it seem unfair to the
Good Ideas Minority Stockholders if the price has significantly dropped and
unfair to the SAT stockholders if the market price has significantly risen. Each
Board has reserved the right to rescind the Merger at any time prior to filing
the Certificate of Merger if, based on the opinion of its outside counsel, the
Board determines that making the offer to the Good Ideas Minority Stockholders
to adopt the Merger Agreement could reasonably be deemed to cause the directors
to breach their fiduciary duties under applicable law to their respective
stockholders. There can be no assurance, however, that the Board will interpret
a particular market fluctuation to cause such a breach as to rescind the Merger.
30
<PAGE> 40
TERMS OF THE TRANSACTION
CONSENT SOLICITATION STATEMENT/PROSPECTUS
Pursuant to this Consent Solicitation Statement/Prospectus, the Good Ideas
Minority Stockholders are being requested to consent to a proposal to adopt the
Merger Agreement, a copy of which is attached hereto as Appendix A and is
incorporated into this Consent Solicitation Statement/Prospectus by this
reference, providing for the merger of Acquisition Corp. with and into Good
Ideas (i.e., the Merger), the conversion of shares of the Minority Good Ideas
Common Stock into shares of the SAT Common Stock on the basis set forth in the
Merger Agreement and the conversion of the Good Ideas Warrants to acquire Good
Ideas Common Stock into equivalent SAT Merger Warrants adjusted for the exchange
rate set forth in the Merger Agreement. Because there are no outstanding stock
options to purchase shares of the Good Ideas Common Stock, no SAT security will
be issued in lieu thereof. See the subsections "Terms of the Merger Agreement-
Conversion of Shares" and "Good Ideas Options and Warrants" under the caption
"The Merger and Related Matters" for more detailed information. On the Record
Date, there were holders of record of the Good Ideas Minority Common
Stock.
THE MERGER
Pursuant to the Merger Agreement, at the Effective Date, each outstanding
share of the Good Ideas Common Stock, other than the shares owned by SAT, will
be converted into .36 of a share of the SAT Common Stock. Each share of the Good
Ideas Common Stock owned by SAT, except for ten shares, will be canceled upon
the Merger. Pursuant to the SAT Board's authorization on December 3, 1996, the
portion of a share of the SAT Common Stock to be received for each share of the
Minority Good Ideas Common Stock was to be determined on the basis of the
following formula: (a) if the Market Value of the SAT Common Stock (as
hereinafter defined) has been $1.50 per share, SAT would have offered .375 of a
share of the SAT Common Stock for each share of the Minority Good Ideas Common
Stock; (b) if the Market Value of the SAT Common Stock had been above $1.50 and
not more than $1.75 per share, SAT would have offered .34375 of a share of the
SAT Common Stock for each share of the Minority Good Ideas Common Stock; (c) if
the Market Value of the SAT Common Stock had been above $1.75 and not more than
$2.00 per share, SAT would have offered .3125 of a share of the SAT Common Stock
for each share of the Minority Good Ideas Common Stock; (d) if the Market Value
of the SAT Common Stock had been above $2.00 and not more than $2.25 per share,
SAT would have offered .28125 of a share of the SAT Common Stock for each share
of the Minority Good Ideas Common Stock; (e) if the Market Value of the SAT
Common Stock had been above $2.25 and not more than $2.50 per share, SAT would
have offered .25 of a share of the SAT Common Stock for each share of the
Minority Good Ideas Common Stock; (f) if the Market Value of the SAT Common
Stock had been more than $2.50 per share, SAT would have offered .25 of a share
of the SAT Common Stock for each share of the Minority Good Ideas Common Stock,
but reserved the right to withdraw the offer; and (g) if the Market Value of the
SAT Common Stock had been below $1.50 per share, SAT would have offered .375 of
a share of the SAT Common Stock for each share of the Minority Good Ideas Common
Stock, but reserved the right to withdraw the offer. The Market Value of the SAT
Common Stock was to be the average of the closing sales prices per share of the
SAT Common Stock as reported on the American Stock Exchange during the 30 days
prior to the Record Date. On February 17, 1997, in order to eliminate
speculation as to the number of SAT shares to be issued, the SAT Board
determined that the market value of a share of the SAT Common Stock would be
assumed to be $1.625, which was the closing sales price on February 14, 1997
(the prior trading day), and set the exchange ratio at .36 of a share of the SAT
Common Stock for each share of the Minority Good Ideas Common Stock. An
aggregate of 557,524 shares of the SAT Common Stock will be issued to the Good
Ideas Minority Stockholders, subject to adjustment for fractional shares. Prior
to the Merger, SAT owned 60.8% of Good Ideas; after the Merger, SAT will own
100% of Good Ideas. Assuming that the U.S. Drug Merger is not consummated and
there are no exercises of outstanding Common Stock purchase warrants or any
conversions of the Series A Preferred Stock or the Convertible Notes between the
date of this Consent Solicitation Statement/Prospectus and the Effective Date,
the existing SAT stockholders will own 98.5% of the outstanding shares of the
SAT Common Stock and the Good Ideas Minority Stockholders will own 1.5%. If the
U.S. Drug Merger is also
31
<PAGE> 41
consummated, the Good Ideas Minority Stockholders will own 1.4%, of the
outstanding shares of the SAT Common Stock. See "The Merger and Related Matters"
for more detailed information concerning the terms of the Merger.
If the Merger is not consummated, Good Ideas and SAT will continue to be
publicly-owned companies and Good Ideas will continue to be a majority-owned
subsidiary of SAT. However, SAT has been seeking a purchaser for Good Ideas,
and, if no acceptable offer is received, intends to liquidate Good Ideas after
the results of the consent solicitation for the Merger are known.
VOTING RIGHTS
The Record Date for the determination of the stockholders of Good Ideas
entitled to notice of the consent solicitation and to consent hereunder is April
, 1997 as fixed by the Board of Directors of Good Ideas on April ,
1997 pursuant to Section 213(b) of the GCL.
On the Record Date, there were 3,948,680 shares of the Good Ideas Common
Stock issued and outstanding, of which 2,400,000 shares (60.8%) were owned by
SAT and 1,548,680 shares (39.2%) by stockholders other than SAT (i.e., the Good
Ideas Minority Stockholders). See "Good Ideas Principal Stockholders" for
information, as of the Record Date, regarding persons known by Good Ideas to own
beneficially 5% or more of the Good Ideas Common Stock as of the Record Date and
as to stock ownership of directors and executive officers of Good Ideas. Each
share of the Minority Good Ideas Common Stock is entitled to one vote. Although,
under Section 251 of the GCL, SAT, as the majority stockholder of Good Ideas,
could adopt the Merger Agreement without the consent of any other Good Ideas
stockholder, the Boards of Directors of SAT and Good Ideas have agreed that, as
a condition to the adoption of the Merger Agreement, the affirmative consent of
the holders of at least 50% of the outstanding shares of the Good Ideas Common
Stock owned by stockholders other than SAT is required for the adoption of the
Merger Agreement. Holders of the Minority Good Ideas Common Stock are entitled
to dissenters rights under Section 262 of the GCL as to the vote with respect to
the adoption of the Merger Agreement. See the section "The Consent
Procedure -- Rights of Dissenting Good Ideas Shareholders" under this caption
"Terms of the Transaction."
THE CONSENT PROCEDURE
(1) Statutory Basis
Unless a corporation's certificate of incorporation otherwise provides,
Section 228 of the Delaware General Corporation Law (the "GCL") permits
stockholders' actions without a meeting of stockholders and without prior notice
if a consent or consents in writing, setting forth the action so taken, is
signed by the holders of the outstanding shares of the voting stock having not
less than the minimum number of votes that would be necessary to take such
action at a meeting at which all shares entitled to vote thereon were present.
Good Ideas' certificate of incorporation does not otherwise provide, so that a
consent procedure pursuant to Section 228 of the GCL may be utilized by SAT.
Under the applicable provision of the GCL, such action is effective when written
consents from holders of record of the minimum number of outstanding shares of
the voting stock necessary to authorize the action are executed and delivered to
the corporation within 60 days of the earliest dated consent delivered in
accordance with the GCL to the corporation. Under Section 251 of the GCL, a
domestic corporation may be merged with and into another domestic corporation by
the affirmative vote of the record holders of more than 50% of the outstanding
shares of the voting stock acting without a meeting and without prior notice.
Accordingly, SAT as the owner of 60.8% of the Good Ideas Common Stock, which is
the sole voting stock of Good Ideas, could adopt the Merger Agreement without
any other stockholder voting in favor of the adoption of the Merger Agreement.
Notwithstanding the foregoing, the Merger Agreement provides that it is a
condition to the consummation of the Merger that the record holders of more than
50% of the outstanding shares of the Good Ideas Common Stock owned by Good Ideas
stockholders other than SAT (i.e., the Good Ideas Minority Stockholders) consent
to the adoption of the Merger Agreement. SAT will execute and deliver a consent
to the adoption of the Merger Agreement as a stockholder of Good Ideas only
after the holders of more than 50% of the outstanding shares of the Minority
Good Ideas Common Stock have consented in order to permit the filing of a
Certificate of Merger in Delaware
32
<PAGE> 42
pursuant to the GCL and the terms of the Merger Agreement. SAT and Good Ideas
have agreed not to waive the requirement as to the approval by the Good Ideas
Minority Stockholders of the Merger Agreement and SAT has agreed not to execute
and deliver its consent to the adoption of the Merger Agreement if such approval
is not obtained.
(2) Procedure to Consent
UNDER THE GCL, ONLY HOLDERS OF RECORD ON THE RECORD DATE ARE ELIGIBLE TO
GIVE THEIR CONSENT TO THE ADOPTION OF THE MERGER AGREEMENT. ANYONE OWNING SHARES
BENEFICIALLY (BUT NOT OF RECORD), SUCH AS A PERSON WHOSE OWNERSHIP OF SHARES IS
THROUGH A BROKER, BANK OR OTHER FINANCIAL INSTITUTION, WHO WISHES TO GIVE THEIR
CONSENT SHOULD CONTACT THAT BROKER, BANK OR FINANCIAL INSTITUTION WITH
INSTRUCTIONS TO EXECUTE THE WHITE FORM OF CONSENT ON HIS OR HER BEHALF OR TO
HAVE THE BROKER, BANK OR FINANCIAL INSTITUTION'S NOMINEE EXECUTE THE CONSENT.
SAT is soliciting the written consents referred to herein and, if
stockholders wish to give their consent, the white consent card should be
returned to Georgeson & Company Inc., Wall Street Plaza, New York, New York
10005, in the enclosed envelope, or to Good Ideas Enterprises, Inc., 10410
Trademark Street, Rancho Cucamonga, California 91730, Attention: Secretary.
(3) Revocation
An executed consent card may be revoked at any time before expiration by
delivering a written dated revocation before the time that sufficient unrevoked
consents have been received to authorize the action for which consents are
solicited. Consents must be received within 60 days after the first consent is
delivered to Good Ideas. A revocation may be in any written form validly signed
by the record holder as long as it clearly states that the consent previously
given is no longer effective. The delivery of a subsequently dated consent card
which is properly completed will constitute a revocation of any earlier consent.
The revocation may be delivered to Georgeson & Company Inc., Wall Street Plaza,
New York, New York 10005 or to Good Ideas Enterprises, Inc., 10410 Trademark
Street, Rancho Cucamonga, California 91730, Attention: Secretary.
(4) Miscellaneous
ABSTAINING FROM GIVING A CONSENT OR NOT RETURNING A SIGNED CONSENT WILL
HAVE THE SAME EFFECT AS WITHHOLDING CONSENT TO THE PROPOSED ACTION. IF YOU ARE
THE STOCKHOLDER OF RECORD AND YOU WISH TO GIVE YOUR CONSENT, PLEASE SIGN, DATE
AND RETURN THE ENCLOSED WHITE CONSENT CARD PROMPTLY IN THE ENVELOPE PROVIDED.
IF YOUR SHARES OF THE GOOD IDEAS COMMON STOCK ARE HELD IN THE NAME OF A
BROKERAGE FIRM, BANK OR NOMINEE, ONLY THEY CAN CONSENT TO THE PROPOSED ACTION
AND ONLY UPON RECEIPT OF YOUR SPECIFIC INSTRUCTIONS. ACCORDINGLY, IF YOU WISH TO
GIVE YOUR CONSENT, PLEASE CONTACT THE PERSON RESPONSIBLE FOR YOUR ACCOUNT AND
GIVE INSTRUCTIONS FOR SUCH SHARES IMMEDIATELY.
SAT will pay all of the costs and expenses in connection with the
preparation, printing and distribution of this Consent Solicitation
Statement/Prospectus, including, without limitation, attorneys' fees, accounting
fees and printing expenses, and all other expenses with respect to the Merger
and the related transactions except for the fees and expenses of Whale
Securities in delivering a fairness opinion for the benefit of the Good Ideas
Minority Stockholders and the fees and disbursements of Good Ideas' special
counsel. For an itemized list of SAT's and Good Ideas' estimated costs and
expenses, see "The Merger and Related Matters -- Fees and Expenses." Good Ideas
will pay a fee of $50,000 to Whale Securities for such services, together with
out-of-pocket expenses. SAT has retained Georgeson & Company Inc. to assist with
the solicitation of consents from the Good Ideas Minority Stockholders, for
which services Georgeson & Company Inc. will receive a fee of $3,750, together
with out-of-pocket expenses. In addition, the directors, officers and employees
of SAT, who
33
<PAGE> 43
will receive no additional compensation, will participate in the solicitations.
Consents may be solicited by personal interviews, telephone calls and telegrams
to supplement the solicitation by mail. Arrangements will also be made with
banks, brokerage houses and other custodians, nominees and fiduciaries for the
forwarding of consent solicitation materials to the beneficial owners of stock
held of record by such persons, and SAT will reimburse such custodians, nominees
and fiduciaries for reasonable out-of-pocket expenses incurred by them in
connection therewith.
Good Ideas has been advised that each of William D. Robbins, the Chief
Executive Officer until December 31, 1996 and a director of Good Ideas, who owns
200,000 shares of the Minority Good Ideas Common Stock, and Michael S. McCord, a
director of Good Ideas since May 31, 1996 and a director of SAT since October
22, 1996, who owns 10,000 shares of the Minority Good Ideas Common Stock,
intends to consent with respect to his 200,000 and 10,000 shares, respectively,
of the Minority Good Ideas Common Stock or in the aggregate 13.6% thereof in
favor of adoption of the Merger Agreement. Each of the other directors of Good
Ideas (Robert Stutman and Linda H. Masterson) has advised Good Ideas that he or
she does not own any shares of the Minority Good Ideas Common Stock.
Each of the SAT directors (other than Mr. McCord) and executive officers
has advised SAT that he or she does not own any shares of the Minority Good
Ideas Common Stock. James C. Witham and Karen B. Laustsen, who were directors
and executive officers of SAT until April 18, 1996, and Gary S. Wolff, who was
an executive officer of SAT until July 3, 1996, ceased to be directors of Good
Ideas on May 31, May 28 and July 3, 1996, respectively. The officerships of
Messrs. Witham and Wolff in Good Ideas simultaneously terminated with their
directorships. Their Good Ideas stock options to purchase an aggregate of 22,500
shares of the Good Ideas Common Stock have terminated pursuant to the terms
thereof. They have also advised SAT that they do not own any shares of the Good
Ideas Common Stock.
Even assuming that Messrs. Robbins and McCord submit consents as indicated,
SAT has determined that SAT will not proceed with the Merger unless SAT has
received consents from the holders of at least 50% of the outstanding shares of
the Minority Good Ideas Common Stock without including the aggregate of 210,000
shares held by these persons. Accordingly, the consent of the holders of 774,341
shares or 57.8% of the 1,338,680 shares of the Minority Good Ideas Common Stock
will be necessary to consummate the Merger. If the Merger is consummated,
Messrs. Robbins and McCord will receive shares of the SAT Common Stock for their
shares of the Minority Good Ideas Common Stock on the same basis as the other
Good Ideas Minority Stockholders.
(5) Rights of Dissenting Good Ideas Stockholders
Under Section 262(a) of the GCL, appraisal rights are available to a holder
of the Minority Good Ideas Common Stock in connection with the consummation of
the Merger who is a stockholder of record on the date of demand for appraisal,
who continuously holds the shares through the Effective Date, who complies with
the procedural requirements of subsection (d) of Section 262 and who has not
consented to the Merger. Under subsection (d) of Section 262, Good Ideas either
before the Effective Date, or SAT within ten days thereafter, is required to
give notice, to any holder of the Minority Good Ideas Common Stock who is
entitled to appraisal rights, of the approval of the Merger and the Effective
Date. The holder may, within 20 days after the date of mailing of the notice,
demand in writing from SAT the appraisal of the holder's shares. Pursuant to
subsection (e) of Section 262, within 120 days after the Effective Date, either
SAT or the stockholder entitled to appraisal rights may file a petition in the
Court of Chancery of the State of Delaware demanding a valuation of the stock of
such stockholder. At any time within 60 days of the Effective Date, the
stockholder may withdraw the demand for appraisal and accept the terms of the
Merger. Within 120 days after the Effective Date, any stockholder who has
complied with the requirements of Section 262, upon written request, shall be
entitled to receive from SAT, within ten days after the later of the request by
the stockholder or the expiration of the period for demands for appraisal, a
written statement setting forth the aggregate number of shares not voted in
favor of the Merger and with respect to which demands for appraisal have been
received.
If the petition has been filed by the stockholder, service will be made on
SAT which then must within 20 days file in the office of the Register in
Chancery a verified list containing the names and addresses of all
34
<PAGE> 44
stockholders who have demanded appraisal for their shares and with whom
agreements as to the value of their shares have not been reached by SAT. If SAT
filed the petition, SAT shall file the verified list with the petition. If
ordered by the Court, the Register in Chancery will give a notice of the time
and place fixed for the hearing on the petition by registered or certified mail
and also by publication in a newspaper of general circulation in Wilmington,
Delaware or such publication as the Court deems advisable.
The Court may require the stockholders who have demanded approval for their
shares to submit their certificates of stock to the Register in Chancery for
notation thereon of the pendency of the appraisal proceedings and, if any
stockholder fails to comply with such directive, the Court may dismiss the
proceedings as to such stockholder.
After determining the stockholders entitled to appraisal, the Court will
appraise the shares, determining their fair value exclusive of any elements of
value arising from the accomplishment or expectation of the Merger, together
with a fair rate of interest, if any, to be paid upon the amount to be
determined to be the fair value. The costs of the proceeding may be determined
by the Court and taxed upon the parties as the Court deems equitable in the
circumstances. Payment shall be made to the stockholder upon the surrender of
the stock certificate(s) to SAT.
From and after the Effective Date, no stockholder who has demanded
appraisal rights shall be entitled to vote or to receive dividends or other
distributions unless the appraisal demand is terminated as provided in Section
262.
A copy of Section 262 of the GCL is annexed hereto as Appendix C and is
incorporated herein by this reference.
THE MERGER AND RELATED MATTERS
REASONS FOR THE MERGER AND APPROVAL
(1) Authorization
On November 16, 1995, the Board of Directors of SAT approved in principle
the acquisition of the minority stockholder interests in Good Ideas, i.e.,
taking Good Ideas private, without setting the consideration to be given to the
Good Ideas Minority Stockholders. On February 6, 1996, the SAT Board authorized
execution of a merger agreement, which included an offer of a fraction of a
share of the SAT Common Stock having a value of $1.00 per share for each share
of the Good Ideas Minority Stock, the determination to be based on the average
of the closing sales prices of the SAT Common Stock during the 30 calendar days
prior to the Record Date. In determining this exchange ratio, the SAT Board
considered, based on an application of the formula, a range as to the number of
shares of the SAT Common Stock to be issued to the Good Ideas Minority
Stockholders: approximately 800,000 shares as the maximum above which the SAT
Board would not want to proceed with the Merger because it would, in the SAT
Board's opinion, be unfair to the SAT stockholders and approximately 500,000
shares as the minimum below which the offer would, in the opinion of the SAT
Board, probably be unacceptable to the Good Ideas Minority Stockholders.
If the Merger is consummated, SAT's indebtedness to Good Ideas ($1,972,000
as of December 31, 1996) would be cancelled without using any of SAT's cash
other than to pay the cost of this "going private" transaction. However, because
SAT intends to liquidate Good Ideas if not sold, 60.8% of any liquidation
distribution to stockholders of Good Ideas would come back to SAT after all
creditors' claims were satisfied.
On April 12, 1996, the Board of Directors of Good Ideas authorized
execution of, and submission to the Good Ideas Minority Stockholders for
approval of a merger agreement incorporating the above exchange rate. Also in
making its determination as to the exchange rate, the Good Ideas Board
considered, based on an application of the formula, a range as to the number of
shares of the SAT Common Stock to be issued to the Good Ideas Minority
Stockholders: approximately 500,000 shares as the minimum below which the offer
would be unacceptable to the Good Ideas Board for offering to the Good Ideas
Minority Stockholders and approximately 800,000 shares as the maximum above
which the SAT Board would, in the opinion of the Good
35
<PAGE> 45
Ideas Board, reject as being unfair to the SAT stockholders. As of such date,
there were four directors of Good Ideas: James C. Witham and Karen B. Laustsen,
each of whom was, from SAT's incorporation until April 18, 1996, a director and
an executive officer of SAT, Gary S. Wolff, who was, from SAT's incorporation
until July 3, 1996, an executive officer of SAT and was, from SAT's
incorporation until September 26, 1995, a director thereof, and William D.
Robbins, the Chief Executive Officer of Good Ideas or its predecessor from their
respective incorporations until December 31, 1996. Each of Messrs. Witham and
Wolff and Ms. Laustsen was an employee of SAT and Mr. Robbins was an employee of
Good Ideas until December 31, 1996. Each of the foregoing is a securityholder of
SAT. Ms. Laustsen resigned as a director of Good Ideas effective May 28, 1996;
Mr. Witham resigned effective May 31, 1996; and Mr. Wolff resigned effective
July 3, 1996. Since May 31, 1996, the Good Ideas Board has, in addition to Mr.
Robbins, consisted of Robert M. Stutman, the Chairman of the Board, the Chief
Executive Officer and a director of SAT since April 18, 1996, Linda H.
Masterson, the President of SAT since May 13, 1996, a director of SAT since
September 26, 1995 and SAT's Chief Operating Officer from May 13, 1996 to
November 14, 1996, and Michael S. McCord, a director of SAT since October 22,
1996 (a consultant to the SAT Board of Directors from September 26, 1995 to
October 22, 1996). Mr. Stutman and Ms. Masterson are also employees of SAT and
all four directors are securityholders of SAT.
In reviewing the number of shares of the SAT Common Stock which may be
issued to the Good Ideas Minority Stockholders depending on the then market
price of the SAT Common Stock, both the SAT Board and the Good Ideas Board
considered the following data:
<TABLE>
<CAPTION>
THE NUMBER OF SHARES
IF THE MARKET PRICE OF THE TO BE OFFERED WILL
SAT COMMON STOCK IS BE
-------------------------- --------------------
<S> <C>
$ 1.00 1,548,680
$ 1.25 1,238,944
$ 1.50 1,032,453
$ 1.75 884,960
$ 2.00 774,340
$ 2.25 688,302
$ 2.50 619,472
$ 2.75 563,156
$ 3.00 516,227
</TABLE>
The Boards then made the assumption that the average of the closing sales prices
during the 30-day period preceding the Record Date was likely to be between
$1.75 and $2.50 per share and then, using their best judgment, the directors
settled on a range between approximately 500,000 and approximately 800,000
shares of the SAT Common Stock.
Both the SAT Board and the Good Ideas Board recognized in February 1996 and
April 1996, respectively, that, whether 500,000 or 800,000 shares were issued to
the Good Ideas Minority Stockholders as a result of the Merger, the difference
in such holders' percentage ownership of the SAT Common Stock would not be
significant as a result of the substantial number of shares of the SAT Common
Stock outstanding (less than 1% based on the 30,613,510 shares outstanding as of
December 31, 1995, i.e., 1.6% to 2.5%, and even less if the U.S. Drug Merger is
consummated as well and/or the then outstanding Common Stock purchase warrants
and options were exercised). In addition, both Boards recognized that, once the
Record Date was set, thereby locking in the number of shares to be offered, both
Boards would have a second chance to evaluate the fairness of the offer. The
Boards also recognized that, even after setting the number of shares in
accordance with the formula, the market price of the SAT Common Stock could
fluctuate either up or down during the 60-day solicitation period, thereby
affecting the value of the offer.
On November 18, 1996, the SAT Board, recognizing that circumstances had
changed between February 6 when the initial offer terms were approved and then,
proposed a revised formula based on the number of shares to be offered, the
exact number to be determined on the basis of the average of the closing sales
prices of the SAT Common Stock during the 30 calendar days prior to the Record
Date. For information as to this revised formula, see "Terms of The
Transaction -- The Merger." Among the changed circum-
36
<PAGE> 46
stances that the SAT Board considered were that the highest offer for Good
Ideas' assets which Good Ideas had received was $225,000, that the market price
for the Good Ideas Common Stock had dropped and delisting was more imminent (it
ultimately occurred effective January 1, 1997) and that the prospective revenues
to be derived from the Employer Services Division and the Robert Stutman &
Associates Consulting Division seemed more certain to be achieved at a minimal
expenditure as compared to the significant investment required to acquire new
toy product lines for Good Ideas with no assurance as to success in the highly
competitive toy industry. On December 3, 1996, both the SAT Board and the Good
Ideas Board approved the terms of the revised offer. Based on the formula, both
Boards recognized that a maximum of 580,755 shares and a minimum of 387,170
shares of the SAT Common Stock would be issued to the Good Ideas Minority
Stockholders. Both Boards concluded that the offer would be in a range of shares
acceptable to its stockholders and, accordingly, authorized execution of the
Merger Agreement. In making its review on November 18th, the Board took into
consideration the factors described in the preceding paragraph. The difference
in the holders' percentage ownership of the SAT Common Stock, based on the
35,603,092 shares outstanding as of September 30, 1996, continued not to be
considered significant -- still less than 1%, i.e., 580,755 shares is 1.6% and
387,170 is 1.1% of the outstanding shares after issuance to the Good Ideas
Minority Stockholders. The directors also analyzed the proposed new exchange
rate in light of the factors set forth in Item 8(b) of Schedule 13E-3 under the
Exchange Act, including current market prices, historical market prices, net
book value, going concern value and liquidation value. See the discussion in the
subsection "SAT Board Reasons" of this section "Reasons for the Merger and
Approval" under this caption "The Merger and Related Matters." The Boards also
considered the oral findings of Whale Securities as to the fairness of the
transaction from a financial point of view.
At a meeting held on February 17, 1997, the SAT Board met to discuss the
concern that, between January 23, 1997 when a $2.625 value was set for the
shares of the SAT Common Stock to be issued to the minority stockholders of U.S.
Drug and the record date for the consent solicitation for the U.S. Drug Merger
when the average of the closing sales prices of the SAT Common Stock during the
30 days prior thereto would be used to determine the specific number of shares
to be issued to the minority stockholders of U.S. Drug, there could be a
fluctuation in the market price of the SAT Common Stock as persons traded based
on the proposed exchange rate. The SAT directors were advised that the closing
sales price on February 14, 1997 was $1.625 per share and that the average of
the closing sales prices of the SAT Common Stock during the 30-day period prior
to January 23, 1997 was $1.74 per share, while the average in the 30 days prior
to February 17, 1997 was $1.78 per share. The SAT Board concluded that a $1.625
assumed market value for the SAT Common Stock seemed appropriate and that the
situation could again be reviewed when the record date was set, especially if a
considerable amount of time was to elapse. The SAT Board then applied the same
principles to the Good Ideas Merger and agreed that the same market value for
the SAT Common Stock should be used. The result would be an offer of .36 of a
share of the SAT Common Stock for each share of the Minority Good Ideas Common
Stock and the issuance of an aggregate of 557,524 shares of the SAT Common
Stock. The Good Ideas Board subsequently concurred.
In approving the Merger on December 3, 1996 and February 17, 1997, each of
the directors of Good Ideas and SAT reasonably believed that the Merger was fair
to the Good Ideas Minority Stockholders.
All actions taken by the Boards of Directors concerning the authorization
of the Merger Agreement and the transactions related thereto were unanimously
approved on December 3, 1996 and February 17, 1997, except that Lee S. Rosen, an
SAT director, on February 17, 1997, voted against fixing the market value of the
SAT Common Stock at $1.625 per share. He advised his fellow directors that,
although he believed that the .25 to .375 of a share exchange ratio was fair to
both the Good Ideas Minority Stockholders and the SAT stockholders, he favored a
$1.75 market value for determining the number of shares of the SAT Common Stock
to be issued or waiting until the 30-day average of closing prices preceding the
Record Date was determined as being more appropriate for the SAT stockholders
and not unfair to the U.S. Drug Minority Stockholders. Mr. Rosen favored the
$1.75 valuation price not only because he believed that using the average of the
closing sales prices over a 30-day period, rather than using the closing sales
price on one day, was a more preferable measure of determining the value to be
assigned to a SAT share, but also because such method of valuation resulted in
less shares of the SAT Common Stock being issued to the Good Ideas Minority
37
<PAGE> 47
Stockholders. Having rejected a similar argument with respect to the proposed
offer to the minority stockholders of U.S. Drug where the six other directors
concluded that the number of additional shares to be issued was not so material
as to dissuade them from approving an offer to the U.S. Drug minority
stockholders that was deemed by them more likely to be acceptable to the U.S.
Drug minority stockholders, the six other directors concluded that a similar
method of valuation should be applied with respect to the Good Ideas Minority
Stockholders. They believed that this resolution would in the end be beneficial
to both the SAT Stockholders and the Good Ideas Minority Stockholders by
terminating an operation that had only been a drain on the Company in a manner
that was fair to each set of stockholders. They also believed, as they did with
respect to the U.S. Drug offer, that it was important to end further speculation
as to the number of shares to be issued so that waiting until the Record Date
was set was not deemed appropriate. Ms. Laustsen abstained at the February 6,
1996 SAT Board meeting with respect to the initial transaction because of her
concern of being on both sides of the transaction. However, when Ms. Laustsen
voted as a Good Ideas director on April 12, 1996 in favor of the then proposal,
she said that she also supported the Merger as a SAT director.
On April , 1997, when the Record Date was set by the Good Ideas Board,
both the SAT Board and the Good Ideas Board reviewed the then market prices of
the SAT Common Stock and the Good Ideas Common Stock and the other factors
previously considered (see subsections (4) and (7) in this section "Reasons for
the Merger and Approval" under this caption "The Merger and Related Matters")
and concluded that no change should be made.
On February 17, 1997, SAT's Board, acting on behalf of SAT as the sole
stockholder of Acquisition Corp., adopted the Merger Agreement and, on February
17, 1997, Acquisition Corp.'s Board of Directors, consisting of Alan I. Goldman,
John C. Lawn and Peter M. Mark, who also serve as SAT directors, unanimously
auhorized execution of the Merger Agreement and approved the related
transactions.
(2) Attempts to Resolve Conflict of Interests
As a result of the interlocking historical relationships among the
directors of Good Ideas with SAT as described above, the Good Ideas Board of
Directors has never been independent of SAT and at least a majority of the
directors have owed fiduciary duties to both SAT and Good Ideas, creating a
conflict of interest, which has existed since SAT, through a subsidiary,
acquired a majority interest in Good Ideas in June 1992. However, specifically
with respect to the Merger, the Good Ideas Board approved certain safeguards in
an effort to assure fairness to the Good Ideas Minority Stockholders. First, the
Merger Agreement must be adopted by the holders of at least 50% of the
outstanding shares of the Minority Good Ideas Common Stock (excluding from such
calculation the 210,000 shares in the aggregate held by two directors of Good
Ideas), even though the consent of SAT alone is sufficient to adopt the Merger
Agreement in accordance with the GCL. Second, Rosenman & Colin LLP, a major law
firm, was engaged as independent counsel for Good Ideas. Such independent
counsel reviewed the Registration Statement and Merger Agreement, advised the
Good Ideas Board as to the foregoing documents and as to their fiduciary duties
and prepared an opinion as to certain tax consequences of the Merger. Lastly,
the Board of Directors of Good Ideas has received an opinion from Whale
Securities as to the fairness of the Merger to the Good Ideas Minority
Stockholders from a financial point of view as of the date of the opinion. The
Merger Agreement provides that the first and third protection for the Good Ideas
Minority Stockholders cannot be waived by any party.
The SAT Board and the Good Ideas Board each considered adding independent
directors to Good Ideas, but rejected the idea because of what each considered
the virtual impossibility, especially in light of potential director liability
concerns, of finding a person or persons to accept a directorship in a public
company knowing that it is in the process of going private, that SAT has
majority control of the Good Ideas Common Stock (63.6% of the outstanding shares
as of March 31, 1997 if the directors' shares are included) and that the
preference of the SAT Board is to sell or liquidate Good Ideas. Although SAT
could have attempted to cause Good Ideas to make it financially attractive for a
potential director to accept a directorship, both the SAT and Good Ideas Boards
believed that this would not be a prudent use of Good Ideas' money and that any
such payment or payments could be perceived as an improper inducement to such
person to favor the Merger.
38
<PAGE> 48
The SAT Board and the Good Ideas Board also considered engaging an
independent representative for Good Ideas to negotiate the terms of the
transaction, but concluded that, in view of the above safeguards to be used, the
expenditure to engage such a person did not appear justified. Because of Good
Ideas' declining revenues and increasing losses, the questions raised as to the
necessity of adding an entire new toy product line or lines for Good Ideas to be
competitive and the problems in the toy industry generally as described
elsewhere in this Consent Solicitation Statement/Prospectus (see "Business of
Good Ideas -- Overview"), the Boards concluded that Good Ideas' operations did
not warrant devoting a substantial amount of time and money to effecting a
"taking private" proposal by engaging an independent negotiator as opposed to
using the limited funds to meeting then operational requirements and adopting
the safeguards described in the second preceding paragraph.
(3) Determination of Terms
Commencing in October 1995, there were a series of meetings, including
those enumerated under the subsection "Authorization," at which either the SAT
directors or the Good Ideas directors discussed the concept of taking Good Ideas
private and ultimately set the terms therefor, including the exchange ratio and
using the mechanism of a merger rather than a tender offer. James C. Witham and
Karen B. Laustsen, who then sat on both Boards and who were contacted by certain
of the Good Ideas Minority Stockholders after SAT announced the proposed taking
private transaction, and Michael S. McCord, who was then a consultant to the SAT
Board and a stockholder in both SAT and Good Ideas, advised the other directors
as to the concerns expressed by certain minority stockholders to them.
Representatives of Rosenman & Colin LLP, special counsel to Good Ideas, met
with the Good Ideas directors on several occasions, advising them about their
fiduciary duties, complicated by the fact, as indicated above in the subsection
"Authorization" under this caption, that nearly all had dual responsibilities to
Good Ideas and SAT. Similarly Gold & Wachtel, LLP, general counsel to SAT,
advised the SAT directors at several meetings about their fiduciary duties. Both
counsel responded to questions about the applicability of the business judgment
rule to the proposed transaction.
Commencing in November 1995 a representative of Whale Securities met with
members of the Good Ideas Board on several occasions first to review the factors
to be considered in determining whether a SAT offer would be fair and, once the
exchange ratio was determined, the reasons why Whale Securities considered the
SAT exchange ratio to be fair to the Good Ideas Minority Stockholders. On May
20, 1996, the SAT directors met with such representative to review the
preliminary fairness opinion.
On November 18 and 19, 1996, respectively, the SAT and Good Ideas Boards
met, with a representative of Whale Securities attending the latter's meeting,
to discuss whether, in view of developments since April 12, 1996, there should
be a change in the terms of the offer to the Good Ideas Minority Stockholders.
The Boards then tested the revised formula under the criteria set forth in Item
8 of Schedule 13E-3 under the Exchange Act, including current market prices,
historical market prices, net book value, going concern value and liquidation
value and, based on the conclusion that the revised offer was fair, from a
financial viewpoint, to the Good Ideas Minority Stockholders, each Board
approved the offer on December 3, 1996.
(4) SAT Board Reasons
In considering the prospective terms of the Merger on November 18, 1996 and
in authorizing execution of the Merger Agreement on December 3, 1996 and
February 17, 1997, the Board of Directors of SAT took into consideration the
factors hereinafter set forth as the reasons for taking Good Ideas private. At
the same time the SAT Board concluded that the SAT offer pursuant to the Merger
was fair to the Good Ideas Minority Stockholders from a financial point of view
because of some, if not most, of these factors.
(a) The Company's best opportunity at obtaining profitability requires
synergistic operations.
Since February 1996, the SAT directors have been of the opinion that, for
the Company to have its best opportunity at increasing revenues and securing
profitability, it should focus solely on its alcohol and drug testing and human
resource provider operations as its core businesses, thereby necessitating the
divestitures of
39
<PAGE> 49
SAT's toy and rubber recycling products subsidiaries, the latter of which
divestitures was effected on April 30, 1996. The SAT Board believes that these
"core businesses," to which it has added, since the acquisition of RSA on May
21, 1996, being a designer of policies and programs on substance abuse
prevention, have a synergy with each other, which its toy and rubber recycling
operations did not have, and thereby make a more attractive investment for
stockholders and a better combination on which to build SAT for the future. The
SAT Board believed that taking this action of divestiture by SAT is consistent
with the trend by many companies against continuing to operate as a
conglomerate, especially when its non-related businesses have declining revenues
and operational losses. The SAT Board concluded that the foregoing description
of many a conglomerate was applicable to the Company and, by concentrating the
Company's activities on only synergistic operations, the Company would have its
best opportunity to seek profitability, as to which profitability there can be
no assurance. The SAT Board further believed that these divestitures would
enhance the value of the SAT Common Stock for the reasons stated in the second
preceding sentence. Accordingly, and in combination with the reasons set forth
below, including, without limitation, Good Ideas' declining revenues and
increasing losses even when it was fully operational, the SAT Board believed,
when the SAT directors initially set the exchange ratio, that the shares of the
SAT Common Stock would over time have greater value to the Good Ideas Minority
Stockholders than would their shares of the Minority Good Ideas Common Stock.
Even now with the expected liquidation of Good Ideas, the SAT Board believes
that the Good Ideas Minority Stockholder will realize more on such holder's .36
of a share of SAT Common Stock than on the liquidation value of a share of the
Minority Good Ideas Common Stock. See factor 4(c). There can, of course, be no
assurance as to what the value of a share of the SAT Common Stock will be when a
former Good Ideas Minority Stockholder seeks to sell the same.
Since SAT's acquisition of Good Ideas in 1992, the management of SAT has
completely changed. The current Board can only speculate as to the rationale of
the former management in making such an acquisition of an unrelated business.
Such decision was within the authority of the then directors and was a decision
presumably made on the basis of the then directors' business judgment as to what
was best for SAT and its stockholders in 1992. However, in the opinion of
current management, the toy industry has substantially changed since 1992 and
the SAT Board unanimously (including two of the prior directors in 1992) did not
believe on February 26, 1996 that the Good Ideas toy lines in 1996 would be able
to compete effectively without a substantial investment to change the lines and
then, even if such changes were effected, there could
be no assurance of success. SAT's Board, recognizing that SAT may not be able to
raise sufficient capital to fund all segments of its business, concluded on
February 26, 1996 that the human resource provider operations (as supplemented
by RSA which was then serving in a consulting role) could be a significant
source of revenues, but would require a capital investment for computers, sales
and other personnel and other related items smaller than that required to turn
around Good Ideas. The Board recognized that the ProActive/RSA combination could
add to the revenues for SAT's alcohol testing operations and, when and if
developed, U.S. Drug's drug testing products. The Board was also cognizant that
a substantial investment would be required to complete U.S. Drug's product
development. Weighing all of these factors, the Board concluded that it was
preferable to concentrate management's time and the Company's financial
resources on alcohol testing, drug testing and human resource provider
operations which at least have a synergy with each other.
In reviewing the terms of its revised offer on November 18, December 3,
1996 and February 17, 1997, the SAT Board ascertained no reason to change its
prior conclusion as described above.
(b) Good Ideas' operations had been declining and would have required
entirely new toy products to effect a turnaround at a substantial
investment of time and money.
On February 26, 1996, the SAT Board reviewed the declining revenues and
increasing losses at Good Ideas. The Board noted the action by Toys R Us, Good
Ideas' principal customer (constituting over 50% of Good Ideas' sales in each of
the past three fiscal years), in reducing its orders to Good Ideas commencing in
fiscal 1995, attributing the cause to its large inventories and declining sales
and customer traffic. The Board also noted what Good Ideas management believed
to be the trend in the toy industry for distributors or retailers to minimize
their number of vendors and to reduce the number of items carried in their
inventory, which caused the toy manufacturer to maintain an inventory to meet
customer demands and thereby increased
40
<PAGE> 50
the manufacturer's costs. These actions also had the effect, in the opinion of
the Good Ideas management, of squeezing out the small companies like Good Ideas
with their limited product lines. In addition, Good Ideas' management advised
that an additional new product line or lines, at a substantial expenditure of
time and money, would have been necessary for Good Ideas to compete effectively
and that there could be no assurance of success even if such effort were made
because of the foregoing conditions in the toy industry.
Specifically, the SAT Board considered the following negative trends: (i)
the net loss of Good Ideas increased from $582,000 for fiscal 1994 to $798,000
for fiscal 1995 and was $1,566,292 for fiscal 1996, (ii) net sales of Good Ideas
for fiscal 1995 were $4,606,039, a decrease of $938,182 or 16.9% from net sales
of $5,544,221 in fiscal 1994, and net sales for fiscal 1996 were $1,508,819, a
decrease of $3,097,220 or 67.2% from the sales for the prior fiscal year, (iii)
net sales from the wooden construction toy category, Good Ideas' primary product
line, for fiscal 1995 were $2,841,000, a decrease of $733,000 or 20.5% from such
net sales in fiscal 1994, and net sales from wooden construction toys for fiscal
1996 were $967,000, a decrease of $1,874,000 or 66.0% from such net sales in the
prior fiscal year, and (iv) selling, general and administrative expenses for
fiscal 1995 increased to $1,924,078, or 41.8% of net sales, from $1,487,811, or
26.8% of net sales, for fiscal 1994 and selling, general and administrative
expenses for fiscal 1996 decreased to $1,278,633, or 84.7% of net sales.
In its review on November 18, December 3, 1996 and February 17, 1997, the
SAT Board unanimously agreed with the earlier conclusions as set forth below.
The SAT Board reached this conclusion as to Good Ideas' operational
problems even though Good Ideas' sales, although declining, were larger than
those of either of the two other segments in each of the three fiscal years
ended March 31, 1996. For this reason, the SAT Board initially deferred any
consideration of divestiture of Good Ideas. However, as indicated above, absent
an infusion of new products, the SAT Board expected Good Ideas' revenues to
continue to decline. On the other hand, the SAT Board anticipated growth from
the RSA/ProActive combined operations and the alcoholic testing operations,
ultimately in an amount sufficient to offset the loss of the Good Ideas'
revenues. In view of the foregoing, the SAT Board concluded on February 26, 1996
that there could be no assurance as to when Good Ideas, if at all, would operate
on a profitable basis and that the likelihood of the Company's success from its
other operations was far greater and that, therefore, the Good Ideas Minority
Stockholders' ownership of shares of the SAT Common Stock holds a significantly
higher opportunity for a greater return on their initial investment.
(c) SAT's offer has greater value to the Good Ideas Minority Stockholders
than Good Ideas' liquidation value, book value or market value.
The SAT Board also considered as a factor that the receipt by the Good
Ideas Minority Stockholders of .36 of a share of the SAT Common Stock for each
share of the Minority Good Ideas Common Stock valued at $1.625 per share is, in
the Board's opinion, a better alternative for the Good Ideas Minority
Stockholder than (a) receiving $.54 per share if Good Ideas was liquidated based
on its assets and liabilities as of December 31, 1996 (i.e., total assets
($2,203,661) less total liabilities ($79,136) divided by outstanding shares
(3,948,680) -- see "Statement of Net Assets in Liquidation" in the Good Ideas
Financial Statements) or (b) receiving $.54 per share if Good Ideas were sold
for its net book value as of December 31, 1996, or (c) retaining their shares in
Good Ideas, which shares are highly illiquid (the average daily trading volume
in Good Ideas in the 12 months preceding February 8, 1996 was approximately
1,500 shares per day and approximately 1,150 shares per day in the ten
subsequent months prior to its delisting; the SAT Board is not aware of any
reported trading volume since January 1, 1997) and which shares are valued, at
April , 1997, at % of the value of the SAT Common Stock being offered
hereunder. The SAT Board noted that the market price for the Good Ideas Common
Stock has consistently gone down since March 1994. See "Good Ideas Market
Information -- Market Data." While there can be no assurance that the value of
the SAT Common Stock will rise, the SAT Board believes that over a period of
time this security may bring greater value to the Good Ideas Minority
Stockholders than cash or holding the Minority Good Ideas Common Stock for the
reasons discussed in this section. The SAT Board particularly noted in this
connection the contrasting liquidity of the SAT Common Stock -- the average
monthly trading volume for such security during the period December 1996 through
February 1997 was approximately 2,400,000 shares.
41
<PAGE> 51
(d) The Good Ideas Common Stock has been delisted.
On November 18, 1995, the Pacific Stock Exchange Incorporated (the "Pacific
Stock Exchange") advised Good Ideas that the share bid price of the Good Ideas
Common Stock was below $1.00 per share, which did not meet the minimum Tier II
listing maintenance requirement of the Pacific Stock Exchange, which requirement
had become effective January 23, 1995. Good Ideas was granted an extended
compliance period, not to exceed six months from May 9, 1996, to demonstrate
that the Good Ideas Common Stock was in compliance. Although the SAT Board
considered in November 1995 the possibility of effecting a reverse stock split
in an amount sufficient to increase the market value of the Good Ideas Common
Stock, it recognized that, unless Good Ideas reversed its adverse operational
trends of declining revenues and increasing losses, as to which there could be
no assurance, it was likely that, after the split, the market price of the Good
Ideas Common Stock would begin to decline and again reach a level not complying
with the Exchange's maintenance requirement. In any event, this possibility to
reverse the operational trend became moot on February 26, 1996 when the SAT
Board reached the conclusion that it was preferable to sell or liquidate Good
Ideas for the reasons discussed under this factor 4. The Board also recognized
that, if delisting occurred, the Good Ideas Common Stock would not meet the
market price requirement for listing on the American Stock Exchange or reporting
on the Nasdaq System and that, if the Good Ideas Common Stock was reported in
the OTC Bulletin Board or the "pink sheets," it was unlikely that the Good Ideas
Common Stock would rise in market value in such over-the-counter market in view
of its operational problems. In addition, the SAT Board felt that it was highly
likely that delisting would reduce even further the Good Ideas Minority
Stockholders' current minimal liquidity in the Minority Good Ideas Common Stock
and, accordingly, their receipt of the SAT Common Stock will be of much greater
value to them.
By letter dated November 11, 1996, the Pacific Stock Exchange advised Good
Ideas that should the Merger not be consummated by December 31, 1996 and/or the
Good Ideas Common Stock remained in noncompliance with the Pacific Stock
Exchange's maintenance requirements, the Good Ideas Common Stock would be
delisted effective January 1, 1997. Such delisting occurred and Good Ideas
Common Stock is now traded in the over-the-counter market.
(e) Going concern value of Good Ideas not considered significant.
In February 1996, the SAT Board also looked at whether it could assign a
"going concern value" to Good Ideas. In this connection, the SAT Board concluded
that Good Ideas' current toy products could no longer generate sufficient
revenues to effect a turnaround, especially in view of the actions by Toys R Us,
Good Ideas' principal customer, in reducing its orders, and that an infusion of
a new product line or lines, requiring a substantial investment in time and
money, was necessary to effectuate this objective. Accordingly, the SAT Board
concluded that Good Ideas' operations were not currently "viable" so as to
allocate a "going concern value" for valuation purposes. However, the SAT Board
concluded that another toy company with its own products might consider the
existing toy products of Good Ideas as attractive additional assets to purchase,
especially if such potential acquiror could also utilize Good Ideas' tax loss
carryforwards (see the section "Results of Operations, Fiscal 1996 vs. Fiscal
1995" under the caption "The Company's Management's Discussion and Analysis of
Financial Condition and Results of Operations"). The SAT Board, based on the
advice of the Good Ideas' management, believed that such a toy company acquiror
would not be interested in Good Ideas' facilities and sales personnel, so that
these could be discontinued, thereby reducing Good Ideas' costs during the
period in which such a purchaser could be sought. Nevertheless, the SAT Board
deemed that arrangements to continue the production and sale of products through
an operating entity were necessary to achieve SAT's desire to sell Good Ideas to
a toy company on this basis. The arrangements were also considered necessary in
February 1996 if operations were to be restarted as indicated in the subsection
"Good Ideas Board's Reasons" in this section "Reasons for the Merger and
Approval" under this caption "The Merger and Related Matters." On the other
hand, Good Ideas had to be treated as a discontinued operation in the
Consolidated Financial Statements based on the February 26, 1996 decision to
sell or liquidate Good Ideas. The SAT Board, however, concluded that, in view of
no third party offers to acquire Good Ideas being made competitive with that
offered by SAT and Good Ideas' questionable viability, the Good Ideas Minority
Stockholders' receipt of the shares of the SAT Common Stock and, therefore,
ownership in a potentially
42
<PAGE> 52
viable and growing public company would be of greater value to them than their
shares of the Good Ideas Minority Stock.
Although both the SAT and Good Ideas Boards subsequently agreed that
continuance of production and sale of products by Good Ideas was not
economically justified, so that all Good Ideas operations have now ceased, SAT
management continued their efforts to sell Good Ideas and, if no acceptable
offer to purchase the Good Ideas Common Stock is accepted by the time the
results of the consent solicitation for the Merger are known, which sale of
stock is deemed unlikely, to liquidate. However, as indicated in the section
"Sale of Good Ideas" under this caption "The Merger and Related Matter," Good
Ideas is attempting to close on an offer for its remaining inventory for
$225,000.
(f) Waiting for an upturn in the toy industry did not seem economically
justified.
In February 1996, the SAT Board considered as an alternative to the Merger
and the sale waiting for an upturn in the toy industry generally and attempting
to make Good Ideas operate on a profitable basis. However, the SAT Board
considered that the costs to achieve such objective, which would, in the
directors' opinion, have required the acquisition through purchase or licensing
of additional toy products, as to which acquisition there could have been no
assurance, and the uncertainty as to when conditions in the toy industry
generally would have improved outweighed any possible benefit to be derived from
such an effort. In addition, there could be no assurance that, if, at a later
date, SAT sought to sell Good Ideas, it would realize an acceptable sales price.
For the reasons set forth in this subsection, combined with Good Ideas' past
negative cash flow from operations, its decline in sales and its increasing
losses, the SAT Board concluded that waiting for an upturn in the toy industry
was far too great a risk to take and that the Good Ideas Minority Stockholders
would realize a greater return on SAT's offer of a fraction of a share of the
SAT Common Stock.
(g) SAT could cancel loan indebtedness on the Merger.
If the Merger is consummated, then SAT's indebtedness to Good Ideas
($1,972,000 as of December 31, 1996, inclusive of the loan assumed by SAT which
was due to Good Ideas from USRR -- see the section "Material Contacts of SAT
with Good Ideas -- Loans from Good Ideas to SAT") will be canceled. SAT could in
such event use any cash flow generated from operations or financing for
operational purposes and not for repayment of this indebtedness. As a result of
the use of the funds for this purpose, the SAT Board believes that the Company's
revenues will grow and that it will achieve profitability earlier than Good
Ideas could have achieved from its toy operations and, accordingly, for this
reason, and in conjunction with the other reasons set forth in this section, the
SAT Board believes that the shares of the SAT Common Stock will over time have
greater value to the Good Ideas Minority Stockholders than their shares of the
Minority Good Ideas Common Stock. If the Merger is not consummated, although SAT
made net loan repayments of $171,000 during fiscal 1996, SAT is not required to
repay the balance of such indebtedness to Good Ideas until its current maturity
date of April 30, 1997 or such later date on which the results of the consent
solicitation for the Merger are known.
(h) Eliminating public subsidiaries could lead to additional cost savings.
The SAT Board believes that it must continue to institute cost reduction
efforts wherever feasible. Based on a review of costs, the Board believes that
at least $50,000 to $75,000 can be saved by the Company each year with respect
to each of Good Ideas and U.S. Drug if each such subsidiary did not have public
stockholders and its common stock was not registered pursuant to Section 12(b)
of the Exchange Act. The cost savings would be largely attributable to the
elimination of expenses incurred by each of these subsidiaries with respect to
corporate governance, management and regulatory compliance, such as maintenance
of boards of directors for each subsidiary and separate periodic filings with
the Commission and various state offices. SAT has eliminated all of its other
non-public subsidiaries and now operates through divisions.
Although the anticipated costs savings are of primary benefit to SAT and
the SAT stockholders, the SAT Board believes that the advantages of being able
to trade the more liquid SAT Common Stock on the American Stock Exchange is of
more benefit to a Good Ideas Minority Stockholder than the current right to
43
<PAGE> 53
trade the Minority Good Ideas Common Stock in the over-the-counter market and,
accordingly, continuance of these expenses brings no real benefit to the Good
Ideas Minority Stockholders.
(5) Reason for Share Offering
Once the decision to sell or liquidate was made on February 26, 1996, the
SAT Board reconsidered the question of whether the Good Ideas Minority
Stockholders would realize a better return on the offer of shares of the SAT
Common Stock. The Board had previously considered that, even if Good Ideas
continued as a operational subsidiary of SAT, the illiquidity of the Good Ideas'
shares, the declining market price and the then strong probability of delisting
made an offer of shares of the SAT Common Stock more attractive to the Good
Ideas Minority Stockholders than retention of their shares of the Minority Good
Ideas Common Stock. Such review concluded that the offer of a fraction of a
share of the SAT Common Stock for each share of the Minority Good Ideas Common
Stock would also appear to result in the Good Ideas Minority Stockholder
receiving more than on sale or liquidation, as indicated above in SAT Board
reason numbered 4(c) above. Accordingly, the sole reason for SAT making a share
offering was the SAT Board's belief that the Good Ideas Minority Stockholders
would have a better chance of realizing a return on their investment whether or
not the Merger was consummated or whether or not Good Ideas was sold or
liquidated. The Good Ideas Board concurred in the SAT Board's belief.
(6) Reason for Using Merger Form
Once the decision to take Good Ideas private was made in February 1996, the
SAT Board structured the transaction as a merger, rather than as a tender offer
to the Good Ideas Minority Stockholders followed by a merger, because it
believed that the merger was a faster and less expensive method than was a
tender offer to achieve its primary objective of selling or liquidating Good
Ideas in a manner which would result in the greatest return to the Good Ideas
Minority Stockholders. Moreover, SAT selected a consent solicitation over a
proxy solicitation in order to save the time and expenses of holding a meeting.
(7) Good Ideas Board's Reasons
Certain of the factors which the Board of Directors of SAT considered as
reasons for approving the Merger were also considered by the Good Ideas Board of
Directors in granting their approval. The factors which were considered by both
Boards in approving the Merger were as follows:
(a) Good Ideas' operations were declining and would have required
entirely new toy products to effect a turnaround at a substantial
investment of time and money. There could be no assurance that, even if
this investment were made, that a successful turnaround could be achieved.
(b) SAT's offer has greater value to the Good Ideas Minority
Stockholders than Good Ideas' liquidation value, book value or market
value.
(c) The Good Ideas Common Stock might be delisted. [This occurred
effective January 1, 1997.]
(d) The going concern value of Good Ideas was not considered
significant.
(e) Waiting for an upturn in the toy industry did not seem
economically justified.
For a more detailed statement of these reasons, see the subsection "SAT
Board's Reasons" under this section "Reasons for the Merger and Approval" under
this caption "The Merger and Related Matters." The other factors considered
relevant by the SAT Board to its determination were not deemed relevant
considerations for the Good Ideas Board. Although the Good Ideas directors
recognized that the Merger would result in the cancellation of SAT's
indebtedness to Good Ideas, they also recognized that SAT would receive, upon
liquidation of Good Ideas, 60.8% of any liquidation distribution to Good Ideas
stockholders after any creditors were paid.
One of the matters considered by the Good Ideas Board in November 1995 and
again in February 1996 was the recoverability of the Good Ideas recorded assets.
Traditionally Good Ideas did not evaluate its toy inventory for obsolescence
until after the ordering for the Christmas season was completed when it had its
best
44
<PAGE> 54
opportunity to evaluate its then customer demand. Once the decision was made
that there was no demand, Good Ideas would then dispose of the toys in its
inventory deemed not to be further marketable. On such basis, the adjustments
would be made by Good Ideas at the end of the December quarter or at fiscal-year
end, virtually simultaneously with the disposal of this inventory.
In connection with its review of inventory as of December 31, 1995, the
Good Ideas Board concluded that, even with the then contemplated more limited
operations for Good Ideas, the recorded value of the assets would be recovered
in a continuing operation and, accordingly, no adjustment was required.
Management did not deem this recoverability adversely affected by the cost
reduction measure of closing Good Ideas' plant and offices, which measure was
dictated by expiration of the lease on December 31, 1995 and with the landlord
seeking a long-term lease, its upcoming fourth quarter (January 1 to March 31)
in which new orders were traditionally few and the ability to have plant and
office services performed in the interim economically elsewhere. In this
connection, the Good Ideas Board noted that Good Ideas was always dependent on
outside sources-most manufacturing was performed in the Far East or in Mexico by
vendors and most of the finishing and packaging operations were subcontracted to
a local Texas vendor. Accordingly, if the decision was made to resume full scale
operations of Good Ideas as they were previously conducted prior to institution
of the cash saving termination of leases and employees, management fully
believed that these operations could be restarted very quickly. The decision to
resume full scale operations has, of course, been abandoned.
The decision by the SAT Board on February 6, 1996 to take Good Ideas
"private" was not, in either Board's opinion, inconsistent with keeping a
limited operation until the decision to expand or sell was made and, as
indicated in the prior paragraph, not inconsistent with their belief as to the
recovery of the recorded value of the inventory. Although Whale Securities
refers (see the section "Fairness Opinion" under this caption "The Merger and
Related Matters") to its estimate that an orderly liquidation of assets of Good
Ideas would likely result in the Good Ideas Minority Stockholders receiving less
than the book value per share, both Boards believe that there was a difference
between evaluating an ongoing business, which Good Ideas was when the inventory
evaluation was being made with respect to the December 31, 1995 results of
operations, and one that was being liquidated.
The impairment of the Good Ideas inventory and fixed asset values was a
direct result of the decision made on February 26, 1996 to sell or liquidate
Good Ideas. From an accounting point of view Good Ideas had to be treated as a
discontinued operation as reflected in the Good Ideas Statement of Net Assets in
Liquidation, Note 14 to Financial Statements of Good Ideas and Note 14 to
Consolidated Financial Statements. However, this may be contrasted with the
Boards' decision at the time to keep an operating company, albeit on a more
limited basis, to facilitate a sale as discussed under SAT Board reason numbered
4(e) in the section "Reasons for the Merger and Approval-SAT Board Reasons"
under this caption "The Merger and Related Matters." Had the decision on
February 26, 1996 been to restart the operation as described in the second
preceding paragraph, management believes that the value of the inventory and
fixed assets would not have been significantly impaired.
As almost ten months passed after the decision on February 26, 1996, it
became clearer to the directors of both Good Ideas and SAT that no offer to
purchase Good Ideas as a continuing business was going to be made and that the
sole viable sales opportunity was to seek to sell the remaining assets of Good
Ideas. Accordingly, on December 3, 1996, the Boards determined to end Good
Ideas' limited operations and not to renew the employment of its sole remaining
employee, William D. Robbins, then its Chief Executive Officer, after December
31, 1996.
As indicated under "Terms of the Transaction-The Consent
Procedure-Miscellaneous," William D. Robbins and Michael S. McCord, the sole
directors of Good Ideas who own shares of the Minority Good Ideas Common Stock,
intend to submit consents in favor of the Merger.
(8) Effect of Merger on SAT
The Merger will, in the opinion of the SAT Board, provide SAT with its best
opportunity to increase its revenues and profits by enabling SAT to capitalize
on the synergy of its core businesses, and, over time, increase the value of the
SAT Common Stock. The note receivable from SAT to Good Ideas in the amount of
45
<PAGE> 55
$1,972,000 as of December 31, 1996 and bearing interest at the rate of 8% per
annum will also be cancelled allowing SAT to use its cash flow for operations
and financing and not for the repayment of this debt. SAT's indebtedness to Good
Ideas represented approximately 89.5% of the $2,204,000 in Good Ideas' assets as
of December 31, 1996. See subsections 4(a) and 4(c) in this section "Reasons for
the Merger" under this caption "The Merger and Related Matters." Moreover, there
will be no federal tax consequences to SAT or its stockholders as a result of
the Merger.
However, the shares of SAT Common Stock to be issued to the Good Ideas
Minority Stockholders will dilute the stock ownership and voting rights of the
current SAT stockholders. Thus, the existing SAT stockholders who hold 100% of
the outstanding shares of the SAT Common Stock will hold 98.5% of the
outstanding shares if the Merger is consummated and 91.5% if the U.S. Drug
Merger is also consummated.
(9) Conclusion
The Boards of SAT and Good Ideas have concluded that, for the foregoing
reasons, the consummation of the Merger is in the best interests of SAT and Good
Ideas and is fair to the Good Ideas Minority Stockholders from a financial point
of view. In making its determination, the SAT Board considered factors (4)(b)
and (c) in this section "Reasons for the Merger and Approval" more important
than factors (4)(a), (d), (e), (f), (g) and (h). In making its determination,
the Good Ideas Board considered factors (7)(a), (b) and (e) in this section
"Reasons for the Merger and Approval" more important than factors 7(c) and (d).
Both the SAT Board and the Good Ideas Board accorded greater weight to
factors 4(b) and 7(a), respectively, in this section "Reasons for the Merger and
Approval" because the continuing decline of the business of Good Ideas was the
greatest immediate problem confronting both SAT and Good Ideas if no acceptable
offer to purchase Good Ideas' stock or assets were to be made. Without such an
offer Good Ideas might be forced to liquidate at possibly an even lower market
value. The Boards of SAT and Good Ideas determined that it was very significant
that, while there was no assurance that Good Ideas would, if at all, become
profitable, the likelihood of the Company's success was far greater and thus,
the Good Ideas Minority Stockholders' ownership of shares of the SAT Common
Stock held (and still holds) a significantly higher opportunity for a greater
return on their initial investment.
Both the SAT Board and the Good Ideas Board accorded greater weight to
factors 4(c) and 7(b), respectively, in this section because the liquidation
value, book value and the market value provided indicators of the possible
alternative valuation of the Good Ideas Common Stock to a greater extent than
the other factors set forth in this section and this assisted the Boards of SAT
and Good Ideas in assessing the fairness of the offer. The Boards of SAT and
Good Ideas determined that it was very significant that, while there was no
assurance that the value of SAT Common Stock will rise, this security has a
greater likelihood of bringing greater value to the Good Ideas Minority
Stockholders over time than cash or holding the Good Ideas Common Stock.
The Good Ideas Board accorded greater weight to factor 7(e) in this section
because of the opportunity cost of waiting for an upturn in the toy industry was
high in that there was no certainty as to when such conditions would improve and
the Good Ideas Minority Stockholders' ownership of shares of the SAT Common
Stock held (and still holds) a significantly higher opportunity for a greater
return on their initial investment.
The SAT Board deemed factors 4(a), 4(d), 4(f) and 4(h) supportive of, or
complementary to, the factors to which it gave greater weight as described
above, while factor 4(g) was not given greater weight because 60.8% of the loan
repayment would return to SAT upon Good Ideas' liquidation. Similarly the Good
Ideas Board believed that factors 7(c) and 7(d) were supportive of, or
complementary to, the factors to which it gave greater weight as described
above.
Both Boards recommend that the Good Ideas Minority Stockholders consent to
the adoption of the Merger Agreement. The directors of Good Ideas direct
attention to their affiliation with SAT and the attendant conflicts of interests
as described in the subsection "Authorization" in this section "Reasons for the
Merger" under this caption "The Merger and Related Matters."
46
<PAGE> 56
The Boards of Directors of SAT and Good Ideas had considered as
alternatives to taking Good Ideas private a sale of the assets or stock of Good
Ideas, its liquidation and an expansion of the business by seeking new products,
including the seeking of financing therefor. In connection with the latter,
neither Board believed that the Good Ideas Minority Stockholders would be
receptive to a rights offering because of the low market price and the basis
price for most of the holders. The Boards, therefore, concluded that, if
financing were necessary, it would have to be external and Good Ideas' business
prospects and operational results would not be conducive to a lender or an
investor. In any event, for the reasons discussed in the subsection "SAT Board
Reasons" in this section "Reasons for the Merger and Approval" under this
caption "The Merger and Related Matters," the Boards rejected expansion of Good
Ideas business as an alternative or waiting to follow developments in the toy
industry generally as alternatives. With respect to the possibility of
expansion, both Boards considered the desirability of SAT repaying its
indebtedness to Good Ideas ($1,972,000 as of December 31, 1996), but, even with
these funds in lieu of external financing, neither Board was convinced that
these were sufficient to acquire the products necessary to effect a turnaround,
especially in view of what management viewed the competitive situation in the
toy industry and the uncertainty of success. As indicated in the same
subsection, the Boards concluded that the Good Ideas Minority Stockholders would
realize more from SAT's offer of shares of the SAT Common Stock than in the
proceeds of a sale or liquidation. Once the decision to take Good Ideas private
was made, the SAT Board chose a merger over a tender offer, followed by a
merger, because it believed such procedure would involve less expenditures of
time and money than a two-step process when the intention was to have all public
stockholders in one corporation.
In evaluating the Merger, the Boards of Directors of SAT and Good Ideas
also considered the oral presentations of Whale Securities to the Good Ideas
Board that the Merger exchange ratio was fair to the Good Ideas Minority
Stockholders from a financial point of view. In addition, before mailing this
Consent Solicitation Statement/Prospectus, they considered the written opinion
of Whale Securities, which confirmed the conclusion of such oral presentations
and which supports the opinions of the SAT and Good Ideas Boards of Directors
that the Merger is fair to the Good Ideas Minority Stockholders. A copy of the
opinion of Whale Securities is attached as Appendix B to this Consent
Solicitation Statement/Prospectus. See the section "Fairness Opinion" below.
After consideration of the foregoing reasons in this section "The Reasons
for the Merger and Approval," the Boards of Directors of SAT and Good Ideas both
believe that this consent solicitation offer is substantively, as well as
procedurally, fair to the Good Ideas Minority Stockholders.
There can be, of course, no assurance that any or all of the objectives
will be achieved.
FAIRNESS OPINION
Whale Securities is an investment banking firm primarily specializing in
the small cap market and is regularly engaged in the evaluation of small cap
companies and their securities in connection with equity and debt financings,
mergers and acquisitions and valuations for corporate and other purposes. Whale
Securities has not acted in the past on behalf of Good Ideas, SAT or Acquisition
Corp. in any capacity. In addition, there is no agreement or understanding as to
the future or current employment of Whale Securities except in connection with
the pending possible acquisition of the minority interest in U.S. Drug by SAT.
Various investment banking firms as to which counsel or others in management had
personal contacts were solicited as to their availability to perform the
analysis and, of the three firms which replied in the affirmative, Whale
Securities was selected based on its prior experience and its reasonable fee for
its services.
Good Ideas agreed to pay Whale Securities a fee of $50,000, of which
$17,500 was paid on Whale Securities' acceptance of the assignment, $17,500 was
to be paid when Whale Securities concluded its findings and $15,000 will be paid
upon Whale Securities delivering its fairness opinion in definitive form.
Accordingly, the fee for the analysis and the report will be $35,000. When Whale
Securities was initially engaged, the fee was to be $35,000; however, because of
the change in SAT's exchange offer and the 12 months which had elapsed since
Whale Securities made its initial analyses, requiring new analyses, the fee was
increased to $50,000. Whale Securities will also be reimbursed for its expenses.
47
<PAGE> 57
Whale Securities has delivered a written opinion dated as of the date
hereof (the "Fairness Opinion") to the Good Ideas Board stating its opinion
that, considered as a whole, the Merger exchange ratio is fair to the Good Ideas
Minority Stockholders from a financial point of view as of the date of the
opinion. The full text of the Fairness Opinion, which contains a description of
the assumptions and qualifications made, procedures followed and matters
considered by Whale Securities in rendering its opinion, is set forth as
Appendix B to this Consent Solicitation Statement/Prospectus, is incorporated
herein by reference and should be read in its entirety.
In connection with the Fairness Opinion, Whale Securities reviewed and
considered, among other things: (1) the Merger Agreement; (2) Good Ideas' and
SAT's Annual Reports on Form 10-K for the three fiscal years ended March 31,
1996, 1995 and 1994 and their Quarterly Reports on Form 10-Q for the quarterly
periods ended June 30, 1996, September 30, 1996 and December 31, 1996; (3)
certain information relating to the businesses, earnings and prospects of Good
Ideas and SAT, which was furnished to Whale Securities by senior management,
including financial forecasts for the business of SAT; (4) the historical market
prices and trading activity for Good Ideas and SAT shares; and (5) publicly
available information concerning certain other companies and transactions which
Whale Securities considered relevant to its analysis. In addition, Whale
Securities held discussions with the managements of Good Ideas and SAT for the
purpose of reviewing the historical and current operations of such companies and
the business prospects for each.
In conducting its analysis and in arriving at its opinion, Whale Securities
relied upon and assumed the accuracy and completeness of the financial and other
information that was publicly available or provided to Whale Securities and
Whale Securities did not undertake to independently verify the same. Whale
Securities did not prepare or obtain any independent evaluation or appraisal of
Good Ideas' or SAT's assets (including technology) or liabilities. Whale
Securities assumed and relied upon the senior management of Good Ideas and SAT
as to the reasonableness and achievability of the financial and operating
forecasts furnished by management (and the assumptions and bases therefor).
Whale Securities' opinion was necessarily based on economic, market and other
conditions as in effect on, and the information made available to it as of, the
date of its opinion. The opinion relating to Good Ideas was prepared by Whale
Securities independently of its separate opinion on the proposed merger relating
to U.S. Drug and the two opinions should be evaluated without regard to the
other even if the interested stockholder is a stockholder in both subsidiaries
of SAT. In addition, neither opinion assumed that the other transaction would be
effected, whether simultaneously or at all. Whale Securities was retained by the
Board of Directors of Good Ideas to act as financial advisor to Good Ideas only
with respect to its fairness opinion. In addition, in the ordinary course of its
securities business, Whale Securities may trade equity securities of Good Ideas
and/or SAT and/or U.S. Drug for its own account and the accounts of customers,
and Whale Securities, therefore, may from time to time hold a long or short
position in such securities. The Fairness Opinion was directed to the Board of
Directors of Good Ideas and does not constitute a recommendation to any Good
Ideas Minority Stockholder as to whether such a stockholder should consent to
any matter submitted for Good Ideas stockholder consent in connection with the
Merger.
In connection with the rendering of its opinion to the Board of Directors
of Good Ideas, Whale Securities performed the financial analyses summarized
below. Whale Securities believes that its analyses must be considered as a whole
and that selecting portions of such analyses and the factors considered therein,
without considering all factors and analyses, could create an incomplete view of
the analyses and the processes underlying Whale Securities' opinion. The
preparation of a fairness opinion is a complex process involving subjective
judgments and is not necessarily susceptible to partial analysis or summary
description. The projections prepared by the management of SAT underlying Whale
Securities' analyses are not necessarily indicative of future results or values,
which may be significantly more or less favorable than such projections.
Estimates of values of companies do not purport to be appraisals or necessarily
reflect the prices at which companies or their securities actually may be sold.
Except as described below, none of the analyses performed by Whale Securities
was assigned a greater significance by Whale Securities than any other.
The projections furnished to Whale Securities were prepared by the
management of SAT. Good Ideas and SAT do not publicly disclose internal
management projections of the type provided to Whale Securities in connection
with the review of the proposed Merger. Such projections were not prepared with
a view towards
48
<PAGE> 58
public disclosure. The projections were based on numerous variables and
assumptions which are inherently uncertain, including, without limitation,
factors relating to general economic and competitive conditions. Accordingly,
actual results could vary significantly from those set forth in such
projections.
Whale Securities did not determine the amount of the consideration to be
paid by SAT to the Good Ideas Minority Stockholders nor did it make a
recommendation as to the exchange ratio determined by the SAT Board, which
exchange ratio was communicated in December 1996 to Whale Securities for review
in preparation of the Fairness Opinion.
The following is a brief summary of certain factors which Whale Securities
discussed with the Board of Directors of Good Ideas which figured prominently in
Whale Securities' valuation of Good Ideas and certain analyses performed by
Whale Securities in connection with the Fairness Opinion.
1. Certain factors considered in the evaluation of Good Ideas:
Good Ideas has been operating during fiscal 1997 as a business in
liquidation. Whale Securities noted that Good Ideas had almost no business
activity in fiscal 1997, with sales for the nine months ended December 31,
1996 of only $48,868. For the nine months ended December 31, 1996, Good
Ideas' cost of sales exceeded its sales by $42,459 and Good Ideas
experienced a loss from operations of $169,693. Whale Securities also noted
that, even when Good Ideas was fully operational, its sales had declined
from $5,544,221 in fiscal 1994 to $1,508,819 in fiscal 1996 and its net
loss had increased from $582,331 in fiscal 1994 to $1,566,292 in fiscal
1996.
Good Ideas' plant and offices were closed in January 1996 and recently
Good Ideas terminated the employment of its sole remaining employee. Except
for notes receivable, accounts receivable and inventories, Good Ideas owns
no material tangible or strategic assets. Its historical business competed
with larger companies offering more heavily branded products. Given the
competitive nature of the toy business, the lack of critical mass to Good
Ideas' sales and gross profits to cover normal operating expenses and Good
Ideas' significant operating losses, Whale Securities noted that the
viability of the Good Ideas toy business as a stand alone enterprise was
questionable. Whale Securities also noted that, despite the public
announcements in November 1995 that SAT might consider the sale of Good
Ideas, the Good Ideas Board had not been presented with third party offers
or overtures for its purchase at prices competitive with the price being
offered by SAT. Whale Securities had been advised by SAT that William D.
Robbins, Good Ideas' Chief Executive Officer until December 31, 1996, and
Gary S. Wolff, the Treasurer of SAT and Good Ideas until July 3, 1996, for
a time spoke with various vendors and customers of Good Ideas as to their
interest in acquiring all or part of Good Ideas; that first Lee S. Rosen, a
SAT director, and then Linda H. Masterson, the SAT President, contacted
certain prospective purchasers or responded to their inquiries; that no
formal bid process has ever been initiated; and that, to date the only
offer which Good Ideas has received was $225,000 from Little Jimmy, Ltd.,
Point Pleasant, New Jersey, for its inventory (of which inventory was sold
to the prospective purchaser for $50,000 in September 1996 and for $62,870
in January 1997). Whale Securities has been further advised that no one has
offered to purchase the Good Ideas Common Stock in order to continue the
business, utilize, to the extent allowed, the Good Ideas net loss tax
carryforwards, or utilize the corporate shell. See also the section "Sale
of Good Ideas" under this caption "The Merger and Related Matters."
In analyzing the businesses of SAT, Whale Securities noted the lack of
synergy between Good Ideas and the other businesses of SAT. The proposed
Merger would, however, allow SAT to cancel an outstanding note owed to Good
Ideas in the amount of $1,971,936 at December 31, 1996. While SAT's control
position did not directly impact Whale Securities' opinion as to fair
value, it did, in Whale Securities' opinion, diminish the likelihood of
alternative offers arising that would be competitive to that of SAT with
respect to the Good Ideas Minority Stockholders. Because SAT owns 60.8% of
Good Ideas, it could exercise a veto power over any offer to purchase Good
Ideas as an entity and it has been Whale Securities' experience that the
presence of such a veto power by a party making an offer tends to
discourage potential bidders for other than specific assets of the target
company. Whale Securities further considered the fact that the Good Ideas
Minority Stockholders had almost no liquidity in their shares because the
Good Ideas Common Stock was delisted from the Pacific Stock Exchange
effective
49
<PAGE> 59
January 1, 1997. The shares of the SAT Common Stock proposed to be issued
in connection with the Merger will be registered shares, freely tradable by
the Good Ideas Minority Stockholders. Whale Securities noted that, with a
monthly trading volume for the SAT Common Stock during the three months of
December 1996 through February 1997 of approximately 2,400,000 shares, the
Good Ideas Minority Stockholders under the proposed Merger would hold far
more liquid securities in SAT shares than by holding Good Ideas shares. As
a result of SAT offering a more liquid security as described in this
paragraph, Whale Securities concluded that this factor tended to support
the fairness of SAT's offer.
2. Whale Securities' analysis encompassed a number of valuation approaches,
including:
(a) Market value of Good Ideas shares and premiums to market for
acquisitions -- Since its delisting from the Pacific Stock Exchange
effective January 1, 1997, the Good Ideas Common Stock has seen negligible
public trading through March 1997, because the stock has not been quoted on
any exchange, the Nasdaq System (including the Small Cap Market) or the OTC
Bulletin Board. As such, there has been no market price for the Good Ideas
shares since the delisting. During the last month of its trading on the
Pacific Stock Exchange in December 1996, the stock price ranged from
$0.15625 to $0.03125 per share. SAT's exchange offer, assuming that the SAT
Common Stock market price is $1.625 or greater upon the Merger, provides
each share of the Good Ideas Minority stock with an equivalent value of
$.585 per share or greater. A price of $.585 per Good Ideas share
represents a premium of 275% and 1772%, respectively, over the Good Ideas
share price range of $.15625 to $.3125 during its last 30 days of trading
on the Pacific Stock Exchange. Good Ideas shares even when listed on the
Pacific Stock Exchange were thinly traded and hence such prices may not
have been a clear indicator of value. Nevertheless, Whale Securities noted
that to the extent the shares of the SAT Common Stock were trading at or
above $1.625 as of the Merger, Good Ideas Minority Stockholders would be
receiving a substantial premium over the range of trading prices of Good
Ideas shares over the last six months, and a premium far in excess of the
average merger and acquisition premiums over market prices (generally
between 35% to 55%) for the market taken as a whole. Hence an evaluation of
the SAT exchange offer from the context of recent Good Ideas market prices
as compared to the value of the shares of the SAT Common Stock offered in
consideration would tend to support the fairness of the SAT exchange offer.
Whale Securities reviewed merger and acquisition activity in the toys and
recreational products industries during the years 1995 and 1996 to see if
comparable transactions existed involving small, unprofitable toy companies
in liquidation. None were identified which were felt to be comparable to
Good Ideas.
(b) Asset based methods -- The toys marketed by Good Ideas were
neither proprietary nor highly branded. The supplier of the equestrian toys
sells the identical products to other toy companies in the United States
and the log building toys similarly are widely available. Few barriers to
entry exist to prevent the establishment of near identical toy lines by new
entrants. Whale Securities noted that Good Ideas had, effective March 31,
1996, changed its basis of accounting from a going concern basis to a
liquidation basis and recorded a charge of $368,388 in fiscal 1996 in
connection with the change and the write down of inventories. Under the
liquidation basis of accounting, assets are adjusted to amounts estimated
to be realizable, liabilities are stated at anticipated settlement amount
and estimated costs of liquidating the company are provided to the extent
reasonably determinable. Good Ideas' book value per share at December 31,
1996 was $.54 per share. The value of the SAT exchange offer would exceed
this book value per share amount to the extent the SAT Common Stock trades
at $1.50 per share or greater. Due to the facts that Good Ideas has been
unprofitable, its business in liquidation, its toy lines non-proprietary
and few barriers exist to new entrants purchasing the products directly
from manufacturers, Whale Securities estimated that a sale of the business,
if possible, would likely not result in a substantial premium to the
underlying value of the assets. Similarly Whale Securities concurred that
an orderly liquidation of the Good Ideas assets would likely result in an
amount approximating the December 31, 1996 recorded book value per share.
Whale Securities noted that Good Ideas had net operating tax loss
carryforwards of approximately $3,100,000 at December 31, 1996, which
might, under certain circumstances, have some value to an acquiror. Also
some investors might attribute some nominal value to the Good Ideas public
shell. Though companies in the toy industry frequently trade in the market
at a multiple of book value, Whale Securities felt that, because Good
Ideas' principal assets were monetary in
50
<PAGE> 60
nature (cash, receivables and inventory), book value and liquidation value
should be weighted heavily in its assessment of the fairness of SAT's
merger offer. Whale Securities also advised that stocks of companies in the
toy industry trade on the average of 3.1 times book value, but the average
company also trades at a 29 Price/Earnings Ratio and has a three-year
revenue growth rate of 25%. Accordingly, in the opinion of Whale
Securities, the statistics of these other companies are not applicable to
Good Ideas because it is in liquidation with no appreciable sales,
customers, management or employees.
LIQUIDATION ANALYSIS OF GOOD IDEAS AS OF DECEMBER 31, 1996 BALANCE SHEET
<TABLE>
<CAPTION>
LIQUIDATION
METHOD
ALL AMOUNTS IN THOUSANDS BOOK VALUE
EXCEPT PER SHARE AMOUNTS AT 12/31/96
---------------------------------------------------------------- ------------
<S> <C>
ASSETS:
Cash & equivalents............................................ $ 1
Accounts receivable........................................... $ 75
Inventories................................................... $ 147
Prepaid expenses.............................................. $ 2
Note receivable -- Parent..................................... $1,972
PP&E, net..................................................... $ 0
Other assets.................................................. $ 7
------
Total assets.......................................... $2,204
LIABILITIES & O.E.:
Accounts payable.............................................. $ 18
Accrued expenses.............................................. $ 20
Capitalized lease obligations................................. $ 0
Reserve for sale or liquidation costs......................... $ 41
------
Total liabilities..................................... $ 79
------
Net assets liquidation method of accounting........... $2,125
Number of shares outstanding.................................... 3,949
Calculated liquidation value per share using book amounts....... $ 0.54
</TABLE>
<TABLE>
<CAPTION>
MINIMUM MAXIMUM
----- -----
<S> <C> <C>
OTHER POTENTIAL ELEMENTS OF VALUE:
Value of NOL carryforward and public shell.................. $ 0 $400
Est. liquidation value per share inclusive of these
elements:................................................ $0.54 $0.64
Implied price of an SAT share to make the exchange offer
fair based on each Good Ideas............................
share receiving .36 of an SAT share,..................... $1.49 $1.78
equivalent to a SAT share price quote of................. $1 17/32 $1 13/16
Conclusion: On a liquidation basis, the SAT offer would
appear to be fair to the extent its share price
is equal to or greater than $1.625.
Assumptions/Estimates:
The note receivable from SAT is collectible.
No material change in accounts from 12/31/96 to present
Financial statement amounts fairly stated.
</TABLE>
(c) Income, cash flow, and discounted cash flow based methods -- Whale
Securities considered the use of income, cash flow and discounted cash flow
based methods in valuing the shares of Good Ideas. Due to the facts that
Good Ideas has experienced losses and negative cash flow for several years
and is no longer operating as an on-going business, Whale Securities
determined the business does not lend itself to
51
<PAGE> 61
the price-earnings and cash flow multiple approaches to valuation. The
management of Good Ideas has not prepared projections for the business of
Good Ideas for any period after September 30, 1996.
(d) Comparison to similar public companies and similar sale
transactions -- Whale Securities identified over 30 publicly traded
companies operating in Good Ideas' business segment. Most of these
companies were significantly larger than Good Ideas. As a composite,
companies in the segment on February 27, 1997 traded on the average at a
multiple of 29 times prior 12-month reported earnings and 3.1 times book
value. Though Whale Securities considered each company, no group of
companies was believed to be defining in terms of the valuation of Good
Ideas due to differing factors in the public companies such as size,
business mix, growth rate, earnings, or lack of trading in their shares.
Whale Securities also conducted a review of merger and acquisition activity
in the toy industry, both in the manufacturing and the distribution
sectors. There were few transactions for which public information was
reported and none were offered as being sufficiently comparable to the
Merger so as to assist in establishing a clear range of value.
(e) Analysis of the SAT Common Stock to be given as
consideration -- In its review of the consideration to be received by the
Good Ideas Minority Stockholders, Whale Securities noted that the shares of
the SAT Common Stock to be issued in connection with the Merger will be
registered shares and freely tradable by the Good Ideas Minority
Stockholders on the American Stock Exchange. Based on SAT's average monthly
trading volume for the three months of December 1996 through February 1997
of approximately 2,400,000 shares, unless conditions changed, the Good
Ideas Minority Stockholders in the event of the Merger would hold
relatively liquid securities in the SAT shares. The SAT share volume should
be compared to the estimated 557,524 shares of the SAT Common Stock the
Minority Good Ideas Shareholders would receive under the Exchange Offer.
Whale Securities cautioned management and the Good Ideas Board that a
decline in the SAT share prices between the Record Date and the closing of
the Merger would result in the holders of the Minority Good Ideas Common
Stock receiving less valuable consideration than the amount contemplated
under the Fairness Opinion.
In connection with the Fairness Opinion, Whale Securities performed
procedures to update, as necessary, certain of the analyses described above and
reviewed the assumptions on which such analyses were based and the factors
considered in connection therewith.
TERMS OF THE MERGER AGREEMENT
The following description of the Merger Agreement describes the material
terms thereof. Good Ideas Minority Stockholders are also directed to Appendix A
to this Consent Solicitation Statement/Prospectus where the full text of the
Merger Agreement is set forth.
(1) Conversion of Shares
After adoption of the Merger Agreement by the requisite consents of the
Good Ideas Minority Stockholders and SAT, Acquisition Corp. will be merged with
and into Good Ideas; each share of the Minority Good Ideas Common Stock issued
and outstanding on the Effective Date will be converted into .36 of a share of
the SAT Common Stock; and each share of the Good Ideas Common Stock owned by
SAT, except for ten shares, will be canceled. The shares of Acquisition Corp.
owned by SAT will be canceled upon the Merger becoming effective. An aggregate
of 557,524 shares of the SAT Common Stock will be issued to the Good Ideas
Minority Stockholders, subject to adjustment for fractional shares. Assuming
that the U.S. Drug Merger is not consummated and there are no exercises of
outstanding Common Stock purchase warrants or any conversions of the Class A
Preferred Stock or the Convertible Notes between the date of this Consent
Solicitation Statement/Prospectus and the effective date of the Merger, the
existing SAT stockholders will own 98.5% of the outstanding shares of the SAT
Common Stock and the Good Ideas Minority Stockholders will own 1.5%. If the U.S.
Drug Merger is also consummated, the Good Ideas Minority Stockholders will own
1.4% of the outstanding shares of the SAT Common Stock. The portion of a share
of the SAT Common Stock to be exchanged for each share of the Minority Good
Ideas Common Stock was determined on the basis of assumed value of $1.625 for
each share of the SAT Common Stock.
52
<PAGE> 62
The Good Ideas Warrants to purchase an aggregate of 120,000 shares of the
Good Ideas Common Stock will be converted into the Merger Warrants of SAT to
acquire 74,285 shares of the SAT Common Stock at $12.115 per share. See the
section "Good Ideas Options and Warrants" under this caption "The Merger and
Related Matters."
No fractional shares of the SAT Common Stock will be issued. Holders of the
Good Ideas Common Stock entitled to receive on the Effective Date fractional
shares of the SAT Common Stock upon the consummation of the Merger will receive
in lieu thereof a cash payment calculated on the basis of the closing sales
price for a share of the SAT Common Stock on the Effective Date (or on the first
day thereafter as such price is available).
(2) Effective Date
The Merger will become effective on the date and at the time of the filing
of a copy of the Certificate of Merger with the Secretary of State of Delaware
(i.e., the Effective Date). This filing will occur as soon as practicable
following the receipt of consents from the holders of more than 50% of the
outstanding shares of the Minority Good Ideas Common Stock and a consent from
SAT and the satisfaction of other conditions and it is currently expected to
take place on or about , 1997. The Merger Agreement requires the
parties to close within five business days after the last condition to the
Merger has been satisfied or waived. Either SAT or Good Ideas is entitled,
however, to abandon the Merger prior to the consummation for the reasons
referred to below in the subsections "Conditions to the Merger" and "Amendment
and Termination Rights" in this section "Terms of the Merger Agreement" under
this caption "The Merger and Related Matters."
(3) Conditions to the Merger
The obligations of SAT (and Acquisition Corp.) and Good Ideas under the
Merger Agreement are subject to the satisfaction of certain conditions (unless
such conditions are waived by the party intended to receive the benefit of those
conditions), including (1) the condition that the representations and warranties
of the parties set forth in the Merger Agreement shall be true in all material
respects on the date of the Merger, (2) the performance by each corporation in
all material respects of all obligations to be performed by it under the Merger
Agreement, (3) the receipt of closing certificates and (4) the receipt of all
requisite consents from all governmental agencies and third parties which are
required to effect the Merger, including, without limitation, (a) that this
Registration Statement has been declared effective by the Commission, (b) that
no stop order shall have been issued or proceedings for such purpose shall have
been instituted and (c) that the issuance of the SAT Common Stock shall have all
requisite authorizations under state securities or "blue sky" laws for issuance.
The obligations of SAT under the Merger Agreement are subject to the
satisfaction of certain conditions (unless such conditions are waived by SAT
except as indicated in the second succeeding paragraph), including (1) the
consent to the adoption of the Merger Agreement by the holders of more than 50%
of the shares of Good Ideas Minority Common Stock, (2) the obtaining of a
fairness opinion to the Good Ideas Minority Stockholders reasonably satisfactory
to SAT and (3) the lack of any material adverse change in the business or
financial condition of Good Ideas. Because Good Ideas has ceased operation, SAT
believes that condition (3) is moot.
The obligations of Good Ideas under the Merger Agreement are subject to the
satisfaction of certain conditions (unless such conditions are waived by Good
Ideas except as indicated in the succeeding paragraph), including (1) the
consent to the adoption of the Merger Agreement by the holders of more than 50%
of the outstanding shares of the Minority Good Ideas Common Stock, (2) the
obtaining of a fairness opinion to the Good Ideas Minority Stockholders
reasonably satisfactory to Good Ideas and (3) the lack of any material adverse
change in the business or financial condition of the Company (excluding Good
Ideas).
The conditions that (1) the holders of more than 50% of the outstanding
shares of the Minority Good Ideas Common Stock consent to the adoption of the
Merger Agreement, (2) a fairness opinion be obtained and (3) the Registration
Statement has been declared effective and there is no "stop order" in effect are
not waivable by either SAT or Good Ideas.
53
<PAGE> 63
If either party terminates its obligations under the Merger Agreement to
consummate the Merger because a condition precedent thereto has not been
satisfied, its sole obligation to the other party shall be to pay its own costs
which it agreed to pay on consummation of the Merger and which were incurred in
connection with the proposed transactions. See the section "Fees and Expenses"
under this caption "The Merger and Related Matters."
(4) Amendment and Termination Rights
The Merger Agreement provides that the respective Boards of Directors of
SAT and Good Ideas may, by written agreement, amend the Merger Agreement at any
time before or after its adoption by the Good Ideas Minority Stockholders,
provided that after such approval no amendment may be made which changes either
the amount or the form of the consideration to be received by the holders of the
Minority Good Ideas Common Stock pursuant to the Merger Agreement without
further approval by the Good Ideas Minority Stockholders.
The Merger Agreement, as amended, may be terminated and the Merger
abandoned, whether before or after approval by the Good Ideas Minority
Stockholders, at any time prior to the Effective Date (1) by mutual written
consent of the Boards of Directors of SAT and Good Ideas, (2) by either SAT or
Good Ideas if the respective Board of Directors, based on the opinion of its
outside counsel, determines that making a recommendation to the Good Ideas
Minority Stockholders to adopt the Merger Agreement could reasonably be deemed
to cause the members of such Board of Directors to breach their fiduciary duties
under applicable law to their respective stockholders or (3) by either SAT or
Good Ideas if there is any statute, rule or regulation which makes consummation
of the Merger illegal or otherwise prohibited or any order, decree, injunction
or judgment enjoining Acquisition Corp., SAT or Good Ideas from consummating the
Merger, and such order, decree, injunction or judgment has become final and
non-appealable. The obligations automatically terminate if the Merger has not
been consummated by September 30, 1997.
SUMMARY OF THE TERMS OF THE SAT COMMON STOCK
(1) General
SAT is authorized to issue 50,000,000 shares of the SAT Common Stock, $.01
par value. SAT has called a Special Meeting of Stockholders for May 5, 1997 to
adopt a proposal to increase the authorized number of shares to 65,000,000.
Holders of the SAT Common Stock (i) have one vote per share; (ii) have equal
rights to any dividends declared by the Board of Directors of SAT after payment
of all accrued and unpaid dividends on SAT's Class A Preferred Stock and any
other preferred stock hereafter issued which has a preference as to dividend
payments; (iii) are entitled to share in all assets available for distribution
to stockholders upon liquidation, dissolution or winding up of SAT's affairs
after payment of all preferences on the Class A Preferred Stock and any other
preferred stock hereafter issued which has a preference upon liquidation,
dissolution or winding up of SAT; (iv) have no preemptive, subscription or
conversion rights; and (v) no sinking fund provisions. There are no provisions
in the Bylaws or the Certificate of Incorporation of SAT which discriminate
against any existing or prospective holder of the SAT Common Stock as a result
of such holder's ownership of a substantial amount of the SAT Common Stock. All
outstanding shares of the SAT Common Stock are, and all shares to be issued upon
the consummation of the Merger will be, fully paid and nonassessable.
Reference is made to "SAT Management -- Directors and Officers" for a
description of how the SAT directors are elected by the holders of the SAT
Common Stock on a classified basis. With a classified Board of Directors, at
least two annual meetings of stockholders, instead of one, will generally be
required to effect a change in the majority of SAT's Board. As a result, a
classified Board may discourage proxy contests for the election of directors or
a purchase of a substantial block of the SAT Common Stock because its provisions
could operate to prevent obtaining control of the SAT Board of Directors in a
relatively short period of time. The classification provisions could also have
the effect of discouraging a third party from making a tender offer or otherwise
attempting to obtain control of SAT. There are no other provisions in SAT's
Certificate of Incorporation or By-Laws that may have the effect of delaying,
deferring or preventing a change in control of
54
<PAGE> 64
SAT and that would operate with respect to an extraordinary corporate
transaction involving SAT or any of its subsidiaries, such as a merger,
reorganization, tender offer, sale or transfer of substantially all of its
assets, or liquidation. However, the Board would have the power, without seeking
further stockholder approval, to include such provisions in the Class B
Preferred Stock described in the succeeding paragraph, but has no current
intention of reissuing such security or including any such provision.
There are 500,000 shares of the Class A Preferred Stock, $.01 par value,
authorized, of which 41,157 shares were outstanding as of March 31, 1997. These
shares have a liquidation preference of $205,785 and are convertible into
185,207 shares of the SAT Common Stock. As of March 31, 1997, there was no other
series of the SAT preferred stock outstanding, although there are 1,500,000
shares of the Class B Preferred Stock, $.01 par value, authorized.
(2) Election of Directors
Holders of the SAT Common Stock have no cumulative voting rights, which
means that stockholders owning more than 50% of the outstanding shares of the
SAT Common Stock can vote to elect all directors. Accordingly, the remaining
stockholders would not be able to elect any. In addition, as indicated in the
preceding subsection, SAT's directors are elected on a classified basis.
(3) Dividends
Dividend payments on the SAT Common Stock are discretionary with the SAT
Board of Directors and depend on various factors, including earnings, capital
requirements and financial condition. SAT has no current plan to pay cash
dividends on the SAT Common Stock in the foreseeable future because of the cash
requirements of the Company and its history of losses. See "SAT Market
Information -- Dividend Policy."
(4) Transfer Agent
The Transfer Agent for the SAT Common Stock is U.S. Stock Transfer
Corporation, 1745 Gardena Avenue, Suite 200, Glendale, CA 91204.
(5) Acquisition Shares
The January 1992 Registration Statement registered under the Securities Act
3,000,000 shares of the SAT Common Stock (the "Acquisition Shares") solely for
offer and issuance to the owners of businesses or properties which SAT may
acquire. SAT has no agreements, arrangements, proposals or understandings
regarding any acquisitions at this time. As of February 28, 1997, SAT had
1,532,679 registered Acquisition Shares at its disposal for future acquisitions.
See "Business of the Company -- Subsidiaries and Divisions" for information as
to the prior issuance of an aggregate of 1,467,321 shares of the Acquisition
Shares relating to the acquisitions of USRR's assets, Alconet and RSA.
Notwithstanding the registered status of the Acquisition Shares, recipients
of these shares offering them for public resale may potentially be deemed
statutory underwriters because they would be engaged in a public distribution of
securities. An additional registration under the Securities Act might,
therefore, be required disclosing the nature of the acquisition, the shares
received as consideration and the manner of their distribution and sale before
the recipient could resell the Acquisition Shares. SAT's Registration Statement
on Form S-3, File No. 333-10945, of which the October 4 Prospectus constitutes
Part I thereof, relates to a reoffering by the holders of the 500,000 shares of
the Acquisition Stock issued in the RSA acquisition.
GOOD IDEAS' DIRECTORS AND EXECUTIVE OFFICERS
If the Merger is consummated, Acquisition Corp. will be merged with and
into Good Ideas and Good Ideas will be the surviving corporation and, under the
Merger Agreement, its directors and officers will continue to serve. For certain
information as to such persons, including their executive compensation where
applicable, see "Good Ideas Management." However, as a result of SAT's intention
to sell or liquidate Good Ideas, the continuance of this corporate existence
should terminate within one to three months after the
55
<PAGE> 65
results of the consent solicitation for the Merger are known. See the section
"Sale of Good Ideas" under this caption "The Merger and Related Matters."
DIFFERENCES IN STOCKHOLDERS' RIGHTS
The Good Ideas Minority Stockholders will become holders of the SAT Common
Stock if the Merger is consummated. Because both Good Ideas and SAT are
incorporated under the laws of Delaware, there will be no change in the
statutory rights as stockholders of the Good Ideas Minority Stockholders when
they become stockholders of SAT. See the section "Summary of the Terms of the
SAT Common Stock" under this caption "The Merger and Related Matters."
DIFFERENCES IN BY-LAWS
The By-Laws of Good Ideas and SAT are substantially similar except that the
former provides for cumulative voting for the Board of Directors. Under
cumulative voting, a stockholder may cast all of his, her or its votes in an
election in favor of a single candidate for a single vacancy. This method of
voting is intended to allow substantial minority stockholders to obtain a
representative on the Board. In SAT the directors are elected by non-cumulative
voting and, because only a plurality of the votes cast at the meeting is
necessary to elect a director, a majority of the SAT stockholders can elect all
of the SAT directors up for election at the meeting. Both Good Ideas and SAT
have classified Boards, so that generally only one-third of the directors should
be up for election at any meeting.
EXCHANGE OF CERTIFICATES
At the Effective Date, each share of the Minority Good Ideas Common Stock
outstanding immediately prior to the Effective Date will be converted into the
right to receive .36 of a share of the SAT Common Stock. The shares of the Good
Ideas Common Stock owned by SAT on the Effective Date, except for ten shares,
will be canceled. Promptly after the Effective Date, a transmittal form will be
furnished by U.S. Stock Transfer Corporation, as Exchange Agent, to the Good
Ideas Minority Stockholders. The transmittal form will contain instructions with
respect to the surrender of the certificates for the Minority Good Ideas Common
Stock in exchange for the certificates for the SAT Common Stock. MINORITY GOOD
IDEAS COMMON STOCK CERTIFICATES SHOULD NOT BE FORWARDED TO THE EXCHANGE AGENT
UNTIL AFTER RECEIPT OF THE TRANSMITTAL FORM AND SHOULD NOT BE RETURNED TO GOOD
IDEAS WITH THE ENCLOSED CONSENT FORM. Upon surrender of stock certificates for
exchange to the Exchange Agent, together with the letter of transmittal duly
executed, the holder of such certificates will be entitled to receive in
exchange therefor certificates representing the number of shares of the SAT
Common Stock equal to the shares of the Minority Good Ideas Common Stock held by
him, her or it in accordance with the Merger Agreement.
After the Effective Date, a record holder of the Minority Good Ideas Common
Stock will have no rights with respect to such stock except to surrender the
certificates in exchange for certificates representing the SAT Common Stock. No
dividends or other distributions declared after the Effective Date with respect
to shares of the SAT Common Stock issuable upon conversion of shares of the
Minority Good Ideas Common Stock and payable to the holders of record of the SAT
Common Stock after the Effective Date will be paid to the holder of any
unsurrendered certificate representing the Minority Good Ideas Common Stock
until the holder thereof surrenders such certificate in exchange for
certificates representing the appropriate number of shares of the SAT Common
Stock. Subject to the effect, if any, of applicable law, after subsequent
surrender and exchange of a certificate, the record holder will be entitled to
receive any dividends or other distributions, without any interest thereon,
which theretofore had become payable with respect to the shares of the SAT
Common Stock for which such certificate was exchangeable. Because of the current
intention of the SAT Board of Directors not to pay dividends on the SAT Common
Stock (see the section "Summary of the Terms of the SAT Common
Stock -- Dividends" under this caption "The Merger and Related Matters" and "SAT
Market Information -- Dividends"), the foregoing discussion may be moot.
56
<PAGE> 66
For all other purposes, however, including all right, if any, to vote with
respect to all matters, each certificate which represented outstanding shares of
the Minority Good Ideas Common Stock before the Merger will be deemed to
represent ownership of shares of the SAT Common Stock into which those shares
are converted by the Merger.
GOOD IDEAS OPTIONS AND WARRANTS
There were no stock options outstanding on the Record Date. On March 31,
1996, there were outstanding stock options that would have expired December 17,
2003 (the "Good Ideas Options") to purchase an aggregate of 22,500 shares of the
Good Ideas Common Stock. Pursuant to the terms thereof, as a result of their
resignations, the Good Ideas Options each to purchase 7,500 shares of the Good
Ideas Common Stock held by each of Karen B. Laustsen, James C. Witham and Gary
S. Wolff, former members of the Good Ideas Board, expired on August 26, 1996,
August 29, 1996 and October 1, 1996, respectively. Good Ideas Options to
purchase an aggregate of 15,000 shares held by Glenn A. Bergenfield and William
DiTuro, former directors of Good Ideas, expired on February 14, 1996.
The only warrants to purchase shares of the Good Ideas Common Stock which
were outstanding on the Record Date were the Good Ideas Warrants owned by
Baraban or its designees. Baraban was the underwriter of Good Ideas' initial
public offering. The Good Ideas Warrants evidence the right to purchase an
aggregate of 120,000 shares of the Good Ideas Common Stock at $7.50 per share.
The exercise price was negotiated by Good Ideas and Baraban and represented 150%
of the offering price to the public in the initial public offering of Good
Ideas. If the Merger is consummated, as a result of the anti-dilution provisions
of the Good Ideas Warrants, the Good Ideas Warrants will be converted into SAT
Common Stock purchase warrants expiring February 16, 1999 (i.e., the Merger
Warrants) to purchase an aggregate of 74,285 shares of the SAT Common Stock,
which is the same number of shares which the holders of the Good Ideas Warrants
would have been entitled to receive after the consummation of the Merger had the
Good Ideas Warrants been exercised immediately prior to the consummation of the
Merger. The exercise price will be proportionately adjusted to $12.115 per share
pursuant to the anti-dilution provisions of the Good Ideas Warrants.
Except for the number of shares of the SAT Common Stock issuable upon the
exercise of the Merger Warrants and the exercise price, both as indicated in the
preceding paragraph, the Merger Warrants will be identical to the Good Ideas
Warrants in terms and conditions. The number of shares issuable upon exercise
and the exercise price are subject to adjustment in the event of (1)(a) a stock
dividend, (b) a subdivision of the SAT Common Stock, (c) a combination of the
outstanding shares of the SAT Common Stock into a smaller number of shares and
(d) a reclassification of the shares of the SAT Common Stock into other
securities of SAT (including a reclassification effected by a merger or
consolidation in which SAT is the continuing corporation); (2) the issuance by
SAT of rights, options or warrants to all holders of the SAT Common Stock to
purchase shares of the SAT Common Stock at a price which is below the then
market price per share of the SAT Common Stock; or (3) a consolidation or merger
of SAT or a sale by SAT of all or substantially all of its property. The
adjustments are intended to place the holder of the Merger Warrant in the same
position the holder would have been had the Merger Warrant been exercised prior
to the event. No fractional share will be issued upon exercise and a cash
payment based on the then market price of the SAT Common Stock shall be paid in
lieu thereof.
Because the shares of the SAT Common Stock issuable upon the exercise of
the Merger Warrants have been registered under the Securities Act in this
Registration Statement, they are freely tradeable unless issued to an
"underwriter" as such term is defined in Rule 145(c) under the Securities Act.
See the section "Resale of SAT Securities" under this caption "The Merger and
Related Matters."
SALE OF GOOD IDEAS
On February 26, 1996, the SAT Board of Directors concluded that the value
of the SAT Common Stock could best be maximized if the Company concentrated its
operations on alcohol and drug testing and the related human resource provider
business of ProActive (now the Employer Services Division of SAT) and disposed
of the rubber recycling product business of USRR and the toy business of Good
Ideas. In December
57
<PAGE> 67
1995, the SAT Board and the Good Ideas Board had concluded that the only way to
reverse the Good Ideas history of declining revenues and increasing losses was
to develop a whole new product line, whether through acquisition or licensing.
However, both Boards were then reluctant to authorize expenditure of funds
because (1) Toys R Us, Inc. ("Toys R Us"), Good Ideas' principal customer
(accounting for our 50% of the Good Ideas sales in the three prior fiscal
years), had, commencing in fiscal 1995, been reducing its orders to Good Ideas,
attributing its reduction to its large inventories and declining sales and
customer traffic; (2) many toy retailers were also minimizing the number of
vendors and reducing the number of items carried in inventory which has the
result of squeezing out the smaller companies like Good Ideas with their limited
product lines; and (3) other small toy manufacturers were complaining to Good
Ideas that they were experiencing the same problems as described in (1) and (2)
so that the problems were not confined to Good Ideas. Accordingly, both Boards
concluded that it would be difficult to make Good Ideas' operations profitable
during the next 12 months. After additional consideration, finally on February
26, 1996, for all of these reasons, the SAT Board concluded that it would be in
the best interest of the SAT stockholders and that of the Good Ideas Minority
Stockholders if the assets of Good Ideas were, or the Good Ideas Common Stock
was, sold to a third party. Accordingly, the Board authorized management to seek
offers from prospective purchasers. No formal bid process was instituted;
however, Gary S. Wolff, the Treasurer of SAT and Good Ideas until July 3, 1996,
was assigned the responsibility to seek a purchaser of either the assets or the
Good Ideas Common Stock. After William D. Robbins, the then Chief Executive
Officer of Good Ideas, spoke to four or five of the principal vendors and
customers of Good Ideas, Mr. Wolff spoke to the three companies that had shown
some interest to Mr. Robbins, with Mr. Wolff's conversations continuing even
after he left the employ of SAT. However, except for the informal offer
hereinafter mentioned, no company with which he spoke was interested in making a
definitive offer. Lee S. Rosen, a SAT director, spoke to three toy companies
with which he had some prior contacts and received the same negative response.
Linda H. Masterson, SAT's President, followed up three inquiries which came to
the office, but no offer resulted from her responses to these inquiries. To
date, the only offer which Good Ideas has received is an informal one from
Little Jimmy, Ltd., Point Pleasant, New Jersey, for $225,000 to acquire its
remaining inventory, which offer the Good Ideas Board has not attempted to
finalize into a binding agreement while exploring other alternatives. Mr. Wolff
and then Ms. Masterson have, however, followed up with the prospective purchaser
to retain interest. As a result, Good Ideas has sold to such prospective
purchaser in September 1996 inventory for $50,000 and in January 1997 inventory
for $62,870. The Good Ideas Board intends that, if no other more favorable offer
is received, to consummate such sale in April 1997 and thereafter to liquidate
Good Ideas not later than the date on which the results of the consent
solicitation for the Merger are known and regardless of whether or not the
Merger is approved, unless an offer for the Good Ideas Common Stock is received,
which offer is deemed highly unlikely. Good Ideas would receive an additional
$112,130 if the sale is consummated. Management believes that no greater offer
was or will be received because of the limited assets left in Good Ideas and the
questions as to the viability of its products. See the section "Reasons for the
Merger and Approval" under this caption "The Merger and Related Matters."
REGULATORY APPROVALS
As of the date hereof, the Merger requires no approval by any federal or
state governmental agency, except for compliance with the Securities Act, the
Exchange Act and state "blue sky" or securities laws. Without limiting the
foregoing, no compliance is necessary under the Hart-Scott-Rodino Antitrust
Improvement Act of 1976, as amended, and the rules and regulations thereunder.
ACCOUNTING TREATMENT
The Merger will be accounted for as a "purchase" as such term is used under
generally accepted accounting principles.
FEES AND EXPENSES
Whether or not the Merger is consummated, all fees and expenses incurred in
connection with the Merger and the transactions contemplated thereby will be
paid by SAT, except that Good Ideas will pay
58
<PAGE> 68
Whale Securities for the fairness opinion (up to $50,000 as a fee plus
out-of-pocket expenses) and the fees and disbursements of Rosenman & Colin LLP,
its special counsel. Such fees and expenses to be paid by SAT include any
expenses incurred in connection with the preparation, printing and distribution
of this Consent Solicitation Statement/Prospectus, including, without
limitation, attorneys' fees, accounting fees and printing expenses and consent
solicitation expenses.
The fees and expenses incurred by SAT in connection with the Merger and the
related transactions described in this Consent Solicitation Statement/Prospectus
are expected to be approximately $181,250, consisting of $87,250 in legal fees
and disbursements, $30,000 in accounting fees and disbursements, $20,000 in
expenses related to the Registration Statement, $25,000 in printing expenses,
$2,500 in Exchange Agent costs, $6,250 in consent solicitation fee and costs
(including mailing costs) and $10,000 in miscellaneous costs. The fees and
expenses of Good Ideas are expected to be approximately $95,000, consisting of
$55,000 in fee and disbursements to Whale Securities, $35,000 in legal fees and
disbursements and $5,000 in miscellaneous costs.
CERTAIN TAX CONSEQUENCES
Rosenman & Colin LLP, special counsel to Good Ideas, has delivered an
opinion to Good Ideas as to certain tax consequences of the Merger to the Good
Ideas Minority Stockholders and Good Ideas, a copy of which opinion is filed as
an exhibit to the Registration Statement. Gold & Wachtel, LLP, general counsel
to SAT, has reviewed the opinion, has advised the SAT Board orally that it
concurs therein and has advised the SAT Board orally as to the tax consequences
of the Merger to SAT and the SAT stockholders.
Such firms concur that the transaction, although accomplished in the form
of a reverse triangular merger, will not meet the statutory requirements of a
tax free reorganization within the meaning of Sections 368(a)(1)(A) and
368(a)(2)(E) of the Internal Revenue Code of 1986, as amended (the "Code"),
because, immediately prior to the Merger, SAT already owns more than 20% of the
Good Ideas Common Stock and, consequently, cannot acquire 80% or more of the
Good Ideas Common Stock through the Merger as is required by Section
368(a)(2)(E) of the Code. Furthermore, in order for a reorganization to qualify
under any subdivision of Section 368(a)(1) of the Code, Treasury Regulations
require that there must be a continuity of the business enterprise under the
modified corporate form. In order for there to be continuity of the business
enterprise, the transferee in a corporate reorganization must either (1)
continue the transferor's historic business or (2) use a significant portion of
the transferor's historic business assets in a business. In the instant
transaction, the Board of Directors of SAT has determined, and this Consent
Solicitation Statement/Prospectus so indicates, that SAT will either sell or
liquidate the business of Good Ideas as soon as is practicable after the results
of this consent solicitation for the Merger are known. Therefore, because SAT
will not continue Good Ideas' historic assets in a business conducted as a
subsidiary of SAT after the transaction, there will not be a continuity of the
business enterprise after the transaction is consummated. For this reason as
well, in the opinion of the respective counsel, the Merger cannot qualify as a
tax-free reorganization.
Such firms also concur that the Merger will not qualify as a transaction
under Section 351 of the Code so as to render the exchange by the Good Ideas
Minority Stockholders of their shares of the Minority Good Ideas Common Stock
for shares of the SAT Common Stock tax free. Section 351 of the Code provides
that no gain or loss is recognized if property is transferred to a corporation
by one or more persons solely in exchange for stock in such corporation and
immediately after the exchange such person or persons are in control of the
corporation. Such counsel have advised that "control" for this purpose means the
ownership of stock possessing at least 80% of the total combined voting power of
all classes of stock entitled to vote and at least 80% of the total number of
shares of all other classes of stock of the corporation. Although the Good Ideas
Minority Stockholders can be deemed to be transferring their shares of the
Minority Good Ideas Common Stock (which is "property") to SAT solely in exchange
for shares of the SAT Common Stock, it is clear that the transferor Good Ideas
Minority Stockholders will not be in "control" of SAT immediately after the
transfer, thus rendering Section 351 of the Code inapplicable to the Merger.
Consequently, the transaction will not be a tax free reorganization and
will be treated as a taxable transaction, with the following consequences: (a)
gain or loss will be recognized by the Good Ideas Minority
59
<PAGE> 69
Stockholders upon the receipt of the SAT Common Stock in exchange for the
Minority Good Ideas Common Stock to the extent of the difference between the
stockholder's tax basis for the Good Ideas Common Stock and the fair market
value of the SAT Common Stock received in the exchange; (b) the tax basis of the
SAT Common Stock will be the fair market value of such stock upon the date
received; and (c) the holding period for federal income tax purposes of the SAT
Common Stock received by the Good Ideas Minority Stockholders will commence on
the date of receipt. If, as would be expected, the shares of the Minority Good
Ideas Common Stock are held as capital assets, any gain or loss recognized will
be a capital gain or loss. There should be no federal income tax consequences to
the holders of the SAT Common Stock, SAT or Good Ideas.
No rulings have been, or will be, requested from the Internal Revenue
Service (the "IRS") with respect to any of the matters described above.
The foregoing is not intended as an alternative to individual tax planning.
Accordingly, each Good Ideas Minority Stockholder should consult his, her or its
own tax advisor concerning the foreign, federal, state, local and other tax
consequences of the Merger as they relate to the stockholder's particular
circumstances. There can be no assurance that some or all of the positions taken
by the parties to the reorganization will not be challenged by the IRS and that
the IRS will not prevail in such challenge.
THE FOREGOING CONSTITUTES ONLY A GENERAL DESCRIPTION OF CERTAIN OF THE
FEDERAL INCOME TAX CONSEQUENCES OF THE TRANSACTION TO THE GOOD IDEAS MINORITY
STOCKHOLDERS, WITHOUT CONSIDERATION OF THE PARTICULAR FACTS AND CIRCUMSTANCES OF
EACH STOCKHOLDER'S SITUATION.
TRADING IN THE GOOD IDEAS COMMON STOCK
If the Merger is consummated, trading in the Good Ideas Common Stock will
cease on the Effective Date; the registration of the Good Ideas Common Stock
under Section 12(b) of the Exchange Act will be terminated; and the Good Ideas
Common Stock will be delisted from the Pacific Stock Exchange.
RESALE OF SAT SECURITIES
The shares of the SAT Common Stock to be issued to the Good Ideas Minority
Stockholders pursuant to the Merger Agreement will be freely transferable under
the Securities Act, except for shares issued to any person who may be deemed to
be an "underwriter" within the meaning of Rule 145(c) under the Securities Act
(an "underwriter," for purposes of the Rule, is generally an affiliate of Good
Ideas, i.e., a person who as a result of an officership, a directorship or his,
her or its beneficial ownership of shares of the Minority Good Ideas Common
Stock was deemed to be a controlling person with respect to Good Ideas). Such an
underwriter may only transfer shares of the SAT Common Stock issued in the
Merger pursuant to an effective registration statement or when the proposed
transfer is otherwise in compliance with Rule 145(d) under the Securities Act or
another exemption from the registration requirements of the Securities Act.
Because the other directors and executive officers of Good Ideas hold no shares
of the Minority Good Ideas Common Stock, no Good Ideas Warrants and no Good
Ideas Options, and because the only 10% stockholder of Good Ideas is SAT which
will surrender all but ten of its shares of the Good Ideas Common Stock if the
Merger is consummated, only William D. Robbins, the Chief Executive Officer and
a director of Good Ideas, and Michael S. McCord, a director of Good Ideas, who
will receive 72,000 and 3,600 shares, respectively, of the SAT Common Stock in
exchange for 200,000 and 10,000 shares, respectively, of the Good Ideas Minority
Common Stock if the Merger is consummated, may be an affiliate of Good Ideas. As
indicated under "SAT Principal Stockholders," no director or executive officer
of SAT (other than Mr. McCord) will receive shares of the SAT Common Stock as a
result of the Merger. SAT will instruct its transfer agent to implement all
applicable restrictions on transfer with respect to Mr. Robbins' and Mr.
McCord's shares or any person who may later be deemed to have been an affiliate
of Good Ideas, of which person SAT currently has no knowledge.
Under Rule 145(d), an affiliate of Good Ideas who receives shares of the
SAT Common Stock will be permitted to sell a limited number of shares provided
such sale is made in compliance with paragraphs (c), (e), (f) and (g) of Rule
144 under the Securities Act, i.e., (1) SAT's securities must continue to be
60
<PAGE> 70
registered under Section 12 of the Exchange Act; (2) SAT has to have filed all
reports required to be filed under Section 13 of the Exchange Act during the 12
months preceding the date of such proposed sale; (3) the total number of shares
sold by the affiliate during the three-month period immediately preceding the
date the affiliate places his, her or its order to sell may not exceed the
greater of 1% of the shares which are shown as outstanding in the most recent
report or statement published by SAT or the average weekly reported trading
volume of the SAT Common Stock during the four calendar weeks preceding the
sale; (4) the sale is conducted in a "brokers' transaction" or is made directly
to a "market maker" (as those terms are defined in Section 4(4) of the
Securities Act and Section 3(a)(38) of the Exchange Act, respectively); and (5)
the affiliate selling the securities does not solicit or arrange for the
solicitation of orders to buy the securities in anticipation of, or in
connection with, such transaction, or make any payment in connection with the
offer or sale of the securities to any person other than the broker who executes
the order to sell the securities. In addition, if the person is not an affiliate
of SAT at the time of the proposed sale and has been the beneficial owner of the
SAT Common Stock for at least two years (one year on and after April 29, 1997)
and SAT is then current in filing its periodic reports under Section 13 of the
Exchange Act, or if the person is not an affiliate of SAT at the time of the
proposed sale and has not been for a period of three months prior thereto and
has been the beneficial owner of the SAT Common Stock for at least three years
(two years on and after April 29, 1997), such person can sell pursuant to the
exemption of Rule 145(d).
MATERIAL CONTACTS OF SAT WITH GOOD IDEAS
GOOD IDEAS RELATIONSHIP WITH SAT
As of March 31, 1997, 60.8% of the outstanding shares of the Good Ideas
Common Stock was held by SAT. James C. Witham, Chairman of the Board and a
director of Good Ideas from June 1992 until May 31, 1996, served as the Chairman
of the Board, the President, the Chief Executive Officer and a director of SAT
from its incorporation until April 18, 1996. Karen B. Laustsen, a director of
Good Ideas from June 1992 until May 28, 1996, was an Executive Vice President
and a director of SAT from its incorporation until April 18, 1996. From June
1992 until July 3, 1996, Gary S. Wolff was the Treasurer, the Chief Financial
Officer, the Chief Accounting Officer and a director of Good Ideas and, from its
incorporation until July 3, 1996, he was the Treasurer, the Chief Financial
Officer and the Chief Accounting Officer of SAT and, prior to September 26,
1995, was a director of SAT. Glenn A. Bergenfield and William DiTuro, also
directors of SAT until November 16, 1995, were directors of SAT prior to
September 26, 1995. Michael J. Witham was a director of Good Ideas and a Vice
President of Good Ideas until September 26, 1996. On May 31, 1996, Robert M.
Stutman, the Chairman of the Board, the Chief Executive Officer and a director
of SAT since April 18, 1996, Linda H. Masterson, the President since May 13,
1996, a director of SAT since September 26, 1995, and, from May 13, 1996 to
November 19, 1996, Chief Operating Officer of SAT, and Michael S. McCord, then a
consultant to the SAT Board of Directors and a former member of the Committee,
were elected directors of Good Ideas, with Mr. Stutman also being elected as the
Chairman of the Board of Good Ideas on May 31, 1996 and Ms. Masterson becoming
its President on January 23, 1997. On October 22, 1996, Mr. McCord was elected
as a director of SAT. All of the foregoing persons except Messrs. Bergenfield,
DiTuro and McCord were or are employees of SAT. William D. Robbins, the other
current director of Good Ideas, was an employee of Good Ideas until December 31,
1996. All of the persons named in this paragraph are securityholders of SAT. See
"Summary-Recent Developments," "SAT Management," "SAT Principal Stockholders,"
and "Good Ideas Principal Stockholders.
NO LOANS TO GOOD IDEAS FROM SAT OUTSTANDING
From time to time commencing in July 1992, SAT made loans to Good Ideas for
working capital bearing interest at a rate of 12% per annum. Effective October
1, 1993, the interest rate on such loans was reduced to eight percent per annum.
As of March 31, 1993, the outstanding balance of all borrowings from SAT was
$1,960,000 and interest expense for the 12 months then ended was $143,000. On
December 15, 1993, SAT received 170,000 shares of the Good Ideas Common Stock as
payment for $748,682 in indebtedness owed by Good Ideas to SAT. As of March 31,
1994, the outstanding balance of all borrowings from SAT was $437,000
61
<PAGE> 71
and interest expense for fiscal 1994 was $164,000. The balance was paid in
fiscal 1995 and no further loans have been made by SAT to Good Ideas.
LOANS FROM GOOD IDEAS TO SAT AND AFFILIATES
During fiscal 1995, Good Ideas made short-term loans to SAT and USRR, a
wholly owned subsidiary of SAT, in the amounts of $1,196,000 and $1,027,000,
respectively. During fiscal 1996, SAT made net loan repayments of $171,000 and
SAT assumed the loan due to Good Ideas from USRR, resulting in a note receivable
from SAT of $1,972,000 at December 31, 1996. The loans are evidenced by notes
which bear interest at the rate of 8% per annum. This indebtedness was
originally due on December 31, 1995, but has been extended initially until June
30, 1996 and then to December 31, 1996. Good Ideas extended in December 1995 the
repayment date on its loan to SAT because Good Ideas wanted to continue to
receive interest payments under the loan while it considered whether or not to
invest in a new product line and in June 1996 while it waited to ascertain
whether the Merger would be consummated. For the same reason in December 1996,
Good Ideas extended the maturity date until the earliest to occur of (a) five
business days after the end of the consent solicitation period for the Merger,
which ends 60 days from the Record Date, (b) five business days after the
Effective Date of the Merger or (c) April 30, 1997. The Merger Agreement
provides that the loan will be forgiven if the Merger is consummated and that
the term of the loan will be extended, if the consent solicitation is still in
progress on April 30, 1997, until the earlier of (a) five business days after
the end of the consent solicitation period for the Merger if the Merger is not
approved or (b) the Effective Date of the Merger. The loans were made with funds
in excess of amounts required for operating capital and carry interest rates in
excess of those available to Good Ideas on short-term money market investments.
MANAGEMENT SERVICES AGREEMENT
For the period July 1992 through March 1993, SAT provided management and
administrative services to Good Ideas in exchange for a fixed monthly charge of
$25,000. In April 1993, Good Ideas and SAT entered into a formal management
agreement, pursuant to which the fee for such services from April to September
1993 was ten percent of annual net sales. Given the related industry experience
of SAT management, the immediate availability of SAT personnel and the belief of
the management of Good Ideas that the terms offered by SAT were fair and
reasonable, Good Ideas did not investigate alternative management services
providers.
Pursuant to the Management Services Agreement effective as of October 1,
1993 (the "Management Services Agreement"), such fees were computed on the basis
of a fixed monthly fee of $25,000, plus five percent of Good Ideas' annual gross
sales in excess of $5,000,000. The fee charged by SAT for its management
services was determined arbitrarily by its Board of Directors after taking into
consideration the anticipated diversion of SAT resources required to provide
such services to Good Ideas, both in terms of employee time and allocated
overhead costs. The services provided to Good Ideas by SAT pursuant to the
Management Services Agreement included management, administrative, accounting
and other financial services and advice, including, without limitation, the
following: services performed by the Treasurer of Good Ideas (who is also the
Treasurer of SAT), for which he was not directly compensated by Good Ideas;
services relating to Good Ideas' financial and banking relationships; services
relating to the preparation of financial statements, budgets, forecasts and cash
flow projections; cash management advice; and other miscellaneous services and
advice. As of February 26, 1996, the services previously provided to Good Ideas
by SAT relating to the negotiation of licensing arrangements and the acquisition
of complementary product lines and businesses, although material in value, had
been preliminary in nature and had not resulted in any agreement with respect to
terms for any such transaction.
The initial term of this Agreement expired on September 30, 1994 and this
Agreement was automatically renewed for successive one-year terms, the last of
which expired on September 30, 1996.
Since July 1992, four former members of SAT's senior management, James C.
Witham, Gary S. Wolff, Karen B. Laustsen and Michael J. Witham (until September
26, 1995), were the primary persons involved in the provision of services to
Good Ideas under the Management Services Agreement. Because of the
62
<PAGE> 72
resignations of Mr. Witham and Ms. Laustsen on April 18, 1996, the resignation
of Mr. Wolff on July 3, 1996 and the elections of Robert M. Stutman and Linda H.
Masterson (effective May 13, 1996), Mr. Stutman and Ms. Masterson have
substituted for Mr. Witham and Ms. Laustsen in performing these services on
behalf of SAT, although Mr. Withman and Ms. Laustsen provided assistance until
May 31, 1996. Mr. Wolff continued to assist SAT in providing services to Good
Ideas until July 3, 1996. Effective that date, Joseph Bradley became Treasurer
of both Good Ideas and SAT, which position he held until September 12, 1996.
Effective that date, Dennis Wittman replaced Mr. Bradley and began to perform
the services as the Treasurer described in the second preceding paragraph. The
management of Good Ideas believes that the Management Services Agreement with
SAT was fair and reasonable and that Good Ideas' costs would have been greater
if it had to obtain such services from an unaffiliated party with commensurate
industry experience, if available, or maintain the internal staff required to
provide such services itself.
In view of the SAT Board's decision on February 26, 1996 to sell or
liquidate Good Ideas, as well as the cost reduction actions previously
implemented, the SAT Board suspended SAT's management fees to Good Ideas
retroactive to January 1, 1996. Even though the term of the Management Services
Agreement has expired, the SAT officers continue to furnish certain of the
services thereunder to Good Ideas.
BUSINESS OF THE COMPANY
GENERAL
SAT 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. These operations are currently
conducted by the Alcohol Testing Products Division of SAT. SAT subsequently
expanded its business operations through the following acquisitions or the
creation of new subsidiaries. Currently all operations of the Company except
those of U.S. Drug are conducted through divisions of SAT. The operations are as
follows:
1. In June 1988, Good Ideas Texas began the manufacture and shipment
of toys. In June 1992, a subsidiary of SAT acquired a 55% interest in Good
Ideas Texas. In December 1993, Good Ideas was incorporated in Delaware and
Good Ideas Texas was merged with and into Good Ideas. SAT thereafter
continued to own 85.7% until Good Ideas had a public offering of the Good
Ideas Common Stock in March and April 1994. As of March 31, 1997, SAT owned
60.8% of the Good Ideas Common Stock and Good Ideas had ceased operations.
2. On January 24, 1992, SAT and the USN entered into a ten-year
non-assignable agreement granting SAT a partial exclusive patent license to
products for drug testing in the United States and certain foreign
countries. Effective January 1993, SAT granted a sole and exclusive
sublicense to U.S. Drug, then a newly-incorporated wholly-owned subsidiary
of SAT, which subsidiary assumed all of SAT's rights and obligations under
the foregoing license. Pursuant to the sublicense, U.S. Drug is developing
proprietary systems that will test for drug use. In October and November
1993, U.S. Drug had a public offering of the U.S. Drug Common Stock. As of
March 31, 1997, SAT owned 67.0% of the outstanding U.S. Drug Common Stock.
3. In September 1995, ProActive, a wholly-owned subsidiary
incorporated in June 1995, began to provide single source services to
assist corporations in their hiring practices ranging from substance abuse
testing and background screening to total program management. ProActive was
merged into SAT on December 31, 1996 and now operates as the Employer
Services Division of SAT.
4. On May 21, 1996, SAT completed its acquisition of RSA, a provider
of corporate drug-free work place programs. Since January 1996, RSA had
been designing policies and programs for the ProActive subsidiary. RSA was
merged into SAT on December 31, 1996 and now operates as the Robert Stutman
& Associates Consulting Division of SAT.
5. In March 1995, SAT acquired Alconet, a company engaged in the
computer software networking business which had developed an alcohol
testing network to upload test results and information from
63
<PAGE> 73
various alcohol breath testing devices. Alconet was merged into SAT on
December 31, 1996 and now operates as part of the Alcohol Testing Products
Division of SAT.
6. The Biochemical Toxicology Laboratories ("BioTox") Division of SAT
serves as a clinical laboratory performing drug and alcohol testing.
In November 1992, USRR, then a newly-incorporated wholly-owned subsidiary
of SAT, acquired the assets of a company and began to manufacture and market
floor covering products for office and industrial use from used truck and bus
tires. Such operations were discontinued on April 30, 1996 when the assets of
USRR were sold. See the section "Subsidiaries and Divisions-U.S. Rubber
Recycling, Inc." under this caption "Business of the Company." USRR was
dissolved on December 31, 1996.
If the U.S. Drug Merger is consummated, then SAT intends to merge U.S. Drug
Acquisition Corp., U.S. Drug's successor by merger, into SAT and continue its
operations as the Drug Testing Products Division of SAT.
Except for Acquisition Corp. which will be merged with and into Good Ideas
if the Merger is approved and U.S. Drug Acquisition Corp. with and into which
U.S. Drug will be merged if the U.S. Drug Merger is approved, all other
subsidiaries of SAT, which were inactive, have been dissolved.
ALCOHOL TESTING PRODUCTS MARKET
SAT through its Alcohol Testing Products Division manufactures, markets and
distributes alcohol testing detection equipment directly to law enforcement and
correctional facilities, various industrial companies, alcohol treatment centers
and emergency rooms, as well as individual consumers. SAT, through its BioTox
Division, provides forensic drug and alcohol testing services to these same
markets. Its product line to date encompassed three distinct alcohol testing
techniques for degrees of accuracy and admissibility in court proceedings.
<TABLE>
<CAPTION>
PERCENTAGE OF REVENUES
DERIVED DURING
EACH OF LAST THREE
FISCAL YEARS
----------------------
SAT'S PRODUCTS AND SERVICES 1994 1995 1996
-------------------------------------------------------- ---- ---- ----
<S> <C> <C> <C>
(1) Evidential Quality Devices.......................... 12% 55% 23%
(2) Screening (or "Non-Evidential") Devices............. 23% 8% 14%
(3) Alcohol and Drug Testing Services................... 59% 37% 63%
</TABLE>
Evidential quality equipment, with the exception of the Mobile Alcohol
Collection System ("MACS"), is approved by the United States Department of
Transportation (the "DOT") for use by law enforcement agencies and industry. The
information derived from the equipment is used in court trials.
Alcohol screening devices are used by correctional facilities, industrial
companies, hospitals, nuclear agencies, companies in the maritime industry and
law enforcement agencies to gather human data on blood alcohol levels. Although
such data (from breath) is not generally admissible as court evidence, it is
used to indicate alcohol presence. These screening devices determine the
presence of alcohol and its approximate blood level. They are less accurate and
reliable than evidential quality devices, which are useable in legal proceedings
in contrast to the screening devices.
The Alcohol Testing Products Division purchases the raw materials and parts
for its products from various suppliers which deliver them to SAT 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.
64
<PAGE> 74
ALCOHOL TESTING PRODUCTS
The product line of SAT's Alcohol Testing Products Division 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."
ALCOPROOF TEST SYSTEM
The AlcoProof test system is a product line consisting of an O.E.M. alcohol
screening device using saliva as a sample and an alcohol breath testing
confirmation device manufactured by SAT and formerly known as MACS. The
screening device is a product manufactured by STC Technologies Inc. and marketed
as Q.E.D. SAT acquired the rights to co-label and market Q.E.D. as Alco Proof
Screen through a recently signed distribution agreement. The test is a manual,
visual read, enzyme based device that is designed for on site use and provides
Department of Transportation ("DOT") approved results in two minutes. The
AlcoProof Confirm test device is used following a positive screening test. A
breath sample is collected onto a silical gel compounded in a glass vial. The
glass vial is sent to a certified laboratory where the sample is extracted from
the silicia and test by a gas chromatograph method. SAT is currently pursuing
DOT approval of AlcoProof Conform as a collection and transport device. SAT is
currently unaware of any product which currently competes with the product.
(1) Evidential Devices
Alco-Analyzer
SAT 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. SAT's
three models have been approved by the DOT as evidential breath alcohol testing
instruments; however, only one -- the Model 2100 -- is currently offered by the
Alcohol Products Division. 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 downloading data.
Testing information and results are displayed on a color computer monitor and
are printed on a multi-part carbonless form.
The Alcohol Products Division of SAT, to management's knowledge, is the
only manufacturer of a gas chromatograph breath testing device designed
specifically for ethyl alcohol determinations using an inert carrier gas.
Management believes that gas chromatography is recognized as an ideal,
convenient and reliable method for determining and identifying chemical
substances within a compound.
Current management does not consider these devices to be a significant
revenue producer for SAT's Alcohol Testing Products Division in the future.
Mobile Alcohol Collection System (MACS)
The Alcohol Products Division 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
currently pursuing DOT approval of MACS as a collection and transport device.
SAT plans to use this product in conjunction with a saliva screening device to
be marketed as part of the AlcoProof System. Management is unaware of any
product which currently competes with the MACS device.
65
<PAGE> 75
(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. The Alcohol Products Testing Division manufactures two variations of the
Alco-Breath Tubes specifically designed for various applications of alcohol
breath testing. These screening devices are designed for use by law enforcement
entities, a market not currently within SAT's strategic focus.
(3) Calibration Devices
The Alcohol Products Testing Division manufactures two devices which are
used to calibrate and check alcohol testing instruments made by both SAT 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 SAT in its own certified
laboratory.
(a) Alco-Simulator and Alco-Simulator 2000
The Alco-Simulator and its newer 2000 model are approved by the DOT as
calibrating devices for evidential breath testing instruments.
(b) Alco-Equilibrator
The Alco-Equilibrator operates on the same general principle as the
Alco-Simulator, but is less accurate and may only be used for calibrating
non-evidential breath testing instruments.
ALCOHOL TESTING MARKETING
The Alco Analyzer, the AlcoProof System and the Alco Breath Tubes represent
90% of SAT's current sales volume of its alcohol testing products in domestic
and international markets. Sales are made directly by SAT's sales
representatives. The Alcohol Testing Products Division markets its products at
trade shows, conventions and through print advertisements.
The Alcohol Testing Products Division and the BioTox Division each
currently operates in three market areas:
Law Enforcement/Correctional
Industrial
Drug and Alcohol Testing Services
(1) Law Enforcement/Correctional
The Alcohol Testing Products Division markets and sells the Alco-Analyzer
and the Mobile Alcohol Collection System ("MACS") to law enforcement agencies
for evidential testing purposes.
Screening devices and Alco-Breath Tubes ("ABT") are generally used for
roadside screening to determine probable cause for further breath testing by
evidentiary quality testing equipment.
The Alcohol Testing Products Division markets and sells breath alcohol
screening devices to the correctional and institutional market, which includes
probation and prison work release programs.
66
<PAGE> 76
(2) Industrial
The Alcohol Testing Products Division is marketing and selling both
evidential quality and the AlcoProof System 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 SAT's gas chromatography products, which
the DOT had previously approved as evidential breath alcohol testing
instruments. SAT had designed the Alco-Analyzer 2100 to specifically meet the
needs of this market. Its marketing strategy had included sales, leases and
placements of the instrument with a cost per test charge.
SAT, as part of its current business strategy, intends to capitalize upon
the DOT's rules for mandatory alcohol testing within the transportation
industry. The final rule, which became effective in January 1995 as to the
larger transportation companies and, in January 1996, as to the balance in the
transportation industry, affected nearly 8,000,000 employees who are engaged in
safety-sensitive positions in the transportation industry by requiring them to
be tested for alcohol on DOT-approved breath testing devices. Mandatory pre-
employment screening, however, is not required by the DOT rule. SAT's
Alco-Analyzer series and, in particular, its Model 2100 meet the DOT's standard.
In December 1994, SAT entered into two agreements with major testing
laboratories, Corning Clinical Laboratories Inc., formerly Metpath Inc., and
Laboratory Corporation of America, Inc. ("Lab-Corp.") formerly National
Healthcare Laboratories Incorporated, for placement of approximately 700 units
of its Model 2100 at the respective laboratory's, collection sites with
remuneration to SAT on a per test basis. These two agreements, as well as others
with smaller customers, had terms ranging from three to five years. Recognizing
that charges based on the per test basis under these agreements were creating
substantial losses for the Alcohol Products Testing Division, current management
sought to renegotiate the financial terms of these agreements. Subsequently, SAT
elected instead to terminate the agreements because of the failure of Corning
and Lab Corp. to make payments under the agreements. The Division will attempt
to sell the units of its Model 2100 as they are returned by these two customers.
There can be no assurance that the Division will be successful in these resale
efforts; however, the continuing losses under these agreements have been stemmed
and collections of accounts receivable from these two customers has been
accelerated.
SAT 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.
The Alcohol Testing Products Division 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 AlcoProof System
can increasingly be sold to commercial companies which, recognizing the adverse
impact of alcohol abuse on the productivity of their employees, wish to
institute on-site testing programs. In order to implement this program,
management believes that the ABTs must be reformatted and that preferably DOT
approval must be obtained for both the MACS and the ABTs. Although management
believes that the nonregulated market is a market with great potential, there
can be no assurance that SAT will derive significant revenues from this market.
If U.S. Drug or its successor by merger (assuming that the U.S. Drug Merger
is consummated) successfully develops its saliva based drug testing product, SAT
will simultaneously attempt to ascertain if such product can perform alcohol
testing as well. There can be no assurance that the product will be successfully
developed for drug testing or that it will be usable for alcohol testing as
well.
(3) Drug and Alcohol Testing Services
Biochemical Toxicology Laboratories ("BioTox") operates as a division of
SAT and also services the needs of U.S. Drug, SAT's drug testing subsidiary.
BioTox is certified as a clinical laboratory by the State of California and also
possesses specific state licenses for alcohol and methadone analysis. It is
engaged in drug
67
<PAGE> 77
and alcohol testing for many area police departments, detoxification centers,
coroners departments and corporations and functions within SAT'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 Products Division, the drug testing subsidiary or division (when the
product is developed) and the Employer Services Division 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
SAT 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 SAT or a subsidiary thereof.
COMPETITION
Alcohol Testing
The substance abuse detection equipment industry is highly competitive. SAT
competes with small companies which also offer alcohol testing equipment such as
CMI Inc., Intoximeters, Inc. and Lifeloc, Inc. Although all of these competitors
are currently believed to have greater revenues than SAT from sales of alcohol
testing devices, management is of the opinion that only CMI, Inc., which is a
subsidiary of MPD, Inc., may have greater financial resources than SAT. In
addition, several companies, including Roche and STC, Inc., offer an on-site
screening saliva based alcohol testing. Roche has, and several of these other
companies may have, greater revenues and financial resources than the Company.
Although SAT 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 SAT 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 SAT and its
products.
Drug Testing
The Company has not received any revenues from U.S. Drug because its
products are still in the developmental stage. Currently U.S. Drug is developing
two products which screen for the presence of drugs of abuse, one which utilizes
flow immunosensor technology with urine samples as a medium of testing and
another which utilizes flow immunosensor technology with saliva samples as a
medium of testing. Only the saliva sampling system is currently being developed;
however, if this product is successfully developed, U.S. Drug intends to use the
technology to complete the urine sample system. The technology in development
will specifically test for five commonly used drugs of abuse: cocaine, opiates
(heroin, morphine and codeine), phencyclidine hydrochloride (PCP), amphetamines
(including methamphetamines) and tetrahydrocannabinol (THC, marijuana). If the
products are developed, U.S. Drug will compete with many of the companies of
varying size that already exist or may be founded in the future which utilize
urine samples as a medium of testing. U.S. Drug will face competition from at
least eight major pharmaceutical companies providing substance abuse screening
methods: (1) enzyme-multiplied immunoassay technique (EMIT) manufactured and
distributed by Syva; (2) radioimmunoassay (RIA) manufactured and distributed by
Roche and others; (3) thin layer chromatography (TLC) manufactured and
distributed by Marion; (4) a fluorescence polarization immunoassay (FPIA)
manufactured by Abbott, and other immunoassay tests provided by (5) Editek; (6)
Hycor; (7) Princeton, and (8) Biosite. Almost all of these companies (i.e.,
Syva, Roche, Marion, Abbott, Editek, Hycor, Princeton and Biosite) have
substantially greater financial resources available to them than does U.S. Drug
to develop and to market their products.
Management believes that saliva sample testing is unique in that, to
management's knowledge, no company is currently offering a substance abuse
detection method using saliva samples as a medium on an "on-site" basis.
However, U.S. Drug has been advised that such a product is under development by
two or
68
<PAGE> 78
more 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. Drug's market research to date has indicated
a greater market potential for a saliva sample portable testing instrument for
use in detecting drugs of abuse by law enforcement agencies, correctional
facilities, hospitals and other medical facilities than a urine sample
instrument. However, because of the expected limited life cycle of a saliva
specimen, the use of this product in other potential markets may be limited.
If U.S. Drug successfully develops first its saliva sample testing method
and second its urine sample testing method, as to which there can be no
assurance, it is not certain whether U.S. Drug will have the financial resources
to compete successfully with other companies which have greater financial
resources available to them.
Prior management had considered, as an alternative to financing U.S. Drug,
seeking a development partner which would share the costs. However, current
management is of the opinion that use of one of the major pharmaceutical or
medical diagnostic companies to assist in the product development at this stage
of development risks giving confidential data to potential competitors and also
may result in marketing rights demands that would later reduce the revenues to
the Company assuming successful consummation of the development program. Current
management also believes that a potential marketing partner cannot be obtained
on acceptable terms until there is a working prototype for the instrument and
the disposables and certain preliminary clinical data is obtained. Current
management does not believe that the prototype will be produced until March 1998
at the earliest and that, at that stage of development, the greater part of the
estimated (as of April 1, 1997) $10,500,000 in development and management
build-out expenses will already have been incurred, making it less beneficial to
obtain a development partner at that time. There can be no assurance that a
development/marketing partner can be obtained upon acceptable terms even at that
later date. Accordingly, 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") in
November 1998 at the earliest. Until the saliva medium product is submitted to
the FDA and marketing has commenced, no revenues from product sales are likely
to be produced. Once the product is submitted to the FDA, U.S. Drug will be able
to market in non-medical-use markets and U.S. Drug should be able to commence
marketing of these products for medical purposes six months to a year after FDA
approval is obtained. 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. There are certain markets in the United
States, as, for example, employment screening and screening by correctional and
criminal justice agencies, and all markets in Europe where FDA approval is not
required and, accordingly, marketing can begin in these areas when the product
is developed; however, FDA approval will obviously assist U.S. Drug's efforts in
these other markets. Management believes that U.S. Drug should attempt to enter
these non-medical-use markets prior to obtaining FDA approval, but marketing
plans have not as yet been finalized.
Human Resource Provider
The Employer Services Division (formerly the ProActive subsidiary) is a
single source service provider, meaning that it is a provider of both substance
abuse testing services and background screening services. A single source
service provider is a relatively new concept. Additionally, the Company, through
the acquisition in May 1996 of RSA (now the Robert Stutman & Associates
Consulting Division), can also provide customized risk management loss
prevention services specifically designed to reduce the negative effect of
workplace substance abuse. The competition from single source providers which
the Employer Services Division currently encounters is primarily from smaller
local and regional companies. To management's knowledge, currently there is no
single source provider on a national level, which is what the Employer Services
Division provides, and there are no other providers of customized programs and
policies like the
69
<PAGE> 79
Robert Stutman & Associates Consulting Division. However, Lab Corp., through
Med-Express, is currently offering background screening services to corporations
on a limited basis. Although, the Employer Services Division has experienced
personnel in both the drug testing and investigative arena, there can be no
assurance that the Employer Services Division will become successful in
marketing its services as a single source provider on a national level. In
addition, the Employer Services Division 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 the Employer Services
Division), and local or regional investigative firms or private investigators
(including vendors to the Employer Services Division) as it relates to
background investigative services. Assuming that the combined operations of the
Robert Stutman & Associates Consulting Division and the Employer Services
Division 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 these SAT operations.
Toy Products
The toy industry is highly fragmented and extremely competitive. Good Ideas
marketed a full line of wooden interlocking log and wooden block construction
playsets which competed primarily with Lincoln Log, a product manufactured and
distributed by Playskool, a division of Hasbro, Inc. ("Hasbro"), one of the five
largest toy companies in the United States. Good Ideas also marketed a line of
equestrian toys consisting of plastic horses ranging in height from five to
eleven inches which competed primarily with products offered by Breyer, Inc.,
the dominant manufacturer of injection-molded collectible horses, and Marchon,
Inc., a United States importer of injection-molded toy horses. Management
believes that Good Ideas offered a high quality line of wooden log playsets and
equestrian toys. However, there could not be any assurance that Playskool/
Hasbro, which has greater financial resources available to it than Good Ideas,
would not have attempted to expand its presence in the wooden log playsets
category, nor could there be any assurance that other toy companies would not
attempt to enter into this category. Due to relatively low barriers to entry in
the toy industry, Good Ideas could have faced competition from a number of
smaller toy companies as well if it were not to be sold or liquidated.
RESEARCH AND DEVELOPMENT
During the nine months ended December 31, 1996, the Company spent
approximately $1,274,000 on research and development, including $1,197,000
expended on developing the drug testing technology of U.S. Drug. During fiscal
1996, the Company spent approximately $1,006,000 on research and development,
including $851,000 expended on development of the drug testing technology of
U.S. Drug. In fiscal 1995, the Company spent approximately $1,249,000 on
research and development, including $886,000 expended on development of the
technology of U.S. Drug. In fiscal 1994, the Company spent approximately
$948,000 on research and development, including $728,000 expended on development
of the technology by U.S. Drug.
PATENTS AND TRADEMARKS
U.S. Drug has rights under two patents, in addition to its rights to use
the USN patent under its sublicense from SAT. SAT and its other subsidiaries
currently have no patents on the other products of the Company. The term of the
USN patent is set forth in the section "Subsidiaries -- U.S. Drug Testing, Inc."
under this caption "Business of the Company" and the terms of the U.S. Drug
patents are 17 years from the respective dates 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 SAT 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 SAT
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
70
<PAGE> 80
Won't Work Here(TM). The Company also has trademark applications pending with
the PTO for: AlcoProof(TM) and Substance Abuse Technologies(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 AND DIVISIONS
(1) Good Ideas Enterprises, Inc.
In February and April 1994, Good Ideas completed an initial public offering
of the Good Ideas Common Stock, which security traded on the Pacific Stock
Exchange through December 31, 1996 and is now traded in the over-the-counter
market. As of March 31, 1997, SAT owned 2,400,000 of the 3,948,680 outstanding
shares of the Good Ideas Common Stock or 60.8% thereof.
For information relating to the former business of Good Ideas, see
"Business of Good Ideas." For information relating to the Management Agreement
between SAT and Good Ideas, see "Material Contacts of SAT with Good
Ideas -- Management Services Agreement."
(2) U.S. Drug Testing, Inc.
In October and November 1993, SAT's then wholly-owned subsidiary U.S. Drug
completed an initial public offering of the U.S. Drug Common Stock, which
security now trades on the Pacific Stock Exchange. As of March 31, 1997, SAT
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 will 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 SAT for Drug of Abuse detection
utilizing the USN patent for flow immunosensor technology. U.S. Drug is
developing its own proprietary "Immunoassay Chemistry" for these five drugs
which will work with the USN developed technology. U.S. Drug has received six
FDA marketing approvals covering its Model 9000 Flow Immunoassay System and the
attendant assays for each of the five Drugs of Abuse listed above, using urine
as the test medium. However, additional development work is required before the
urine based testing product can be marketed. U.S. Drug, based on its review of
current market conditions, has decided to defer, but not cancel, completion of
the calibrators and the other elements required to be completed in order to
market the urine medium testing product until it can complete the assays for a
saliva medium testing product and, as a result, has produced no revenues through
December 31, 1996. U.S. Drug has commenced research using saliva as a testing
medium in connection with the flow immunosensor technology, conducted a
feasibility study as to such product which was completed in November 1996 and
the results of which allowed U.S. Drug to proceed to the next stage of
development and, assuming subsequent success in the remainder of the development
program, currently expects to submit its five-panel screening assay to the FDA
in November 1998 at the earliest. Until the saliva medium product is submitted
to the FDA for approval and marketing begins, no revenues from product sales are
likely to be produced. U.S. Drug's management expects marketing to the medical
purpose markets of U.S. Drug products to commence six months to a year after
obtaining FDA approval, 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. There are certain markets in the United States,
as, for example, employment screening and screening by correctional and criminal
justice agencies, and all markets in Europe where FDA approval is not required
and, accordingly, marketing can begin in these areas when the product is
submitted to the FDA; however, FDA approval will obviously assist U.S. Drug's
efforts in these other markets. Management believes that U.S. Drug should
attempt to enter these non-medical-use markets prior to obtaining FDA approval,
but no marketing plans have as yet been finalized.
71
<PAGE> 81
U.S. Drug spent approximately $3,753,000 on research and development during
the period from October 8, 1992 through December 31, 1996.
The following material contracts relate to the drug testing operations now
conducted by the subsidiary:
(a) On January 24, 1992, SAT and the USN entered into a ten-year
non-assignable agreement granting SAT a partial exclusive patent license to
products for drug testing in the United States and certain foreign
countries. The license applies to the U.S. Government owned invention
described in U.S. Patent Application Serial No. 07486024, "Flow
Immunosensor Method and Apparatus" filed February 23, 1990. The technology
covered by the patent application is designed to test and detect minute and
large amounts of drugs contained in body fluids rapidly and efficiently. In
November 1994, the license agreement was revised to provide for minimum
annual royalties of $375,000 for 1995, $600,000 for 1996 and $1,000,000 for
1997 and thereafter. In June 1995, the license agreement with the USN was
renegotiated and amended to provide for minimum annual royalties of
$100,000 per year commencing October 1, 1995 and terminating September 30,
2005. Additional royalties will be paid pursuant to a schedule based upon
sales of products. By 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 SAT 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 SAT's default.
(b) On April 16, 1992, SAT entered into a 12-month cooperative
research agreement ("CRDA") with the Naval Research Laboratory section of
the USN to further develop the licensing technology of the "Flow
Immunosensor".
(c) Effective January 1993, SAT granted a sole and exclusive
sublicense to U.S. Drug which assumed all of SAT'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 SAT
for performance thereunder. In the event of a default by U.S. Drug under
its sublicense from SAT, all rights of U.S. Drug under the License
Agreement would terminate and SAT as the licensee can continue to exercise
all rights, and be subject to all obligations, thereunder without any claim
by U.S. Drug. SAT simultaneously assigned to U.S. Drug all of its rights
under the CRDA. SAT transferred or sublicensed 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, SAT and U.S. Drug entered into a five-year
management agreement (the "U.S. Drug Management Agreement") which obligated
U.S. Drug to pay SAT annually $300,000 plus ten percent of its product
sales in exchange for SAT's administrative management services, including
management, administrative, accounting and other financial services and
advice, including, without limitation, the services currently performed by
the Treasurer of U.S. Drug, for which he is not directly compensated by
U.S. Drug; services relating to U.S. Drug's financial and banking
relationships; services relating to the preparation of financial
statements, budgets, forecasts and cash flow projections; cash management
advice; and other miscellaneous services and advice. In July 1993, the
parties amended the U.S. Drug Management Agreement retroactive to April 1,
1993, changing U.S. Drug's annual management fee obligation to $420,000
plus three percent of its gross revenues.
U.S. Drug has rights under two patents, in addition to its rights to use
the USN patent under its sublicense from SAT. 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. 5,354,654, "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
72
<PAGE> 82
patented process allows for the freeze-drying of ready-to-use immunoassay
chemistry or reagents which is then indefinitely preserved.
The expiration date of the USN patent is February 23, 2010, while the term
of the other patents is 17 years from the date of issuance, subject to renewal.
Termination of the Licensing Agreement for the USN patent, which would occur
only on a default by SAT or an invalidation of the USN patent, would end the
Company's rights to developing testing products. Termination of the other
patents or licenses to use the same would require the Company to make changes to
its products which could further delay development and marketing thereof.
During May 1996, SAT filed a Registration Statement on Form S-4, File No.
333-4790 (the "U.S. Drug Registration Statement"), under the Securities Act to
register shares of the SAT 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 SAT (i.e., the U.S. Drug
Merger). The SAT Board of Directors has concluded that the value of the SAT
Common Stock could best be maximized if the Company concentrated its operations
on the businesses of alcohol testing products, drug testing products, human
resource provider and designing policies and programs for substance abuse
prevention and operated all as divisions within one corporation. This action
required the sale of the rubber recycling product business of USRR (see the
subsection (4) in this section "Subsidiaries and Divisions" under this caption
"Business of the Company") and would require the sale of the toy business of
Good Ideas. See "The Merger and Related Matters -- Sale of Good Ideas."
(3) Employer Services Division/Robert Stutman & Associates Consulting
Division
ProActive, which was a wholly-owned subsidiary of SAT that commenced
operations in September 1995, provided single source services to assist
corporations in their hiring practices ranging from substance abuse testing and
background screening services to total program management. ProActive was merged
into SAT on December 31, 1996 and its operations are now conducted by the
Employer Services Division of SAT. Such Division'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. The Employer
Services Division's background investigative services include criminal history
checks, employment verifications, credit checks, reference checks, driving
record checks, workers' compensation history checks, and social security number,
educational and professional license verifications. The Employer Services
Division'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. The Employer Services Division's hiring solutions to
corporations include the use of its proprietary computer software which provides
the Employer Services Division with access to immediate on-line information.
After the Employer Service Division executes an agreement with a customer,
it generally takes 90 to 120 days to set up the procedures with the customer so
that this SAT Division can begin to derive revenues.
On December 14, 1995, SAT and ProActive entered into an agreement with RSA
and Robert M. Stutman, personally, pursuant to which (1) SAT 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, SAT agreed to issue to Mr. Stutman and RSA three-year Common
Stock purchase warrants, each to purchase 200,000 shares of the SAT 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
73
<PAGE> 83
fees to ProActive based on referrals to RSA and an initial $100,000 payment by
ProActive and varying monthly fees thereafter to RSA.
On April 18, 1996, Mr. Stutman was elected as the Chairman of the Board and
a director of SAT and designated as its Chief Executive Officer. SAT also agreed
in principle to acquire RSA. On May 21, 1996, SAT completed its acquisition of
RSA and RSA became a 100% owned subsidiary of SAT. SAT paid $2,100,000 to the
RSA shareholders for their shares of RSA (including $1,078,920 paid to Mr.
Stutman for his 52.8% of the RSA shares and $721,080 paid to Brian Stutman, son
of Mr. Stutman and now Vice President, Sales and Marketing of SAT, for his 35.3%
of the RSA shares and issued to the RSA shareholders an aggregate of 500,000
shares of the SAT 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 the January 1992 Registration Statement and SAT Common
Stock purchase warrants expiring May 20, 1999 to purchase an aggregate of
900,000 shares of the SAT 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) at $3.125 per share, which was the fair market value on the date
of grant. SAT also issued two promissory notes aggregating $400,000 in principal
amount (the "RSA Notes") to two RSA shareholders (one of whom was Mr. Stutman
who received a RSA Note for $239,760 and Brian Stutman received a note for the
balance). The RSA Notes bore interest at the rate of 7.5% per annum and were to
become due in one year from the May 21, 1996 closing date. SAT was required to
prepay the RSA Notes if the gross proceeds received by SAT from the exercises of
the SAT Common Stock purchase warrants after April 17, 1996 exceeded $7,000,000.
The RSA Notes were secured by all of SAT's tangible and intangible personal
property except the following: (1) SAT's cash and cash equivalents; (2) SAT's
securities, including the stock of its subsidiaries; and (3) certain contracts,
including the license from the USN. See "Summary-Recent Developments" for
information as to changes in the RSA Notes, the use of the principal and
interest of the RSA Notes to exercise Common Stock purchase warrants held by the
two Messrs. Stutman and a reduction in the exercise price of one of their SAT
Common Stock purchase warrants. 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 remained outstanding,
except that the RSA warrant was distributed among the RSA shareholders,
including Mr. Stutman who received a warrant to purchase 105,500 shares and
Brian Stutman who received a warrant to purchase 70,500 shares.
During its last three fiscal years ended December 31, 1996, RSA's revenues,
income and income per share were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1995 1994 1993
---------- -------- ----------
<S> <C> <C> <C>
Revenue................................. $1,101,599 $646,428 $ 536,292
Net Income (Loss)....................... $ (19,549) $ 16,694 $ (98,448)
Income (Loss) per share................. $ (244.36) $ 208.68 $(1,278.55)
</TABLE>
RSA was merged into SAT on December 31, 1996 and its services are now
performed by the Robert Stutman & Associates Consulting Division of SAT.
(4) Alconet, Inc.
In March 1995, SAT acquired 100% of the issued and outstanding common stock
of Alconet and all the membership interests of Dakotanet, L.L.C. As
consideration, SAT issued 782,321 shares of the SAT Common Stock registered
under the Securities Act as Acquisition Shares in the January 1992 Registration
Statement (see "The Merger and Related Matters -- Summary of the Terms of the
SAT Common Stock -- Acquisition Shares") and valued at $1,564,642. The
acquisitions have been accounted for as a purchase in the financial statements
of the Company. In March 1996, SAT 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 was engaged
in the computer software/networking business. Alconet had developed an alcohol
testing network to upload test results and information from various alcohol
breath testing devices.
74
<PAGE> 84
Alconet was merged into SAT on December 31, 1996 and its operations are now
conducted as part of the Alcohol Testing Products Division of SAT.
In the quarter ended September 30, 1996, SAT wrote off $714,377 in good
will associated with the subsidiary.
(5) U.S. Rubber Recycling, Inc.
In November 1992, SAT purchased the total assets of Adflo International,
Inc. for its then newly formed whollyowned subsidiary, USRR, which then began to
manufacture floor covering products for office and industrial use from used
truck and bus tires. These tires were delivered to USRR's Rancho Cucamonga plant
and to an off-site storage facility, where they were recycled by splitting and
cutting the tires and reassembling the recycled parts into finished products.
Sales were made nationwide through manufacturer's representatives and
distributors. All manufacturing was performed in the USSR's then Rancho
Cucamonga facility. USRR ceased operations on April 30, 1996 when substantially
all of its assets were sold as described in the second succeeding paragraph.
SAT acquired the total assets of Adflo International, Inc. for a total
consideration of 185,000 shares of the SAT Common Stock valued at $196,563. The
transaction was accounted for as a purchase in the financial statements of the
Company. These shares were part of the Acquisition Shares registered under the
Securities Act in the January 1992 Registration Statement solely for acquisition
purposes (see "The Merger and Related Matters -- Summary of the Terms of the SAT
Common Stock -- Acquisition Shares").
On April 30, 1996, USRR sold substantially all of its assets to an
unaffiliated buyer for $450,000, $150,000 of which was paid at the closing and
the balance by the delivery of a $300,000 promissory note. The purchaser also
paid approximately $80,000 in accounts payable of USRR and assumed certain other
liabilities, including USRR's lease (see, however, the section "Description of
Property" under this caption "Business of the Company"). The sale resulted in a
loss of approximately $88,000. The promissory note is payable in six annual
installments of $50,000, together with interest at a rate of 7% per annum. In
addition to the annual installments, the promissory note will be prepaid in an
amount equal to 12 1/2% of the buyer's annual gross sales of USRR products in
excess of $1,400,000. The promissory note is secured by a first priority
security interest in all of the buyer's assets. USRR is required to agree,
however, to subordinate its security interest to up to $1,000,000 of
institutional financing for the buyer.
USRR was dissolved on December 31, 1996, with its obligations being assumed
by SAT.
EMPLOYEES
As of March 31, 1997, the Company had 82 full time employees including its
officers, of which 16 engaged in manufacturing, 14 in sales and marketing, 12 in
research and development and 36 in general and administrative jobs. The Company
has no collective bargaining agreement with its employees.
DESCRIPTION OF PROPERTY
Effective August 1, 1996, SAT subleased approximately 8,500 square feet of
office space in Fort Lauderdale, Florida, under a lease expiring November 30,
2001, which lease grants the tenant a right to renew for an additional five-year
term. The space is being utilized as SAT's corporate headquarters and by the
Robert Stutman & Associates Consulting Division (formerly RSA) and the Employer
Services Division (formerly ProActive). RSA's landlord for space in Dedham,
Massachusetts has cancelled RSA's lease. SAT's former subsidiary ProActive
occupied approximately 1,640 square feet of office space in Savannah, Georgia
under a lease expiring January 2, 1999. ProActive has sublet such premises and
remains liable in the event of a default by the sublessee. SAT has assumed such
liability as a result of ProActive's merger into it.
SAT occupies approximately 20,000 square feet of office and factory
facilities in Rancho Cucamonga, California under a lease expiring January 31,
2002 (as a result of a renewal), which premises are shared with its subsidiaries
U.S. Drug and Good Ideas and its Alcohol Testing Products Division. This lease
includes the option of extending its term for another consecutive five-year
period. The former Alconet subsidiary (now part
75
<PAGE> 85
of the Alcohol Testing Products Division) occupied approximately 1,200 square
feet of office space in Bismark, North Dakota under a lease which would have
expired March 31, 1997 and has been cancelled.
Good Ideas previously occupied approximately 22,000 square feet of office
and factory space in Fort Worth, Texas under a lease which expired December 31,
1995. Until April 30, 1996, SAT's subsidiary USRR occupied approximately 17,000
square feet of office and factory space in Rancho Cucamonga, California under a
lease expiring June 30, 1999. Pursuant to the sale of USRR's assets (see the
section "Subsidiaries and Divisions -- U.S. Rubber Recycling, Inc." under this
caption "Business of the Company"), the purchaser assumed the foregoing lease,
but the landlord did not release USRR from its obligations under the lease. SAT
has assumed USRR's obligation as a result of USRR's dissolution.
In addition to rent, the leases provide for payment of real estate taxes
and other occupancy costs. For information as to the aggregate rentals paid
during the past three fiscal years and anticipated to be paid in the ensuing
three fiscal years, see Note 13 to Notes to the Company's Financial Statements
elsewhere in this Prospectus.
Management is of the opinion that the leased facilities are currently
adequate and suitable for the Company. However, if U.S. Drug successfully
completes its product development program, as to which there can be no
assurance, U.S. Drug will require additional space for manufacturing.
LEGAL MATTERS
The Company is not a party to any material litigation and is not aware of
any pending litigation that could have a material adverse effect on the
Company's business, results of operations or financial condition.
76
<PAGE> 86
BUSINESS OF GOOD IDEAS
OVERVIEW
Good Ideas Texas was incorporated under the laws of the State of Texas on
December 18, 1987. Pursuant to the Good Ideas Acquisition Agreement, SAT through
a subsidiary acquired a 55% interest in Good Ideas Texas for which SAT's
subsidiary issued shares of its stock valued at $5,844 and received 1,533,125
shares of the Good Ideas Common Stock effective June 29, 1992. On June 5, 1992,
Good Ideas was incorporated under the laws of the State of Delaware. On December
17, 1992, Good Ideas Texas was merged with and into Good Ideas and a
27,871-for-1 stock split was effected for the previously issued shares of Good
Ideas Texas (all references herein to the number of shares of the Good Ideas
Common Stock being adjusted to reflect this stock split on a retroactive basis).
In August 1993, SAT acquired its subsidiary's interest in Good Ideas, which
acquisition included the issuance of 400,000 shares of the SAT Common Stock
valued at $2.4375 per share to two officer-stockholders of Good Ideas, which
transaction gave effect to the $5,844 previously paid. During fiscal 1993, SAT
settled litigation against SAT by a person who was also an investor in Good
Ideas and, as part of the settlement, received 696,875 shares of the Good Ideas
Common Stock from such investor. As a result of these transactions, SAT owned
2,230,000 shares of the Good Ideas Common Stock for which it had paid for in
shares of the SAT Common Stock or of its subsidiary having an aggregate value of
$975,000. On December 15, 1993, SAT received 170,000 shares of the Good Ideas
Common Stock as payment for $748,682 in indebtedness owned by Good Ideas to SAT.
In addition, also on December 15, 1993, the two officer-stockholders surrendered
157,500 shares of the Good Ideas Common Stock to Good Ideas in consideration of
receiving new employment agreements. As a result of this reduction in the
outstanding shares of the Good Ideas Common Stock, SAT's ownership was increased
to 2,400,000 or 85.7% of the 2,800,000 shares of the Good Ideas Common Stock
then outstanding. In February and March 1994, Good Ideas had a public offering
of Good Ideas Common Stock in which an aggregate of 1,320,000 shares were sold.
As of March 31, 1997, SAT owned 2,400,000 of the 3,948,680 shares of the Good
Ideas Common Stock outstanding or 60.8%.
As a result of certain of the transactions described in the preceding
paragraph, SAT acquired 2,400,000 shares of the Good Ideas Common Stock for an
aggregate cost, without attempting to value the shares surrendered in the
settlement, of $1,723,682 or $.72 per share of the Good Ideas Common Stock as
compared with .36 of a share of the SAT Common Stock having a value of $1.625
per share being offered to the Good Ideas Minority Stockholders for each share
of the Good Ideas Common Stock pursuant to this Consent Solicitation
Statement/Prospectus.
Good Ideas designed, marketed and distributed a variety of traditional toy
products for children of various ages. Good Ideas' sales historically had been
derived from a line of traditional wooden construction toys. Good Ideas'
historic strategy had been to design and develop enduring traditional lines of
toys and to create enhancements to, and extensions of, these toy lines which
maximized product line sales while minimizing development and advertising
expenses for new and enhanced products. Good Ideas enhanced and extended its
existing toy lines through the addition of accessories and through the
incorporation of plastic figures and components into themed playsets which
provided the consumer with a creative play environment. Commencing in fiscal
1995, Toys R Us, the major customer of Good Ideas, significantly reduced its
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 were facing
these same problems -- their distributors or retailers to which they sold had
large inventories of products and declining sales and customer traffic. In
addition, management believes that many retailers were minimizing their number
of vendors and reducing the number of items carried in inventory, which had the
result of squeezing out the smaller companies like Good Ideas with their limited
products lines. See "The Company's Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Good Ideas Enterprises" and
"Good Ideas' Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Results of Operations." If Good Ideas is not sold,
management intends to liquidate the business of Good Ideas as soon after the
results of the consent solicitation for the Merger are known (see "The Merger
and Related Matters -- Sale of Good Ideas"). All operations of Good Ideas have
now ceased.
77
<PAGE> 87
In addition to the products described in the ensuing sections, Good Ideas
had also manufactured and sold a construction toy consisting of a set of
corrugated cardboard bricks marketed under the trademark Bill's Bric
Builders(TM). Due to increasing paper costs, the line of corrugated cardboard
bricks was discontinued after fiscal 1995.
SALES BY PRODUCTS
The following table sets forth Good Ideas' net sales by product in dollar
volume (in thousands) and as a percentage of net sales for the three years ended
March 31, 1996. No breakdown is shown for the nine months ended December 31,
1996 because the product sales have been minimal.
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-------------------------------------------------------------------
1996 1995 1994
------------------- ------------------- -------------------
CATEGORY AMOUNT PERCENTAGE AMOUNT PERCENTAGE AMOUNT PERCENTAGE
- ------------------------------------------- ------ ---------- ------ ---------- ------ ----------
<S> <C> <C> <C> <C> <C> <C>
Wood Construction Toys..................... $ 967 64.1% $2,841 61.7% $3,574 64.5%
Equestrian Toys............................ 531 35.2% 1,213 26.3% 1,015 18.3%
Corrugated Cardboard Construction Toys*.... 8 0.6% 344 7.5% 413 7.4%
Other Products............................. 2 0.1% 208 4.5% 542 9.8%
------ ------ ------ ------ ------ ------
Total............................. $1,508 100.0% $4,606 100.0% $5,544 100.0%
====== ====== ====== ====== ====== ======
</TABLE>
- ---------------
* Due to increasing paper costs, the line of corrugated cardboard bricks was
discontinued after fiscal 1995.
WOODEN CONSTRUCTION TOYS
Good Ideas marketed a full line of wooden interlocking log and wooden block
construction toys sets. Good Ideas shipped classic stained log sets marketed
under the trademark Paul Bunyan Log Builders(TM) and brightly-painted,
multi-colored combination log and building block sets under the trademark Paul
Bunyan Wood Builders(TM). Good Ideas believes that it was a major supplier of
wooden interlocking-log construction toys in the United States. Good Ideas also
shipped a themed playset, marketed as General Custer's Fort Apache(TM),
combining standard wood logs with plastic figures and accessories. In 1993, Good
Ideas commenced shipping additional themed playsets, such as Log Town(TM)and Log
Village(TM), which included plastic roofs, windows, doors and other accessories.
Good Ideas' wooden construction toys typically ranged in retail price from $4.99
to $39.99, depending upon the number of pieces in the set and the addition of
plastic components in themed sets.
EQUESTRIAN TOYS
Good Ideas' line of equestrian toys consisted of flocked plastic horses
ranging in height from five to eleven inches, which were marketed under the
trademark Black Beauty and Friends(TM). This line included a variety of
different styles of horses to encourage collection of the entire line. These
styles included the Appaloosa, Chestnut, Carrousel, Palomino, Dappled Gray,
Paint, Leopard and Black Beauty horses. Individual horses typically ranged in
retail price from $3.99 for a five-inch horse to $7.99 for an eight-inch horse
and $14.99 for an eleven-inch horse. Combination sets of one five-inch pony and
one eight-inch mare typically retailed for $9.99. In addition, Good Ideas
separately offered accessories and playsets scaled to the most popular eight-
inch horses, including an assortment of cotton blankets and leggings made in a
variety of colors and real leather saddles. Good Ideas also marketed two
playsets under the trademark Black Beauty and Friends(TM): the Equestrian Center
and the Stable and Corralset. Both of these sets contained different styles of
horses, which were not available for purchase separately. The Equestrian Center
typically retailed for $11.99 and the Stable and Corral typically retailed for
$29.99.
COLORFORMS FLIP-TOP ACTIVITY CENTER(TM)
In October 1994, Good Ideas acquired a license allowing Good Ideas to
manufacture certain products bearing the Colorforms brand name and logo,
including an activity table utilizing the products of both Good
78
<PAGE> 88
Ideas and Colorforms under the trademark Colorforms Flip-Top Activity
Center(TM). The activity table was included in Good Ideas' 1995 product line and
was introduced at the New York Toy Fair in February of 1995. The activity
table's suggested retail price was $129.99. There were limited sales of these
products during the six months ended September 30, 1995. The license expired in
October 1995 and was not renewed.
DESIGN AND DEVELOPMENT
Good Ideas' design and development strategy had been to produce enduring,
traditional lines of toys and to create enhancements to and extensions of these
toys lines in order to broaden their appeal to targeted consumers. Good Ideas'
line of wooden log construction sets exemplified this strategy. Traditional
stained-wood interlocking log construction toys have been marketed in the United
States for many years. Good Ideas had enhanced and extended its line of wooden
log construction toys with the introduction of multi-colored logs and themed
playsets containing plastic figures and accessories.
Good Ideas relied on its senior management personnel and on independent
designers and contractors to design and develop its products. Typically, Good
Ideas had presented designers with toy concepts developed or acquired by it and
the designers created renderings of the product. Good Ideas retained product and
packaging designers on an ongoing basis and generally paid a flat fee for their
services. To minimize some of the risk associated with introducing new products,
Good Ideas normally consulted with its principal customers in the development of
new products.
SALES AND MARKETING
Good Ideas had distributed its products primarily to national mass
merchandisers, such as Toys R Us, Wal-Mart Stores, Inc. ("Wal-Mart") and J.C.
Penney Company, Inc. ("Penney"), and to wholesale clubs, such as Price Costco
Wholesale Corporation ("Costco") and BJ's Wholesale Club, Inc. ("BJ's"). Good
Ideas had sold its toy products to high-end specialty retailers, including
F.A.O. Schwarz and Imaginarium. As indicated in the table below, none of the
foregoing customers had sales to them of 10% or more of the Good Ideas sales
during the past three fiscal years other than Toys R Us (in excess of 50% in all
three years) and Costco (not in fiscal 1996). Several of Good Ideas' products
appeared in the 1995 Sears Wish Book which markets toys manufactured and
distributed by many different toy manufacturers and distributors.
The traditional types of toys that Good Ideas developed and marketed were
well known and did not require substantial advertising to create consumer
awareness. Consequently, Good Ideas believes that the most important marketing
tools for these products were their packaging and pricing. Good Ideas utilized
attractive, innovative and unique packaging to differentiate its products from
those of its competitors. Good Ideas did not incur significant expenses for
advertising. On a limited basis, Good Ideas made advertising allowances
available to the retailers that promoted its products.
79
<PAGE> 89
The following table sets forth net sales to Good Ideas' largest customers
for each of the specified periods by dollar volume (in thousands) and as a
percentage of net sales:
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
-------------------------------------------------------------------
1996 1995 1994
------------------- ------------------- -------------------
CUSTOMER AMOUNT PERCENTAGE AMOUNT PERCENTAGE AMOUNT PERCENTAGE
- ------------------------------------- ------ ---------- ------ ---------- ------ ----------
<S> <C> <C> <C> <C> <C> <C>
Toys R Us............................ $ 779 51.7% $2,726 59.2% $3,182 57.4%
Costco............................... 50 3.3% 963 20.9% 554 10.0%
Other(1)............................. 679 45.0% 917 19.9% 1,808 32.6%
------ ------ ------ ------ ------ ------
Total...................... $1,508 100.0% $4,606 100.0% $5,544 100.0%
====== ====== ====== ====== ====== ======
</TABLE>
- ---------------
(1) "Other" includes all customers with sales of less than 10% of total sales.
Good Ideas maintained, until December 31, 1995, a small internal sales and
marketing staff and relied primarily upon 20 sales representatives in the United
States, one in Mexico and one in Canada, all of whom were independent
contractors. These sales representatives made on-site visits to customers to
solicit orders for products and marketed Good Ideas' products at the major toy
trade shows in New York City and Hong Kong and at regional trade shows. Good
Ideas had no long-term commitments from any of its customers, but instead relied
upon its independent sales representatives and personal relationships with its
customers to sell its products.
MANUFACTURING
Good Ideas contracted with manufacturers in China, Mexico and the United
States to produce its products. Decisions related to the choice of manufacturer
were based on price, quality of merchandise, reliability and the ability of a
manufacturer to meet Good Ideas' timing requirements for delivery. Good Ideas
did not have long-term contracts with any of its manufacturers and competes with
other companies for production facilities with respect to certain of its
products.
The principal raw materials used in the production of Good Ideas' products
were wood and plastic. Raw materials were generally purchased by Good Ideas'
contract manufacturers which delivered the completed products to Good Ideas.
Good Ideas also purchased packaging for certain of its products.
Good Ideas' wooden construction toys were rough-cut by manufacturers
located in China and Mexico. Following rough-cut foreign manufacturing, all of
Good Ideas' wooden construction toys were finished by a domestic manufacturer.
The flocked horses sold by Good Ideas were purchased from a single
manufacturer in China. Good Ideas' supplier owned the molds for the plastic
horses that made up the core of its equestrian line of toys. Good Ideas'
supplier of plastic horses was under no obligation to refrain from selling such
products to other purchasers in the United States.
Plastics components used in Good Ideas' themed construction sets were
manufactured by a number of manufacturers. Tooling and molding for unique
plastic components were owned by Good Ideas.
BACKLOG
Total order backlog at March 31, 1994, 1995 and 1996 was approximately
$500,000, $322,000 and $-0-, respectively. Good Ideas' experience had been that
cancellations, rejections or returns of orders did not materially reduce the
amount of sales realized from its backlog.
Good Ideas participated in the electronic data interchange program
maintained by several of its former largest customers, including Toys R Us,
Wal-Mart and Penney. This program allowed Good Ideas to monitor store inventory
and schedule production to meet anticipated re-orders.
80
<PAGE> 90
PROPRIETARY TRADEMARKS
Good Ideas' name Good Ideas(TM) and Big Bill's Bric Builders(TM) are
registered trademarks of Good Ideas and have been published by the U.S. Patent
and Trademark Office (the "PTO"). Additionally, the Company has filed trademark
applications with the PTO for the following trademarks: Paul Bunyan Log
Builders(TM) and Black Beauty and Friends(TM).
COMPETITION
For information relating to competition, see "Business of the
Company -- Competition -- Toy Products."
GOVERNMENT REGULATION
Good Ideas were subject to the Federal Hazardous Substances Act and the
Federal Consumer Product Safety Act, among other laws. These laws empower the
Consumer Products Safety Commission (the "CPSC") to protect children from
hazardous toys and other articles. Pursuant to federal law, all toy products
must meet certain product safety standards established by the CPSC. Similar laws
exist in some states and cities in the United States and in many jurisdictions
throughout the world. Further, in order to gain widespread acceptance by toy
retailers, toy products must meet additional product safety standards
established by the Toy Manufactures Association (the "TMA"). The CPSC has the
authority to exclude from the market articles which are found to be hazardous
and can require a manufacturer to repurchase such toys under certain
circumstances.
EMPLOYEES
As of March 31, 1997, Good Ideas employed no persons, excluding the
personnel employed by SAT who provide management and administrative services to
Good Ideas.
81
<PAGE> 91
SAT PRINCIPAL STOCKHOLDERS
The following table sets forth certain information, as of March 31, 1997,
with respect to (1) any person who owned beneficially more than 5% of the SAT
Common Stock; (2) each director of SAT; (3) the Chief Executive Officer of SAT;
(4) each executive officer of SAT (including the then Chief Executive Officer)
who was paid more than $100,000 in fiscal 1996, whether or not he or she was
still an executive officer on January 31, 1997; and (5) all directors and
executive officers as a group. Each beneficial owner has advised SAT that he or
she has sole voting and investment power as to the shares of the SAT Common
Stock reported in the table, except that the Common Stock purchase warrants
described in the notes below do not have any voting power until exercised and
may not be sold or otherwise transferred except in compliance with the
Securities Act.
<TABLE>
<CAPTION>
NUMBER OF SHARES
NAME AND ADDRESS BENEFICIALLY OWNED PERCENTAGE
----------------------------------------------------- ------------------ ----------
<S> <C> <C>
Steven A. Cohen(2)................................... 1,748,100(3) 4.9%
777 Long Ridge Road
Stamford, CT 06902
S.A.C. Capital Associates, LLC(2).................... 508,100(4) 1.4%
777 Long Ridge Road
Stamford, CT 06902
Robert M. Stutman(5)................................. 930,500(6) 2.5%
4517 N.W. 31st Avenue
Ft. Lauderdale, FL 33309
Linda H. Masterson(7)................................ 210,000(8) nil
10410 Trademark Street
Rancho Cucamonga, CA 91730
Gary S. Wolff(9)..................................... 25,000(10) nil
190 Sylvan Avenue
Englewood Cliffs, NJ 07632
James C. Witham(11).................................. 878,500 2.4%
27 La Costa Drive
Rancho Mirage, CA 92270
Karen B. Laustsen(12)................................ 104,500 nil
3000 C La Paz Lane
Diamond Bar, CA 91765
Alan I. Goldman(13).................................. 20,000(14) nil
497 Ridgewood Avenue
Glen Ridge, NJ 07028
John C. Lawn (13).................................... 20,000(14) nil
c/o The Century Council
550 South Hope Street
Suite 1950
Los Angeles, CA 90071-2604
Peter M. Mark(13).................................... 587,600(14) 1.6%
5531 Sugar Hill
Houston, TX 77056
Michael S. McCord(13)................................ 234,441(15) nil
Suite 701
2001 Kirby Drive
Houston, TX 77019
</TABLE>
82
<PAGE> 92
<TABLE>
<CAPTION>
NUMBER OF SHARES
NAME AND ADDRESS BENEFICIALLY OWNED PERCENTAGE
----------------------------------------------------- --------- ---
<S> <C> <C>
Lee S. Rosen(13)..................................... 1,478,648(16) 4.0%
17332 Saint James Court
Boca Raton, FL 33496
All directors and executive officers as a group
(eight persons).................................... 4,065,065(6)(8) 10.6%
(14)(15)(16)
</TABLE>
- ---------------
(1) The percentages computed in this column of the table are based upon
36,030,591 shares of the SAT Common Stock outstanding on March 31, 1997 and
effect being given, where appropriate, pursuant to Rule 13d-3(d)(1) under
the Exchange Act, to shares issuable upon the exercise of SAT Common Stock
purchase warrants and stock options which are currently exercisable or
exercisable within 60 days of March 31, 1997.
(2) Steven A. Cohen and S.A.C. Capital Associates, LLC filed a Schedule 13D, as
amended (the "Cohen Schedule 13D"), because their joint beneficial
ownership may constitute ownership by a "group" as such term is defined in
Rule 13d-5(b) under the Exchange Act. Based on the holders' advice to SAT
and the subsequent grants by SAT, the group beneficially owned an aggregate
of 2,256,200 shares or 6.5% of the outstanding shares at March 31, 1997.
(3) The shares reported in the table as being beneficially owned reflect (a)
1,743,100 shares of the SAT Common Stock and (b) 5,000 shares of the SAT
Common Stock issuable at $1.8125 per share upon the exercise of a Lenders
Warrant. The shares reported in the table do not reflect (x) 2,500,000
shares of the SAT Common Stock issuable upon the conversion of a
Convertible Note at $2.00 per share and (y) 1,250,000 shares of the Common
Stock issuable at $2.00 per share upon the exercise of a June 30 Warrant
because neither the Convertible Note is convertible, nor the June 30
Warrant is exercisable, at March 31, 1997 or within 60 days thereafter.
(4) The shares reported in the table as being beneficially owned reflect (a)
503,100 shares of the SAT Common Stock and (b) 5,000 shares of the SAT
Common Stock issuable at $1.8125 per share upon the exercise of a Lenders
Warrant. The Cohen Schedule 13D reported that S.A.C. Capital Associates,
LLC, an Anguillan limited liability company, acquired the foregoing
securities, but, because S.A.C. Capital Advisors, LLC, a Delaware limited
liability company, has voting and dispositive power over the securities,
the latter was deemed to be the beneficial owner thereof. The shares
reported in the table do not reflect (x) 2,500,000 shares of the SAT Common
Stock issuable upon the conversion of a Convertible Note at $2.00 per share
and (y) 1,250,000 shares of the SAT Common Stock issuable at $2.00 per
share upon the exercise of a June 30 Warrant because neither the
Convertible Note is convertible, nor the June 30 Warrant exercisable, at
March 31, 1997 or within 60 days thereafter.
(5) Mr. Stutman was elected as Chairman of the Board and a director of SAT and
designated as its Chief Executive Officer on April 18, 1996.
(6) The shares reported in the table include (a) 3,125 shares of the SAT Common
Stock issuable upon the exercise at $2.00 per share of a Common Stock
purchase warrant expiring December 13, 1998 issued to him for his
consulting services while still an employee of RSA; (b) 105,500 shares of
the SAT Common Stock issuable upon the exercise at $2.00 per share of a
Common Stock purchase warrant expiring March 31, 1999 issued to him when
the Common Stock purchase warrant to purchase 200,000 shares issued to RSA
was divided among the RSA shareholders; and (c) 474,750 shares of the SAT
Common Stock issuable upon the exercise at $2.125 per share of a Common
Stock purchase warrant expiring May 20, 1999 issued to him in exchange for
his ownership interest in RSA.
(7) Ms. Masterson, a director of SAT, became its President and Chief Operating
Officer effective May 13, 1996. Effective November 19, 1996, Ms. Masterson
relinquished her duties as Chief Operating Officer in order to concentrate
on certain operations of the Company.
(8) The shares reported in the table reflect (a) 10,000 shares of the SAT
Common Stock issuable upon the exercise at $1.9375 per share of a Common
Stock purchase warrant expiring November 15, 1998 issued to her as a
director of SAT on the same basis as described in Note 14 to the table and
(b) 200,000
83
<PAGE> 93
shares of the SAT Common Stock issuable upon the exercise at $2.125 per
share of a Common Stock purchase warrant expiring May 12, 1999 issued
pursuant to Ms. Masterson's terms of employment, which 200,000 shares are
the only shares as to which the warrant to purchase an aggregate of 600,000
shares is currently exercisable or exercisable within 60 days of March 31,
1997.
(9) Mr. Wolff was the Treasurer, Chief Financial Officer and Chief Accounting
Officer of SAT until he resigned on July 3, 1996.
(10) The shares reported in the table reflect (a) 15,000 shares of the SAT
Common Stock issuable upon the exercise at $1.06 per share of a Common
Stock purchase warrant expiring September 30, 1996 and (b) 10,000 shares of
the SAT Common Stock issuable upon the exercise at $4.00 per share of a
Common Stock purchase warrant expiring May 17, 1997.
(11) Mr. Witham was the Chairman, the President, the Chief Executive Officer and
a director of SAT until April 18, 1996.
(12) Ms. Laustsen was an Executive Vice President and a director of SAT until
April 18, 1996.
(13) A director of SAT.
(14) The shares reported in this table include or reflect (a) 10,000 shares of
the SAT Common Stock issuable upon the exercise at $1.9375 per share of a
Common Stock purchase warrant expiring November 15, 1998 and (b) 10,000
shares of the SAT Common Stock issuable upon the exercise at $1.825 per
share of a Directors' Warrant, both issued to the holder as a director of
SAT who is not employed by SAT or any subsidiary thereof.
(15) The shares reported in the table include (a) 10,000 shares of the SAT
Common Stock issuable upon the exercise at $1.9375 per share of a Common
Stock purchase warrant expiring November 15, 1998 issued to Mr. McCord as a
consultant to the Board of Directors of SAT and (b) 10,000 shares of the
SAT Common Stock issuable upon the exercise at $1.825 per share of a
Directors' Warrant issued to him as a director of SAT on the same basis as
those described in Note 14 to this table.
(16) The shares reported in the table include (a) 10,000 shares of the SAT
Common Stock issuable upon the exercise at $1.9375 per share of a Common
Stock purchase warrant expiring November 15, 1998 issued to Mr. Rosen on
the same basis as those described in Note 14 to this table; (b) 10,000
shares of the SAT Common Stock issuable upon the exercise at $1.825 per
share of a Directors' Warrant issued to Mr. Rosen on the same basis as
those described in Note 14 to this table; (c) 200,000 shares of the SAT
Common Stock issuable upon the exercise at $1.9375 per share of a Common
Stock purchase warrant expiring November 15, 1998; (d) 150,000 shares of
the SAT Common Stock issuable upon the exercise at $3.00 per share of a
Common Stock purchase warrant expiring November 15, 2000; (e) 150,000
shares of the SAT Common Stock issuable upon the exercise at $2.00 per
share of a Common Stock purchase warrant expiring November 15, 2000; (f)
300,000 shares of the SAT Common Stock issuable upon the exercise at $2.125
per share of a Common Stock purchase warrant expiring April 17, 1999; and
(g) 200,000 shares of the SAT Common Stock issuable upon the exercise at
$2.00 per share of the December 2 Warrant. The Common Stock purchase
warrants described in (c), (d) and (e) were issued to Mr. Rosen as
consideration for his services, including those related to the private
placement consummated in February 1996. 50,000 of the shares subject to
each of the warrants described in (d) and (e) may be forfeited if none of
the Common Stock purchase warrants issued to the purchasers in such private
placement are exercised and may be reduced in the number of shares which
may be exercised pro rata to the exercise of the private placement
warrants.
(17) The shares reported in the table include, in addition to those reported for
a director (who may also be an executive officer) elsewhere in the table
(see the text relating to Notes 6, 8, 14, 15 and 16 to the table), (a)(i)
176,250 shares of the SAT Common Stock issued to an executive officer of
SAT in exchange for his ownership interest in RSA; (ii) 59,876 shares of
the SAT Common Stock issuable upon the exercise by such executive officer
at $2.00 per share of a Common Stock purchase warrant expiring March 31,
1999 issued to him when the Common Stock purchase warrant to purchase
200,000 shares issued to RSA was divided among the RSA shareholders; and
(iii) 317,250 shares of the SAT Common Stock issuable upon the exercise by
such executive officer at $2.125 per share of a Common Stock purchase
84
<PAGE> 94
warrant expiring May 20, 1999 issued to him in exchange for his ownership
interest in RSA and (b)(i) 3,000 shares of the SAT Common Stock held by a
second executive officer; (ii) 5,000 shares of the SAT Common Stock
issuable upon the exercise by him at $2.125 per share of an Employee
Warrant expiring July 17, 1998, (iii) 10,000 shares of the SAT Common Stock
issuable upon the exercise by him at $2.3125 of a Common Stock purchase
warrant expiring July 7, 1999; and (iv) 12,500 shares of the SAT Common
Stock issuable upon the exercise by him at $2.125 per share of an Employee
Warrant expiring May 2, 2003 which are the only shares of the Employee
Warrant to purchase 50,000 shares currently exercisable or exercisable
within 60 days of March 31, 1997. The shares reported in the table exclude
40,000 shares of the SAT Common Stock issuable upon the exercise by a third
executive officer of SAT at $2.125 per share of an Employee Warrant which
is not currently exercisable or exercisable within 60 days of March 31,
1997.
As indicated elsewhere in this Consent Solicitation Statement/Prospectus
(see "Business of the Company -- General"), Good Ideas and U.S. Drug are the
only subsidiaries of SAT which are not wholly-owned.
As of March 31, 1997, no director or executive officer of SAT owned
beneficially any shares of the Good Ideas Common Stock except for Michael S.
McCord who owned 10,000 shares. No director or officer of SAT owns any Good
Ideas Warrants and there are no outstanding stock options to purchase shares of
the Good Ideas Common Stock. SAT itself owns 2,400,000 of the 3,948,600
outstanding shares of the Good Ideas Common Stock or 60.8% thereof.
The following table reports, as of March 31, 1997, the number of shares of
the U.S. Drug Common Stock beneficially owned by two directors of SAT as of such
date. No other director and no executive officer of SAT owns any shares of the
U.S. Drug Common Stock:
<TABLE>
<CAPTION>
NUMBER OF SHARES
NAME BENEFICIALLY OWNED PERCENTAGE(1)
----------------------------------------------------- ------------------ -------------
<S> <C> <C>
Peter M. Mark........................................ 15,500 nil
Michael S. McCord.................................... 36,000(2) nil
</TABLE>
- ---------------
(1) The percentage computed in this column of the table is based upon 5,221,900
shares of the U.S. Drug Common Stock outstanding on March 31, 1997. No
effect is given, pursuant to Rule 13d-3(d)(1) under the Exchange Act, to
shares issuable upon the exercise of U.S. Drug Common Stock purchase
warrants which are currently exercisable or exercisable within 60 days of
March 31, 1997 because neither director of SAT owns any such warrant.
(2) The shares reported in the table do not reflect an aggregate of 25,300
shares owned by affiliates of Mr. McCord as to which he disclaims beneficial
ownership.
SAT owns 3,500,000 shares of the 5,221,900 shares of the U.S. Drug Common
Stock outstanding as of March 31, 1997 or 67.0% thereof.
85
<PAGE> 95
GOOD IDEAS PRINCIPAL STOCKHOLDERS
The following table sets forth, as of March 31, 1997, certain information
with respect to (1) any person who beneficially owned more than 5% of the Good
Ideas Common Stock, (2) each director of Good Ideas, (3) the then Chief
Executive Officer of Good Ideas who was the only executive officer of Good Ideas
whose total annual salary and bonus exceeded $100,000 in fiscal 1996; and (4)
all directors and executive officers as a group. Each beneficial owner who is a
natural person has advised Good Ideas that he or she has sole voting and
investment power as to the shares of the Good Ideas Common Stock reported in the
table, except that, with respect to the beneficial ownership of SAT's shares,
the voting and investment power is shared by the seven directors of SAT, a
majority of whom must approve any vote or disposition of such shares.
<TABLE>
<CAPTION>
PERCENTAGE OF
NUMBER OF SHARES COMMON STOCK
NAME AND ADDRESS OF COMMON STOCK BENEFICIALLY
OF BENEFICIAL OWNER BENEFICIALLY OWNED OWNED(1)
-------------------------------------------------- ------------------ ------------------
<S> <C> <C>
Substance Abuse Technologies, Inc................. 2,400,000 60.8%
4517 N.W. 31st Avenue
Ft. Lauderdale, FL 33309
William D. Robbins(2)............................. 200,000 5.1%
c/o Good Ideas
Enterprises, Inc.
10410 Trademark Street
Rancho Cucamonga, CA 91730
Robert M. Stutman(3).............................. 2,400,000(4) 60.8%
4517 N.W. 31st Avenue
Ft. Lauderdale, FL 33309
Linda H. Masterson(5)............................. 2,400,000(4) 60.8%
10410 Trademark Street
Rancho Cucamonga, CA 91730
Michael S. McCord(6).............................. 10,000 nil
Suite 701
2001 Kirby Drive
Houston, TX 77019
All directors and executive officers as a group
(5 persons)..................................... 210,000 5.3%
</TABLE>
- ---------------
(1) The percentages computed in this column of the table are based upon
3,948,680 shares of the Good Ideas Common Stock outstanding on February 28,
1997. No effect is given, pursuant to Rule 13d-3(d)(3)(i) under the Exchange
Act, to shares issuable upon the exercise of Good Ideas Warrants because no
person named in the table owns such a Warrant.
(2) Former Chief Executive Officer and a director of Good Ideas.
(3) Chairman of the Board and a director of Good Ideas and Chairman of the
Board, Chief Executive Officer and a director of SAT.
(4) Mr. Stutman, as the Chairman of the Board the Chief Executive Officer and a
director of SAT, and Ms. Masterson, as the President and a director of SAT,
may be deemed to be the beneficial owner of the SAT shares of the Good Ideas
Common Stock. See, however, the introductory paragraph to this section.
(5) President and a director of Good Ideas and President and a director of SAT.
(6) A director of Good Ideas and SAT.
86
<PAGE> 96
SAT MARKET INFORMATION
MARKET DATA
Between January 2, 1992 and October 23, 1996, the SAT Common Stock has
traded on the American Stock Exchange ("AMEX") under the symbol "AAA." Effective
October 26, 1996, the SAT Common Stock began trading under the symbol "SAU." The
following table sets forth the high and low sales prices for the shares of the
SAT Common Stock during the periods indicated:
FISCAL 1995
<TABLE>
<CAPTION>
QUARTER ENDED HIGH LOW
------------------------------------------------------- ------- -------
<S> <C> <C>
June 30, 1994.......................................... $2.5625 $ 1.75
September 30, 1994..................................... $ 4.25 $2.1875
December 31, 1994...................................... $ 5.625 $3.1875
March 31, 1995......................................... $ 3.75 $ 1.875
</TABLE>
FISCAL 1996
<TABLE>
<CAPTION>
QUARTER ENDED HIGH LOW
------------------------------------------------------- ------- -------
<S> <C> <C>
June 30, 1995.......................................... $2.1875 $ 1.625
September 30, 1995..................................... $2.9375 $ 1.875
December 31, 1995...................................... $ 2.25 $ 1.875
March 31, 1996......................................... $ 3.375 $1.8125
</TABLE>
FISCAL 1997
<TABLE>
<CAPTION>
QUARTER ENDED HIGH LOW
------------------------------------------------------- ------- -------
<S> <C> <C>
June 30, 1996.......................................... $ 3.625 $2.3125
September 30, 1996..................................... $ 3.00 $ 1.75
December 31, 1996...................................... $2.3125 $ 1.375
</TABLE>
On April , 1997, the closing sales price of the SAT Common Stock was
$ per share.
HOLDERS
The holders of record of the SAT Common Stock on March 31, 1997 were 997
and SAT estimates, based on the number of proxies mailed in connection with the
two Annual Meetings of Stockholders held in February and October 1996, that it
has approximately 8,200 stockholders, including holders in street name.
DIVIDENDS
No dividends on the SAT Common Stock have been declared by SAT's Board of
Directors through December 31, 1996 and, in view of the Company's cash
requirements and history of operational losses, SAT's Board of Directors has no
current intention to declare or pay dividends on the SAT Common Stock in the
foreseeable future. Dividends on the Class A Preferred Stock are payable
semi-annually cumulative from December 17, 1990 and all dividends have been paid
timely.
RECENT QUOTATIONS
The following table sets forth the closing sales prices per share for the
SAT Common Stock and the Good Ideas Common Stock, as reported by the American
Stock Exchange and the Pacific Stock Exchange, respectfully, on February 5,
1996, the last full day on which these stocks were traded prior to the initial
public announcement of the principal terms of the proposed Merger and on April
, 1997, the latest available date. See the section "Market Data" under this
caption "SAT Market Information" and "Good Ideas Market
87
<PAGE> 97
Information -- Market Data" for a historical comparison of market prices of the
SAT Common Stock and the Good Ideas Common Stock, respectively.
<TABLE>
<CAPTION>
SAT GOOD IDEAS
COMMON STOCK COMMON STOCK
------------ ------------
<S> <C> <C>
February 5, 1996.............................. $2.375 $ .375
April , 1997................................
</TABLE>
GOOD IDEAS MARKET INFORMATION
MARKET DATA
The Good Ideas Common Stock was traded on the Pacific Stock Exchange under
the symbol "KID" through December 31, 1996 and thereafter has been traded in the
over-the-counter market also under the symbol "KID." The quarterly high and low
sales prices since Good Ideas' initial public offering on February 17, 1994 as
reported by the Pacific Stock Exchange are set forth below for the periods
indicated.
FISCAL 1995
<TABLE>
<CAPTION>
QUARTER ENDED HIGH LOW
------------------------------------------------------- ------- -------
<S> <C> <C>
June 30, 1994.......................................... $ 4.875 $ 3.625
September 30, 1994..................................... $ 4.50 $ 1.875
December 31, 1994...................................... $ 3.125 $ 1.50
March 31, 1995......................................... $1.9375 $ .75
</TABLE>
FISCAL 1996
<TABLE>
<CAPTION>
QUARTER ENDED HIGH LOW
------------------------------------------------------- ------- -------
<S> <C> <C>
June 30, 1995.......................................... $ 1.25 $ .625
September 30, 1995..................................... $ .75 $ .50
December 31, 1995...................................... $ .75 $ .125
March 31, 1996......................................... $ .6875 $ .25
</TABLE>
FISCAL 1997
<TABLE>
<CAPTION>
QUARTER ENDED HIGH LOW
------------------------------------------------------ ------- --------
<S> <C> <C>
June 30, 1996......................................... $ .8125 $ .125
September 30, 1996.................................... $ .6875 $ .125
December 31, 1996..................................... $ .50 $.015625
</TABLE>
On April , 1997, the high bid and low asked prices of the Good Ideas
Common Stock were $ and $ , respectively, per share. The
foregoing quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commission, and may not represent actual transactions.
EXCHANGE LISTING
On November 18, 1995, the Pacific Stock Exchange advised Good Ideas that
the share bid price of the Good Ideas Common Stock was below $1.00 per share,
which did not meet the minimum Tier II listing maintenance requirement of the
Pacific Stock Exchange, which requirement had become effective January 23, 1995.
Good Ideas had been granted an extended compliance period, not to exceed six
months from May 9, 1996, to demonstrate that the Good Ideas Common Stock was in
compliance. By letter dated November 11, 1996, the Pacific Stock Exchange
advised Good Ideas that should the Merger not be consummated by December 31,
1996 and/or the Good Ideas Common Stock remained in noncompliance with the
Pacific Stock Exchange's maintenance requirements, the Good Ideas Common Stock
would be delisted effective January 1, 1997. Such delisting has occurred. As a
result, the Good Ideas Common Stock now trades in the over-the-
88
<PAGE> 98
counter market. Good Ideas management intends that, if the Merger is
consummated, Good Ideas will deregister the Good Ideas Common Stock under
Section 12(b) of the Exchange Act and trading in the Good Ideas Common Stock
will cease on the Effective Date. In such event, the Good Ideas Minority
Stockholders will thereafter be able to trade their shares of the SAT Common
Stock on the American Stock Exchange.
As an alternative to the Merger, the Good Ideas Board of Directors had
reconsidered the possibility of effecting a reverse stock split of the Good
Ideas Common Stock in an amount sufficient to increase the market value of the
Good Ideas Common Stock to a level above the minimum requirement of the Pacific
Stock Exchange. This approach has been previously rejected because the Board
recognized that, unless Good Ideas reversed its adverse operational trends of
declining revenues and increasing losses, as to which there could be no
assurance, it was likely that, after the split, the market price would begin to
decline and again reach a level not complying with the Pacific Stock Exchange's
maintenance requirement. The Board also recognized that, if delisting occurred,
the Good Ideas Common Stock would not meet the market price requirement for
listing on the American Stock Exchange or reporting on the Nasdaq System and
that, if the Good Ideas Common Stock was reported in the OTC Bulletin Board or
in the "pink sheets," it was unlikely that the Good Ideas Common Stock would
rise in market value in such over-the-counter market in view of its operational
problems.
Because the bid price of the Good Ideas Common Stock was below $5.00 when
it was delisted, the security became subject to Rule 15g-9 promulgated under the
Exchange Act, which Rule imposes additional sales practices requirements on a
broker-dealer which sells Rule 15g-9 securities to persons other than the
broker-dealer's established customers and institutional accredited investors (as
such term is defined in Rule 501(a) under the Securities Act). For transactions
covered under Rule 15g-9, the broker-dealer must make a suitability
determination of the purchaser and receive the purchaser's written agreement to
the transaction prior to the sale. In addition, broker-dealers, particularly if
they are market makers in the Common Stock, have to comply with the disclosure
requirements of Rules 15g-2, 15g-3, 15g-4, 15g-5 and 15g-6 under the Exchange
Act unless the transaction is exempt under Rule 15g-1. Consequently, Rule 15g-9
and these other Rules may adversely affect the ability of broker-dealers to sell
or to make markets in the Good Ideas Common Stock.
HOLDERS
As of March 31, 1997, there were 171 holders of record (including SAT) and,
based on prior requests for Annual Reports, management believed that there were
approximately 1,100 beneficial holders of the Good Ideas Common Stock.
DIVIDENDS
Good Ideas' Board of Directors has not declared any dividends on the Good
Ideas Common Stock through December 31, 1996 and, in view of the financial
condition and the intention to sell or liquidate Good Ideas, the Board has no
current intention to pay any such dividends.
89
<PAGE> 99
SAT MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table contains information concerning the current directors
and executive officers of SAT as of March 31, 1997:
<TABLE>
<CAPTION>
NAME AGE POSITION
--------------------------------- --- -----------------------------------------------------
<S> <C> <C>
Robert M. Stutman................ 53 Chairman, Chief Executive Officer and a director
Linda H. Masterson............... 45 President and a director
Robert Muccini................... 54 Vice President, Finance, Treasurer, Chief Financial
Officer and Chief Accounting Officer
Steven J. Kline.................. 40 Vice President, Research and Development
Brian Stutman.................... 29 Vice President, Sales and Marketing
Alan I. Goldman.................. 59 Director
John C. Lawn..................... 60 Director
Peter M. Mark.................... 50 Director
Michael S. McCord................ 53 Director
Lee S. Rosen..................... 41 Director
</TABLE>
A director will be generally elected for a classified term of three years
or until his or her successor is elected and shall have qualified, which
classification of directors was initiated at the Annual Meeting of Stockholders
held on February 7, 1996. Each of the above directors other than Mr. Stutman
(who was first elected on April 18, 1996) and Mr. McCord (who was first elected
on October 22, 1996) was first elected on September 26, 1995 and was re-elected
at the Annual Meeting of Stockholders held on February 7, 1996, with Messrs.
Goldman and Mark to serve for a two-year term and Messrs. Lawn and Rosen and Ms.
Masterson to serve for a three-year term. Mr. Stutman was re-elected, and Mr.
McCord was initially elected, at the Annual Meeting of Stockholders held on
October 22, 1996, each to serve for a three-year term.
On March 24, 1997, the SAT Board of Directors increased the number of
directors from seven to eight effective June 1, 1997 and elected David L. Dorff
to fill the vacancy. Mr. Dorff was formerly an executive officer of the Triarc
Restaurant Group of Triarc Corporation, a restaurant and beverage company, and
the U.S. Shoe Footwear Group of United States Shoe Corp., a shoe and women's
clothing manufacturer, and a consulting partner with the accounting firm of
Deloitte & Touche. Mr. Dorff's term will terminate at the next Annual Meeting of
Stockholders, at which he must be designated to a class and be elected by the
stockholders in order to continue to serve as a director.
Each officer of SAT is elected by the Board of Directors to serve at the
discretion of the directors. For information as to severance arrangements
relating to two executive officers named in the table, see the section
"Employment Agreements" under this caption "SAT Management".
BUSINESS HISTORY
Robert M. Stutman was elected Chairman of the Board and a director of SAT
on April 18, 1996 and designated as its Chief Executive Officer. For more than
five years prior thereto, he has been serving as the President of RSA, a
provider of corporate "Drug-Free Workplace" programs. Prior to forming RSA, he
was Special Agent in charge of the New York office of the United States Drug
Enforcement Administration (the "DEA"). He also currently serves as a special
consultant in substance abuse for the CBS News Division. SAT acquired RSA on May
21, 1996. See "Business of the Company -- Subsidiaries and Divisions -- Employer
Services Division/Robert Stutman & Associates Consulting Division."
Linda H. Masterson has had substantial experience in marketing, sales and
business development in the medical diagnostics, healthcare and biotechnology
fields. On September 26, 1995, she was elected a director of SAT. Effective May
13, 1996, she became the President and Chief Operating Officer of SAT. Effective
November 19, 1996, she relinquished her duties as Chief Operating Officer in
order to devote more time to
90
<PAGE> 100
supervising the development program of U.S. Drug and the operations of the
Alcohol Testing Products and BioTox Divisions of SAT. Until May 13, 1996, she
was employed as the Executive Vice President of Cholestech, Inc., a start-up
diagnostic company, for which she developed and restructured the company
business strategy. In 1993, Ms. Masterson founded Masterson & Associates, a
company of which she was the President and owner until she joined Cholestech,
Inc. in May 1994, which was engaged in the business of providing advice to
start-up companies, including the preparation of technology and market
assessments and the preparation of strategic and five-year business plans for
biotech, medical device, pharmaceutical and software applications companies.
From 1992 to 1993, Ms. Masterson was employed as the Vice President of Marketing
and Sales of BioStar, Inc., a start-up biotech company focused on the
commercialization of a new detection technology applicable to both immunoassay
and hybridization based systems. From 1989 to 1992, she was employed as Senior
Vice President of Marketing, Sales and Business Development by Gen-Probe, Inc.,
a specialized genetic probe biotechnology company focused on infectious
diseases, cancer and therapeutics. Prior to 1989, Ms. Masterson was employed for
12 years in various domestic and international marketing and sales positions at
Johnson & Johnson, Inc., Baxter International Inc. and Warner Lambert Co. Ms.
Masterson has a BS in Medical Technology from the University of Rhode Island, a
MS in Microbiology/ Biochemistry from the University of Maryland and attended
the Executive Advanced Management Program at the Wharton School of Business at
the University of Pennsylvania.
Robert Muccini was elected on February 17, 1997 as Vice President, Finance
and Treasurer of SAT and designated Chief Financial Officer and Chief Accounting
Officer of SAT effective with the then anticipated resignation of Dennis A.
Wittman (who had served since September 5, 1996) as a result of the then
intended relocation of SAT's Finance and Accounting Department from Rancho
Cucamonga, California to the corporate headquarters in Fort Lauderdale, Florida,
which resignation and, accordingly, Mr. Muccini's election and designation
became effective on February 25, 1997. In anticipation of the contemplated
relocation of SAT's Finance and Accounting Department to corporate headquarters
in Fort Lauderdale, Florida, he joined SAT on December 16, 1996. From May 1996
until he joined SAT, Mr. Muccini acted as a consultant on accounting matters to
Precision Response Corporation, a provider of telemarketing services. From
December 1994 to April 1996, he was Chief Financial Officer of Expert Software,
Inc., a developer of consumer software. From November 1991 to July 1994, he was
Vice President of Finance of Bird Corporation, a building products manufacturer
and environmental services provider. From 1983 to 1990, he was Senior Vice
President of Finance of MicroAmerica, Inc. (now Merisel, Inc.), computer
distributor. From 1981 to 1983, he was Controller and Chief Financial Officer of
Hyde Athletic Industries, an importer and distributor of athletic footwear. From
1979 to 1981, he was Controller and Treasurer of Stride-Rite Corporation, also
an importer and distributor of athletic footwear. From 1967 to 1979, he was an
accounting manager in the Construction Products Division of W.R. Grace &
Company. Mr. Muccini holds a B.S./B.A. degree in accounting from Northeastern
University.
Steven J. Kline was elected Vice President, Research and Development on
March 25, 1997. He joined U.S. Drug as Director of Research in July 1994 and
became its Vice President, Research in January 1995 (the title being changed to
Vice President, Research and Development in May 1996), a position he still
holds. From 1984 to July 1994, he served Abbott Laboratories in various chemical
research positions, the last being R&D Section Head, Abused Drugs/Toxicology
Business Unit, Diagnostics Division. Mr. Kline holds a B.S. in chemistry from
the University of Maryland and a Ph.D in medicinal chemistry from the University
of Florida.
Brian Stutman was elected Vice President, Sales and Marketing on December
3, 1996. From September 1993 to December 1996, he was Vice President of Business
Development for RSA, which became a subsidiary of SAT on May 21, 1996. From
September 1989 to September 1993, Brian Stutman was an account representative
for Storage Technology, a north eastern distributor of mainframe computer
hardware. Brian Stutman has a B.A. in communications from the University of
Massachusetts where he graduated cum laude.
Alan I. Goldman has had over 35 years of experience in corporate finance,
investment banking, commercial banking and central banking. From February 1985
to the present, Alan I. Goldman has been engaged in investment banking and
consulting on financial and management matters, specializing in mergers and
acquisitions, private placements and business and organization consulting. From
October 1986 to July 1990, he was a consultant to Goldmark Partners Ltd., an
investment banking firm specializing in mergers and
91
<PAGE> 101
acquisitions. From June 1987 to March 1988, he was also the President of
Goldmark Capital, Ltd., a private investment firm. From May 1975 to January
1985, Mr. Goldman held the position of Senior Vice President, Finance and Chief
Financial Officer of Management Assistance Inc. ("MAI"), then a $450 million
multinational computer manufacturing, marketing and maintenance company listed
on the New York Stock Exchange. In January 1985, MAI discontinued its operations
when it sold its Sorbus Service Division to a subsidiary of Bell Atlantic
Corporation and its Basic Four Computer Division to a corporation now called MAI
Systems, Inc. From June 1970 to May 1974, he was Vice President, Finance,
Treasurer and Chief Financial Officer of Interway Corporation, then a New York
Stock Exchange-listed, $200 million international company engaged in piggy-back
trailer and containing leasing and fleet management and now a part of
Transamerica Corporation. From 1969 to 1970, he was at Lehman Brothers where he
participated in investment banking and corporate finance activities; from 1962
to 1969, he was at Bankers Trust Company, where he managed several offices; and
from 1958 to 1962, he served in various positions at the Federal Reserve Bank of
New York. Mr. Goldman currently serves as a director of Production Systems
Acquisition Corporation, a public company in the production systems business.
John C. Lawn has been serving from December 8, 1994 to date, as the
Chairman and Chief Executive Officer of The Century Council ("Century"), which
is a national not-for-profit organization dedicated to fighting alcohol abuse
which is supported by more than 800 concerned brewers, vintners, distillers and
wholesalers. From 1990 to 1994, Mr. Lawn served as Vice President and Chief of
Operations of the New York Yankees. From 1985 to 1990 he served as Chief
Administrator at the DEA, having previously served as Deputy Administrator from
1982 to 1985, and was awarded the President's Medal, the highest honor for
civilian service. Prior to joining the DEA, Mr. Lawn served with the Federal
Bureau of Investigation from 1967 to 1982.
Peter M. Mark formed Mark Energy Capital Group, Ltd. ("MECG") in December
1994, a private investment group for which through a wholly-owned corporation he
served as the General Partner from December 1994 to the present. The primary
interest of MECG is to acquire proven producing oil and gas properties in the
United States. In April 1981, he formed Mark Resources Corporation, a private
oil and gas company whose operations were primarily located in the Appalachian
Basin, and served as its President, its Chief Executive Officer and a director
from April 1981 until December 1993 when it was sold to Lomak Petroleum, Inc.
("Lomak"). Mr. Mark then served as a director and the Vice Chairman of Lomak
until December 1994 when he formed MECG. Between 1976 and 1991, Mr. Mark
organized and managed 30 limited partnerships and numerous joint ventures which
explored and developed approximately 700 wells for oil and gas.
Michael S. McCord is the owner of McCord Investments, a sole proprietorship
formed in 1980 which primarily invests in various capital markets. Mr. McCord is
also a stockholder, director and officer of McCord Brothers, Inc. and a partner
of McCord Brothers Partnership, a privately-owned company and partnership,
respectively, each of which invests in oil, gas and real estate properties. From
1974 to 1980, Mr. McCord served as Financial Vice President of the Wedge Group,
a privately held holding company which acquired and held control of
international multi-industry (including agricultural, construction, energy,
manufacturing and service) companies with aggregate revenues in excess of $1
billion. Mr. McCord was elected as a director of each of Good Ideas and U.S.
Drug on May 31, 1996. From October 12, 1995 to October 22, 1996, he served SAT
as a consultant to its Board of Directors.
Lee S. Rosen has been a financial consultant with registered broker-dealer
firms for the past seven years, as follows: He is currently employed by First
Colonial Securities Group, Inc., which firm he joined in October 1996. From July
1995 until October 1996, he was employed by Donald & Co. Securities Inc. From
April 1994 until June 1995, he was employed by Kidder Peabody & Co.,
Incorporated ("Kidder") or, after Kidder was acquired by PaineWebber
Incorporated ("PaineWebber") in January 1995, by PaineWebber. Prior to working
for Kidder, from April 1993 until April 1994, Mr. Rosen was employed by
Shearson, Lehman, Hutton & Co., Inc. ("Shearson") or, after Shearson was
acquired by Smith Barney, Inc. ("Smith Barney") in September 1993, by Smith
Barney. From September 1991 until April 1993, he was employed by Raymond James &
Associates, Inc. From February 1989 until September 1991, Mr. Rosen worked for
A.G. Edwards, Co., Inc.
92
<PAGE> 102
FAMILY RELATIONSHIPS
There are no family relationships among the directors and executive
officers of SAT except that Robert M. Stutman and Brian Stutman are father and
son, respectively.
SUMMARY COMPENSATION TABLE
The following table sets forth the cash compensation and certain other
components of the compensation of James C. Witham, the Chairman of the Board,
the President and the Chief Executive Officer of SAT until April 18, 1996 and
the only two other then executive officers of SAT who received compensation in
excess of $100,000 in fiscal 1996:
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
---------------------------
ANNUAL COMPENSATION SECURITIES ALL
-------------------- UNDERLYING OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS COMPENSATION
- -------------------------------------- ---- -------- ------- ---------- ------------
<S> <C> <C> <C> <C> <C>
James C. Witham(1).................... 1996 $412,500(2) $50,000 -- --
Chairman, President 1995 $301,154 $50,000 180,000(3) --
and Chief Executive Officer 1994 $244,327 $50,000 -- --
Gary S. Wolff(1)...................... 1996 $203,077(2) $25,000 -- --
Treasurer and Chief 1995 $160,615 $25,000 80,000(3) --
Financial Officer 1994 $112,769 $25,000 -- --
Karen B. Laustsen(1).................. 1996 $159,923(2) $25,000 -- --
Executive Vice President 1995 $120,461 $15,000 100,000(3) --
1994 $ 89,396 $25,000 -- --
</TABLE>
- ---------------
(1) SAT had three-year employment agreements with these officers which were
scheduled to terminate on December 31, 1996 and which provided minimum
aggregate salaries for the three officers amounting to $638,000 per year
plus reimbursement for related business expenses. On April 18, 1996, Mr.
Witham and Ms. Laustsen resigned their officerships and directorships in
SAT; however, they continued to serve SAT as employees until May 31, 1996.
On July 3, 1996, Mr. Wolff resigned his officership in SAT. See the section
"Employment Agreements" under this caption "Management."
(2) The amounts shown in the table exceed the salary amounts shown below in the
section "Employment Agreements" under this caption "Management" as a result
of March 1996 company-wide payments of several years of unused vacation
accruals, of which $95,192.25, $33,846.20 and $32,999.98 were paid to Mr.
Witham, Mr. Wolff and Ms. Laustsen, respectively.
(3) In August 1994, SAT granted non-qualified stock options expiring August 1,
2004 (the "SAT Options") under the Restricted Stock, Non-Qualified Option
and Incentive Stock Option Plan (the "1990 Option Plan") to purchase an
aggregate of 450,000 shares of the SAT Common Stock as follows: James C.
Witham -- 180,000 shares, Gary S. Wolff -- 80,000 shares, Karen B.
Laustsen -- 100,000 shares, Glenn A. Bergenfield -- 12,500 shares, William
DiTuro -- 12,500 shares, Michael J. Witham -- 60,000 shares and George
Berger -- 5,000 shares. At the date of grant, all of the foregoing optionees
were directors and/or officers of SAT. All of the SAT Options were
exercisable at $2.375 per share. SAT terminated the 1990 Option Plan
subsequent to the grants and all of the options have expired except that Mr.
Bergenfield exercised his option.
93
<PAGE> 103
AGGREGATE OPTION EXERCISES IN FISCAL YEAR 1996 AND OPTION VALUES AT MARCH 31,
1996
The following table sets forth certain information concerning stock option
exercises by the three individuals named in the Summary Compensation Table
during fiscal 1996. In addition, this table includes the number of shares
covered by exercisable options as of March 31, 1996. Also reported are the
values for "in-the-money" options which represent the positive spread between
the exercise price of any such existing stock options and the closing market
price of the SAT Common Stock at March 31, 1996.
<TABLE>
<CAPTION>
NUMBER OF
UNEXERCISED VALUE OF UNEXERCISED
SHARES ACQUIRED OPTIONS IN-THE-MONEY OPTIONS
NAME ON EXERCISE VALUE REALIZED MARCH 31, 1996 AT MARCH 31, 1996
---------------------------- --------------- -------------- -------------- --------------------
<S> <C> <C> <C> <C>
James C. Witham............. -0- -0- 677,500 $1,197,388
Gary S. Wolff............... -0- -0- 105,000 $ 114,688
Karen B. Laustsen........... -0- -0- 235,000 $ 376,075
</TABLE>
All of the stock options have expired pursuant to their terms.
OTHER COMPENSATION
SAT currently has no pension plan in effect and has no stock option plan,
restricted stock plan, stock appreciation rights nor any other long-term
incentive plan under which grants or awards may be made in fiscal 1997 or
thereafter. The Board is, however, considering adoption of a stock option plan
for directors, officers and key employees of the Company and has implemented a
401(k) plan for all employees managed by Automated Data Processing, Inc.
EMPLOYMENT AGREEMENTS
SAT had entered into employment agreements (the "Employment Agreements")
with each of James C. Witham, Karen B. Laustsen and Gary S. Wolff providing for
a three-year term commencing January 1, 1994 and terminating December 31, 1996.
On April 18, 1996, Mr. Witham and Ms. Laustsen resigned their directorships and
officerships, but agreed to continue to serve SAT as employees until May 31,
1996. Mr. Wolff resigned as the Treasurer, the Chief Financial Officer and the
Chief Accounting Officer of SAT, Good Ideas and U.S. Drug and as a director of
Good Ideas and U.S. Drug on July 3, 1996. As a result of these resignations, the
Employment Agreements terminated on May 31, 1996 as to Mr. Witham and Ms.
Laustsen and on July 3, 1996 as to Mr. Wolff, except that SAT made a $25,000
severance payment to Mr. Wolff and continued medical benefits for the three
former executive officers until December 31, 1996, the original expiration date
of the Employment Agreements. Subsequent to his resignation, Mr. Wolff continued
for a few months to assist SAT in its efforts to sell the stock or assets of
Good Ideas. See "The Merger and Related Matters -- Fairness Opinion."
Pursuant to his Employment Agreement, Mr. Witham was employed as the
President and Chief Executive Officer of SAT at an annual base salary of
$330,000. Pursuant to her Employment Agreement, Ms. Laustsen was employed as an
Executive Vice President at an annual base salary of $132,000. Pursuant to his
Employment Agreement, Mr. Wolff was employed as the Treasurer and Chief
Financial Officer at an annual base salary of $176,000 per year. Each of such
salaries reflected a 10% increase effective July 1, 1995, which increase was the
first in 18 months. Mr. Witham and Ms. Laustsen were each required to devote
substantially all of his or her time to the business of SAT, while Mr. Wolff was
only required to devote a majority of his time.
The Employment Agreements contained standard provisions for participation
by the executive in SAT's benefit programs, whether relating to the SAT Common
Stock, bonuses or medical, life and disability insurance or otherwise. Mr.
Witham and Ms. Laustsen were each provided with a company car, which have been
returned to SAT. The Employment Agreements also provided for termination in the
event of disability for six or more consecutive months and termination "for
cause" which meant conviction for embezzlement, theft or other criminal act
constituting a felony or failure to comply with the terms and conditions of the
94
<PAGE> 104
Agreement if such breach was not cured within seven days after written notice
was given to the executive by the Board of Directors.
Michael J. Witham, who is the son of James C. Witham and who was the Vice
President of Manufacturing of SAT, had an employment agreement similar to the
Employment Agreements providing for an annual base salary of $115,500. Effective
September 26, 1995, Michael J. Witham agreed to terminate his employment
agreement in consideration of a payment to him of $50,000 and an assignment to
him of a company car. He resigned as an executive officer of SAT, as a director
of U.S. Drug and no longer serves the Company in any capacity.
Effective April 18, 1996, Robert M. Stutman, the President and a principal
shareholder of RSA, became the Chief Executive Officer of SAT. Mr. Stutman's
annual base salary is $225,000. He was eligible to receive a cash bonus of
$100,000 if the Company broke even or was profitable in fiscal 1997 and an
additional $150,000 if the Company has net earnings of $2,000,040 in fiscal
1997. However, because SAT does not anticipate profitability in fiscal 1997,
this term of employment has become moot. Cash bonuses will be discretionary in
subsequent years. He also received a one -- time cash bonus of $50,000 upon
ProActive satisfying certain performance standards. In the event that Mr.
Stutman is terminated without cause (as defined) during the first three years
(i.e., through May 20, 1999) that he is employed by SAT, he shall receive
severance pay in an amount equal to the base salary that would have been paid to
him after the date of termination had Mr. Stutman not been terminated and had he
been employed by SAT for a period of three years.
Effective May 13, 1996, Linda H. Masterson, a member of SAT's Board of
Directors, was employed as the President and Chief Operating Officer of SAT. On
November 19, 1996, Ms. Masterson relinquished her duties as Chief Operating
Officer in order to devote more time to supervising the development program of
U.S. Drug and the operations of the Alcohol Testing Products and BioTox
Divisions of SAT. Ms. Masterson's annual base salary is $175,000. Ms. Masterson
was granted a Common Stock purchase warrant to purchase 600,000 shares of the
SAT Common Stock. If SAT adopts a stock option plan, then the Common Stock
purchase warrant will be converted to a stock option subject to such plan. In
either case, the option or warrant was to become exercisable over a four-year
period as follows: 50,000 shares upon commencement of the term of employment
(i.e., May 13, 1996), 100,000 shares at the end of the first year, 150,000
shares at the end of the second year, 150,000 shares at the end of the third
year and 150,000 shares at the end of the fourth year. The expiration dates of
the stock option will be in accordance with the terms of the stock option plan
and the expiration dates of the warrant were four years from the respective
dates on which the warrant becomes exercisable. The initial exercise price was
$3.125 share. On December 6, 1996, the SAT Board of Directors, while reducing
the exercise price of Common Stock purchase warrants granted to other employees
from $3.50 to $2.125 per share, made the following adjustments to Ms.
Masterson's warrant: (a) the exercise price was also reduced to $2.125 per share
for the first 150,000 shares as to which the warrant is currently or becomes
exercisable on May 13, 1997 and (b) the warrant becomes exercisable on May 13,
1997 at the reduced exercise price with respect to 50,000 of the 150,000 shares
as to which the warrant was first to become exercisable in the fourth year. A
discretionary cash and/or stock bonus may be paid commencing with the fiscal
year after the fiscal year in which the Company first has positive earnings. A
bonus in the form of stock options pursuant to an employee stock option plan or
warrants, if no such plan is adopted, was to be granted in respect of fiscal
1997 as follows: 33,000 shares if the Company broke even in fiscal 1997 and an
additional 50,000 shares if the Company had net earnings of $2,000,040 for
fiscal 1997. However, as indicated above for Mr. Stutman, this bonus arrangement
for fiscal 1997 has become moot. In the event that Ms. Masterson is terminated
without cause (as defined), she shall be paid severance equal to her annual base
salary.
Effective May 21, 1996, when RSA became a subsidiary of SAT, Brian Stutman
continued to serve as Vice President of Business Development for RSA. On
December 3, 1996, he was elected as Vice President, Sales and Marketing of SAT.
Mr. Stutman's annual base salary is $130,000. He is eligible for a bonus of
$30,000 for fiscal 1997 if his business plan goals are met and received a
one-time bonus of $30,000 upon ProActive satisfying certain performance
standards. In the event Mr. Stutman is terminated without cause (as defined)
during the first three years that he is employed by SAT (i.e.,through May 20,
1999), he shall receive severance pay in an amount equal to the base salary that
would have been paid to him after the date of
95
<PAGE> 105
termination had Mr. Stutman not been terminated and had he been employed by SAT
for a period of three years.
No employment agreements will be executed with either of the Messrs.
Stutman or Ms. Masterson; however, written agreements have been prepared
evidencing the severance provisions and are filed as exhibits to the
Registration Statement.
DIRECTORS' COMPENSATION
Prior to the change on September 26, 1995 in the composition of the Board
as a result of a settlement of a consent solicitation (see the section "Changes
in Management of SAT" under this caption "Management"), directors of SAT who
were not employees were eligible to receive 10,000 shares of the SAT Common
Stock in the current fiscal year, in addition to being reimbursed for their
travel and other expenses. On September 26, 1995, 10,000 shares of the SAT
Common Stock were allocated to each of Glenn A. Bergenfield and William DiTuro,
then directors, who then resigned as part of the settlement.
On November 16, 1995, as modified on December 11, 1995 and December 3,
1996, the Board approved the following compensation arrangements for directors
who are not employees of the Company: (1) each year the director will receive a
Common Stock purchase warrant to purchase 10,000 shares of the SAT Common Stock
exercisable at the closing sales price on November 16 or the preceding business
day if November 16 is a Saturday, Sunday or holiday (effective October 1, 1997,
the date will become October 1) for a three-year period; (2) an annual payment
of $10,000 and (3) a quarterly payment of $2,500 provided that the director
attends at least 75% of the meetings during the year. The Board also authorized
an annual payment of $1,000 for a director serving as the Chairman of a Board
committee and $500 for serving as a member of a Board committee. All annual cash
payments are to be made as of October 1, commencing October 1, 1996. Pursuant to
the foregoing authority, Common Stock purchase warrants were granted for 1995 to
five directors (i.e., Alan I. Goldman, John C. Lawn, Peter M. Mark, Linda H.
Masterson and Lee S. Rosen) to purchase an aggregate of 50,000 shares at
$1.9375, the closing sales price on November 16, 1995, and for 1996 to five
directors (i.e., Alan I. Goldman, John C. Lawn, Peter M. Park, Michael S. McCord
and Lee S. Rosen) at $1.8125, the closing sales price on November 15, 1996. The
Board has approved the following compensation for all directors: the issuance of
a Common Stock purchase warrant to purchase 10,000 shares of the SAT Common
Stock for each $1.00 rise over the closing sales price of the SAT Common Stock
on November 16th (October 1st commencing October 1, 1997) of each year (which
would be $1.9375 for November 16, 1995 and $1.8125 for November 15, 1996), the
rise to be calculated on the basis of the average of the closing sales prices
during the 90-day period preceding the 30th day after the date on which the
results of operations for the fiscal year are announced either through a press
release or the filing of the Annual Report on Form 10-K under Section 13 of the
Exchange Act. The exercise price will be the greater of the average of the
closing sales prices during the 90-day period or the closing sales price on
October 1 commencing October 1, 1997. Based on the fact that the results of
operations for fiscal 1996 were reported in a press release dated June 14, 1996,
each of the current directors did not receive a Common Stock purchase warrant in
1996 because the average sales price during the 90 calendar days prior to July
14, 1996 was $2.9308 per share or less than a $1.00 rise over $1.9375 per share.
CERTAIN TRANSACTIONS
On October 12, 1995, the Board of Directors appointed Michael S. McCord, a
stockholder of SAT and a former member of the Committee, as a consultant to SAT
to serve at the discretion of the Board. For such services he was granted on
November 16, 1995 a Common Stock purchase warrant to purchase 10,000 shares of
the SAT Common Stock at $1.9375, the closing sales price on the date of grant.
He also received quarterly installment payments of $2,500 for his consulting
services until October 22, 1996, when he resigned as a consultant because on
such date he was elected as a director of SAT.
In February 1996, Lee S. Rosen, a director of SAT, received (1) $100,000
and (2)(a) a Common Stock purchase warrant expiring November 15, 1998 to
purchase 400,000 shares of the SAT Common Stock at $1.9375 per share, (b) a
Common Stock purchase warrant expiring November 15, 2000 to purchase 150,000
96
<PAGE> 106
shares of the SAT Common Stock at $3.00 per share and (c) a Common Stock
purchase warrant to purchase 150,000 shares of the SAT Common Stock at $4.00 per
share for services performed in connection with SAT's offering of 2,000,000
shares of the SAT Common Stock pursuant to Regulation D of the Securities Act.
The latter two warrants can only be exercised as to 50,000 shares of the SAT
Common Stock subject thereto in proportion to the shares issued upon the
exercise of December 17 Warrants to purchase 2,000,000 shares of the SAT 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 SAT in connection with the exercise of outstanding Common Stock
purchase warrants to purchase shares of the SAT Common Stock. The payments to
Mr. Rosen have been charged to Additional Paid-In Capital. Mr. Rosen also
received a Common Stock purchase warrant expiring April 17, 1999 (the "April 17
Warrant") to purchase 300,000 shares of the SAT Common Stock at $3.125 per
share.
On June 20, 1996, the SAT Board authorized SAT to engage a consultant for
whom the consideration was to be 200,000 shares of the SAT Common Stock. Mr.
Rosen fulfilled SAT's obligation to such consultant by delivery of his own
shares. In consideration thereof, on December 3, 1996, the SAT Board authorized
(1) Mr. Rosen's exercise of the Common Stock purchase warrant expiring November
15, 1998 as to 200,000 shares of the SAT Common Stock, the consideration
therefor being the value of the consultant's services (i.e., the product of
200,000 shares and the closing sales price of $2.875 per share on June 20, 1996
or $575,000); (2) the issuance to Mr. Rosen of the December 2 Warrant to
purchase 200,000 shares of the SAT Common Stock at $2.00 per share; and (3) a
reduction in the exercise price of his Common Stock purchase warrant expiring
November 15, 2000 from $4.00 to $2.00 per share.
On January 23, 1997, in consideration of certain services which Mr. Rosen
had performed and certain existing and potential liabilities as to which he had
become subject as a result of the 1995 consent solicitation (see the section
"Changes in Management" under this caption "SAT Management"), the SAT Board
authorized a reduction in the exercise price of the April 17 Warrant (see the
second preceding paragraph) from $3.125 to $2.125 per share. On December 6,
1996, the Board had authorized a similar reduction in exercise price for Common
Stock purchase warrants to purchase an aggregate of 249,000 shares of the SAT
Common Stock held by employees of the Company. For information as to a similar
reduction in exercise price for two executive officers of SAT (one of whom is
also a director), see "Summary -- Recent Developments."
CHANGES IN MANAGEMENT OF SAT
In mid-May 1995, as a result of communications among certain stockholders
of SAT relating to their dissatisfaction with the performance of the then
management of SAT in maximizing the value of SAT, Lee S. Rosen, Michael S.
McCord, Arthur Schwartz, Morris B. Black and Stuart S. Greenberg (the then
Chairman of Baraban) formed a stockholders' committee later named "The Committee
for Maximizing Stockholder Value of U.S. Alcohol Testing of America, Inc. (the
"Committee") to make recommendations to the management of SAT. 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 SAT to delete the provision that establishes three classes of directors on
SAT's Board of Directors; and (3) to amend the by-laws of SAT to fix the number
of directors at seven instead of five and to require that a majority of the
directors be independent. On September 11, 1995, the Committee, acting through
Georgeson & Company Inc. as its solicitation agent, first delivered and mailed
definitive consent solicitation material pursuant to Regulation 14A under the
Exchange Act to brokers and certain stockholders of record of SAT. SAT
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.
97
<PAGE> 107
On September 26, 1995, the following events occurred:
a. the Committee and SAT settled the above litigation;
b. the number of directors of SAT was increased from five to seven;
c. incumbent directors Glenn A. Bergenfield, William DiTuro and Gary
S. Wolff resigned as directors of SAT; however, they continued to serve as
directors of Good Ideas and U.S. Drug (Mr. Bergenfield and Dr. DiTuro
subsequently resigned as directors of both subsidiaries on November 16,
1995 and Mr. Wolff resigned as a director of both subsidiaries on July 3,
1996);
d. Alan I. Goldman, a nominee of the Committee, Peter M. Mark, a
member of the Committee, and Lee S. Rosen, a member of the Committee and
also a Committee nominee, were elected as directors of SAT;
e. John C. Lawn and Linda H. Masterson were elected as directors of
SAT (prior to their election as directors, neither Mr. Lawn nor Ms.
Masterson had any affiliation with SAT or the Committee, although Ms.
Masterson had been interviewed by the Committee as a possible executive
officer if changes were required as the result of a successful consent
solicitation and Mr. Lawn had been recommended to the Committee as a
possible candidate for a directorship by the Committee's counsel (now
general counsel to SAT)); and
f. James C. Witham, Chairman of the Board, President and Chief
Executive Officer, and Karen B. Laustsen, Executive Vice President,
continued to serve SAT in such capacities and as directors until April 18,
1996 (see second succeeding paragraph), while Gary S. Wolff remained as
Chief Financial Officer on an interim basis until his resignation on July
3, 1996.
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 SAT; however, they remained as employees of SAT until May
31, 1996 to assist in the transition and other matters relating to the Company,
including the Merger. They continued to serve as directors of U.S. Drug and Good
Ideas until May 28, 1996 in the case of Ms. Laustsen and May 31, 1996 in the
case of Mr. Witham. The resignations of Mr. Witham and Ms. Laustsen were
voluntary and relationships have continued on a cordial, cooperative basis since
April 18th.
Recognizing that RSA, a provider of corporate drug-free work place
programs, could bring potential revenues to the Company in what the SAT Board
deemed to be the Company's core businesses, especially if RSA were part of the
Company and not just a consultant, and that Robert M. Stutman, RSA's President
and founder, was a recognized authority in the area of substance abuse
prevention programs, a committee of four of the independent directors of SAT
negotiated with Mr. Stutman on April 17, 1996 the terms for a possible
acquisition of RSA. When Mr. Witham joined the discussions on the next day, he
favored naming Mr. Stutman as Chief Executive Officer of SAT 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 SAT
stockholders. Ms. Laustsen subsequently also offered to resign for the same
reason. Recognizing that, as a result of these offers, SAT 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 SAT. On April 18, 1996, Mr. Stutman was elected as Chairman
of the Board and a director of SAT 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 SAT and designated as its Chief Operating
Officer (see "Summary -- Recent Developments"). 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, then a consultant to SAT's
Board of Directors, a director of SAT since October 22, 1996 and a stockholder
of each of SAT, Good Ideas and U.S. Drug. At the Annual Meeting of Stockholders
held on October 22, 1996, Messrs. Stutman and McCord were elected as directors
for a three-year term.
98
<PAGE> 108
GOOD IDEAS MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table contains certain information relating to the directors
and executive officers of Good Ideas as of March 31, 1997:
<TABLE>
<CAPTION>
NAME AGE POSITION
----------------------------------- --- ----------------------------------------------------
<S> <C> <C>
Robert M. Stutman.................. 53 Chairman of the Board
Linda H. Masterson................. 45 President and Director
William D. Robbins................. 46 Director
Michael S. McCord.................. 53 Director
Robert Muccini..................... 54 Vice President, Finance, Treasurer, Chief Financial
Officer and Chief Accounting Officer
</TABLE>
The Certificate of Incorporation of Good Ideas provides for the division of
the Board of Directors into three classes, each class serving for a period of
three years. The foregoing notwithstanding, directors serve until their
successors have been duly elected and qualified or until they resign, become
disqualified or disabled, or are otherwise removed. If a vacancy is created in
any class, the Board may elect a director who will serve until the next Annual
Meeting of Stockholders at which time he or she, if the director is to be
reelected, must be designated to a class. Of the directors named above, Mr.
Robbins' term is scheduled to expire with the Annual Meeting of Stockholders in
1997. Messrs. McCord and Stutman and Ms. Masterson were elected by the Board on
May 31, 1996 and, accordingly, must be designated to a class if they stand for
reelection at the next Annual Meeting of Stockholders, which will not be held
because either the Merger will be consummated or Good Ideas will be sold or
liquidated.
Glenn A. Bergenfield and William DiTuro, who were elected by stockholders
to serve until the Annual Meeting of Stockholders in 1995, resigned as directors
on November 16, 1995. Karen B. Laustsen, James C. Witham and Gary S. Wolff, who
were elected by stockholders to serve until the Annual Meeting of Stockholders
in 1996, resigned as directors on May 28, 1996, May 31, 1996 and July 3, 1996,
respectively. Michael J. Witham, who was elected to serve until the Annual
Meeting of Stockholders in 1997, resigned on September 26, 1995.
Each officer of Good Ideas is elected by the Board and serves at the
discretion of the Board until his or her successor is elected and qualifies or
until he or she resigns, becomes disqualified or disabled, or is otherwise
removed.
BUSINESS HISTORY
For the business history of Messrs. Stutman, McCord and Muccini and Ms.
Masterson, see "SAT Management -- Business History."
William D. Robbins, a co-founder of Good Ideas Texas, has served as Chief
Executive Officer and a director of Good Ideas or its predecessor Good Ideas
Texas since the latter's inception in December 1987. His designation as Chief
Executive Officer ended with the termination of his employment with Good Ideas
on December 31, 1996. From September 1986 to December 1987, Mr. Robbins was
employed by LJN Toy Company. Prior to September 1986, Mr. Robbins was employed
by Toys R Us for 18 years, most recently as General Merchandising Manager of
Imports and Director of Product Development.
FAMILY RELATIONSHIPS
There are no family relationships among the directors and executive
officers of the Company.
99
<PAGE> 109
SUMMARY COMPENSATION TABLE
The following table sets forth certain information as to the sole executive
officer of Good Ideas (who was the Chief Executive Officer) whose cash
compensation exceeded $100,000 in fiscal 1996.
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
----------------------------------------
ANNUAL COMPENSATION OTHER SECURITIES
------------------------- ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION OPTIONS COMPENSATION
- ----------------------------------- ---- -------- ------- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
William D. Robbins................. 1996 $160,000 -- -- -- --
Chief Executive Officer 1995 $160,615 -- -- -- --
1994 $158,077 $20,000 -- -- --
</TABLE>
STOCK OPTIONS
In December 1993, the Board of Directors approved a stock option/stock
issuance plan which covered 500,000 shares of the Good Ideas Common Stock. The
stock options were to be granted at an exercise price of not less than 85% of
the fair market value of a share of the Good Ideas Common Stock on the date of
grant and were to have terms not to exceed ten years. In December 1993, stock
options expiring December 17, 2003 (the "Good Ideas Options") to purchase an
aggregate of 37,500 shares of the Good Ideas Common Stock at $4.40 per share
were granted to the then five directors. Good Ideas Options to purchase 7,500
shares each granted to Glenn A. Bergenfield and William DiTuro, who resigned as
directors on November 16, 1995, terminated on February 16, 1996. Good Ideas
Options to purchase 7,500 shares each granted to Karen B. Laustsen, James C.
Witham and Gary S. Wolff, who resigned as directors on May 28, 1996, May 31,
1996 and July 3, 1996, respectively, terminated on August 26, 1996, August 29,
1996 and October 1, 1996, respectively. As a result, there are no Good Ideas
Options outstanding.
OTHER COMPENSATION
Good Ideas currently has no pension plan in effect and has in effect no
stock option plan, no restricted stock plan, no stock appreciation rights nor
any other long-term incentive plan under which grants or allocations may be made
in fiscal 1997 or thereafter.
DIRECTOR COMPENSATION
Good Ideas previously paid each director who is not a compensated officer
of Good Ideas $1,000 for each Board meeting attended, plus reimbursement of
reasonable out-of-pocket expenses. This policy has been suspended as part of the
cost reduction actions.
EMPLOYMENT CONTRACTS
Messrs. William D. Robbins and Richard Snyder entered into employment
agreements with Good Ideas, which provided for terms from January 1, 1994 to
December 31, 1996 and from June 1, 1995 to May 31, 1997, respectively. Pursuant
to these agreements, Mr. Robbins was employed as Chief Executive Officer and Mr.
Snyder was employed as Chief Operating Officer and President. Under the
agreements, the Company agreed to pay Mr. Robbins and Mr. Snyder a base annual
salary of $160,000 and $110,000, respectively. Such base salaries were subject
to increase at the discretion of the Board of Directors. Mr. Robbins' employment
agreement further provided that Mr. Robbins would receive bonuses at the
discretion of the Board of Directors. Mr. Snyder's employment agreement provided
for a performance bonus equal to 2% of the increase in gross revenues over the
prior 12-month period first payable after May 31, 1996. In September 1995, Mr.
Snyder was transferred, with his full consent, to USRR upon the same terms and
conditions as his former employment with Good Ideas. Mr. Robbins' agreement was
not renewed and, accordingly, his employment by Good Ideas terminated on
December 31, 1996.
In December 1993 and April 1994, William Rodish and Jody Harding entered
into employment agreements with Good Ideas, which provided for three-year terms
from January 1, 1994 to December 31, 1996 and from April 1, 1994 to March 31,
1997, respectively, at base annual salaries of $60,000 and $55,000,
100
<PAGE> 110
respectively. On October 13, 1995, Mr. Rodish resigned as the Vice President of
Marketing of Good Ideas. Mr. Rodish's employment contract was terminated with no
further financial obligation on Good Ideas' part. In April 1996, Ms. Harding
resigned as the Controller and the Secretary of Good Ideas. Ms. Harding's
employment contract was terminated and Good Ideas made a $10,000 severance
payment to Ms. Harding.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
For information as to transactions with SAT, the holder of 60.8% of the
outstanding shares of the Good Ideas Common Stock, see "Material Contacts of SAT
with Good Ideas." For information as to Mr. McCord's prior consulting
arrangement with SAT, see "SAT Management -- Certain Transactions." For
information as to the relationship of Mr. Stutman and Ms. Masterson to SAT, see
the sections "Directors and Executive Officers" and "Employment Agreements"
under the caption "SAT Management" and also with respect to Mr. Stutman, see
"Business of the Company -- Subsidiaries and Divisions -- Employer Services
Division/Robert Stutman & Associates, Consulting Division."
101
<PAGE> 111
THE COMPANY'S SELECTED FINANCIAL DATA
The following tables set forth selected financial data of the Company for
the five fiscal years ended March 31, 1996 and the nine months ended December
31, 1996 and 1995. This selected financial data should be read in conjunction
with "The Company's Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Company's Financial Statements and related
notes thereto included elsewhere in this Consent Solicitation
Statement/Prospectus.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED MARCH 31,
----------------------------------------------------------------------
1996 1995 1994 1993 1992
------------ ------------ ------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
SELECTED CONSOLIDATED INCOME STATEMENT DATA:
Continuing Operations:
Sales -- Net................................... $ 1,165,661 $ 1,695,215 $ 442,728 $ 611,739 $ 688,412
----------- ----------- ----------- ---------- -----------
Costs and Expenses:
Cost of Sales (Exclusive of Depreciation
Shown Below)............................... 1,208,726 1,397,034 389,830 464,103 545,594
Selling, General & Administrative Exp.
(Exclusive of Depreciation Shown Below)...... 5,720,592 5,284,405 3,759,858 4,647,943 2,549,367
Research & Development......................... 1,005,832 1,248,962 947,811 1,067,381 156,817
Interest....................................... 81,450 46,069 1,534 24,116 73,311
Depreciation and Amortization.................. 1,017,534 695,367 380,676 191,414 61,907
Loss from Settlement of Class Action
Litigation................................... -- -- 4,600,000 -- --
Loss from Settlement of Litigation............. 1,137,914 -- 50,000 652,625 582,338
Buy-out of Consulting Agreement................ -- -- -- -- 400,000
----------- ----------- ----------- ---------- -----------
Total Costs and Expenses................ 10,172,048 8,671,837 10,129,709 7,047,582 4,369,334
----------- ----------- ----------- ---------- -----------
Loss from Operations............................. (9,006,387) (6,976,622) (9,686,981) (6,435,843) (3,680,922)
Other Income (Expense) -- Net.................... 408,876 (499,137) (473,241) (1,187,772) 137,770
----------- ----------- ----------- ---------- -----------
Loss Before Minority Interest in Net Loss
(Income) of Subsidiary......................... (8,597,511) (7,475,759) (10,160,222) (7,623,615) (3,543,152)
Minority Interest in Net Loss (Income) of
Subsidiary..................................... 541,466 769,632 464,083 (360,477) 53,128
----------- ----------- ----------- ---------- -----------
Loss from Continuing Operations.................. (8,056,045) (6,706,127) (9,696,139) (7,623,615) (3,490,024)
----------- ----------- ----------- ---------- -----------
Discontinued Operations:
Loss from Discontinued Operations before Minority
Interest, Net of Subsidiary Preferred Stock
Dividends Paid................................. (1,545,457) (857,575) (242,451) (173,118) --
Minority Interest, net of Subsidiary Preferred
Stock Dividends Paid........................... 467,183 327,306 (127,445) (200,520) --
Loss on Disposal, net of Minority Interest of
$143,671....................................... (1,326,267) -- -- -- --
----------- ----------- ----------- ---------- -----------
Loss on Discontinued Operations.................. (2,404,541) (530,269) (369,896) (373,638) --
----------- ----------- ----------- ---------- -----------
Net Loss......................................... $(10,460,586) $ (7,236,396) $(10,066,035) $(7,997,253) $(3,490,024)
=========== =========== =========== ========== ===========
Loss Applicable to Common Stock:
Net Loss......................................... $(10,460,586) $ (7,236,396) $(10,066,035) $(7,997,253) $(3,490,024)
Preferred Stock Dividend -- Class "A"............ (28,810) (39,179) (26,358) (39,992) (199,362)
Preferred Stock Dividend -- Class "B"............ -- (2,425) (13,826) (331,767) (227,083)
----------- ----------- ----------- ---------- -----------
Loss Applicable to Common Stock.................. $(10,489,396) $ (7,278,000) $(10,106,219) $(8,369,012) $(3,916,469)
=========== =========== =========== ========== ===========
Per Common Share (1):
Loss from Continuing Operations.................. $ (.27) $ (.26) $ (.44) $ (.65) $ (.66)
Loss from Discontinued Operations................ (.08) (.02) (.02) (.03) --
----------- ----------- ----------- ---------- -----------
Net Loss......................................... $ (.35) $ (.28) $ (.46) $ (.68) $ (.66)
=========== =========== =========== ========== ===========
Weighted Average Common Shares Outstanding....... 29,834,502 25,691,674 22,027,068 12,317,743 5,938,747
=========== =========== =========== ========== ===========
</TABLE>
- ---------------
(1) Adjusted to reflect all common stock splits.
102
<PAGE> 112
<TABLE>
<CAPTION>
AS OF MARCH 31,
--------------------------------------------------------------------
1996 1995 1994 1993 1992
----------- ----------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
SELECTED CONSOLIDATED BALANCE
SHEET DATA:
Working Capital................ $ 1,685,583 $ 4,634,665 $ 7,489,655 $ 3,172,817 $11,778,216
=========== =========== =========== ========== ===========
Total Assets................... $ 6,952,284 $14,097,548 $ 16,848,773 $ 6,300,602 $12,904,801
=========== =========== =========== ========== ===========
Long-Term Debt -- Less Current
Portion...................... $ 42,962 $ 79,008 $ 81,521 $ 2,886 $ --
=========== =========== =========== ========== ===========
Minority Interest.............. $ 1,478,508 $ 2,723,502 $ 3,705,120 $ 3,676,068 $ 4,090,109
=========== =========== =========== ========== ===========
Stockholders' Equity........... $ 4,032,330 $ 7,693,942 $ 6,844,375 $ 1,482,943 $ 8,301,977
=========== =========== =========== ========== ===========
</TABLE>
103
<PAGE> 113
SUBSTANCE ABUSE TECHNOLOGIES, INC.
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
DECEMBER 31,
---------------------------
1996 1995
----------- -----------
<S> <C> <C>
SELECTED INCOME STATEMENT DATA:
Continuing Operations:
Sales -- Net.............................................................. $ 2,070,206 $ 901,439
Costs and Expenses:
Cost of Sales............................................................. 1,628,825 675,726
Selling and Marketing Expenses............................................ 858,755 722,069
General and Administrative Expense........................................ 4,119,837 3,770,005
Research and Development.................................................. 1,273,822 789,506
Interest Expense.......................................................... 143,855 74,311
Depreciation and Amortization............................................. 787,291 832,589
Write-off of Alconet Goodwill............................................. 714,377 --
----------- ----------
Loss from Operations...................................................... (7,456,556) (5,962,767)
Other Income (Expense)...................................................... (4,540) 359,395
----------- ----------
Loss before Minority Interest in Net Loss of................................ (7,461,096) (5,603,372)
Subsidiary Minority Interest in Net Loss of Subsidiary...................... 604,570 394,148
----------- ----------
Loss from Continuing Operations............................................. (6,856,526) (5,209,224)
----------- ----------
Discontinued Operations:
Loss from Operations before Minority Interest in Net Loss................. (170,377) (1,005,072)
Minority Interest......................................................... 19,500 363,581
----------- ----------
Loss from Discontinued Operations........................................... (150,877) (641,491)
----------- ----------
Net Loss.................................................................... $(7,007,403) $(5,850,715)
=========== ==========
Loss Applicable to Common Stock:
Net Loss.................................................................. $(7,007,403) $(5,850,715)
Preferred Stock Dividend.................................................. (21,606) (21,606)
----------- ----------
Loss Applicable to Common Stock........................................... $(7,029,009) $(5,872,321)
=========== ==========
Loss per Common Share:
Loss from Continuing Operations........................................... $ (0.20) $ (0.18)
Loss from Discontinued Operations......................................... -- (0.02)
----------- ----------
Net Loss.................................................................. $ (0.20) $ (0.20)
=========== ==========
Weighted Average Common Shares Outstanding.................................. 34,978,113 29,248,777
=========== ==========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1996 1995
----------- -----------
<S> <C> <C>
SELECTED BALANCE SHEET DATA:
Working Capital............................................................. $ 3,158,783 $ 2,204,198
=========== ==========
Total Assets................................................................ $11,258,892 $ 8,987,126
=========== ==========
Long-Term Debt, Less Current Portion........................................ $ 3,850,747 $ 66,365
Minority Interest........................................................... $ 854,439 $ 1,873,099
=========== ==========
Shareholders' Equity........................................................ $ 5,112,141 $ 5,320,299
=========== ==========
</TABLE>
104
<PAGE> 114
THE COMPANY'S MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
EFFECT OF U.S. DRUG MERGER
During May 1996, SAT filed the U.S. Drug Registration Statement to register
shares of the SAT 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 SAT. The effects of the proposed merger (i.e., the
U.S. Drug Merger) are discussed below.
If the U.S. Drug Merger is consummated, SAT will have to invest
approximately $12,000,000 in the drug testing operations during the period April
1, 1997 to December 31, 1998 in order to complete the development of the drug
testing products. Such estimate reflects both product development and
manufacturing build-out costs, as well as general and administrative expenses.
U.S. Drug will attempt to reduce such estimated costs to approximately
$10,500,000 by leasing rather than purchasing certain items, but there can be no
assurance as to the extent, if any, that leasing will be a viable option.
Because no third parties have expressed to date any interest in financing U.S.
Drug directly and because management, for various reasons, does not deem it
feasible that a marketing or development partner be sought at the current time,
SAT will be required to advance or invest the funds if a product is to be
developed. Since June 30, 1996, SAT has repaid its loan of $282,000 due to U.S.
Drug and has authorized loans aggregating $2,000,000 to U.S. Drug, of which
approximately $1,200,000 in principal amount has been advanced as of December
31, 1996. Because no revenues from sales are currently expected from the drug
testing operations until the first quarter of 1999 at the earliest, assuming
that U.S. Drug Acquisition Corp., as the successor to U.S. Drug by merger, meets
the current product development schedule, as to which there can be no assurance,
the drug testing operations will operate at a loss for at least fiscal 1998 and
the fiscal year ending March 31, 1990 ("fiscal 1999"), requiring the Company to
seek to generate revenues from the operations of the Employer Services Division
and the Robert Stutman & Associates Consulting Division and the revised
operations of the Alcohol Testing Products Division, assuming that the sale of
Good Ideas is effected. Although SAT management is optimistic about the Company
achieving a significant amount of revenues from these 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 operations of
the Employer Services Division and the Robert Stutman & Associates Consulting
Division can also increase the revenues from the alcohol testing products and,
when its products are developed and marketable, those of the drug testing
subsidiary or division. 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 operations of the Employer Services Division and the
Robert Stutman & Associates Consulting Division are the most likely source, seek
additional financing and/or secure additional exercises of outstanding SAT
Common Stock purchase warrants. 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 SAT management believes that, as the
result of the private placement completed in November 1996, the recent and
anticipated future exercises of SAT Common Stock purchase warrants and other
potential sources of funds, including management's expectation that its cash
from operations will turn positive, possibly in the quarter ending December 31,
1997, but more probably in the quarter ending March 31, 1998, the Company
expects to meet its cash requirements (excluding U.S. Drug) for at least the
next 12 months. Such estimate is based primarily on SAT continuing to develop
new customers for its Employer Services Division, taking into account that it
generally takes 90 to 120 days from contract signing to implement procedures and
beginning to receive revenues. Such estimate also assumes that SAT will not
incur significant non-recurring costs as it has in recent years, that SAT has
eliminated its significant losses in the Alcohol Products Division and will
continue to derive from its Robert Stutman & Associates Consulting Division
increasing revenues and sources of potential business for the Company's other
operations. In the
105
<PAGE> 115
event warrant exercises are not achieved at the levels expected and the
Company's cash flow from operations (other than U.S. Drug) does not turn
positive, the Company in such event would have to seek new financing even for
its non-U.S. Drug operations, which financing may not be available or, if
available, may not be on acceptable terms. In addition, depending on market and
other conditions relating to the individual holder, there can be no assurance
that the outstanding SAT Common Stock purchase warrants will be exercised and,
if exercised, when. Financing will have to be sought for U.S. Drug through SAT.
There can be, of course, no assurance that management's expectations will be
realized.
If the U.S. Drug Merger is not effected, an infusion of equity will be
necessary for U.S. Drug to maintain its listing of the U.S. Drug Common Stock on
the Pacific Stock Exchange because U.S. Drug, based on its balance sheet as of
December 31, 1996, did not meet such Exchange's assets and stockholders' equity
maintenance requirements. Similarly, U.S. Drug would not meet the entry
requirements of the American Stock Exchange or the Nasdaq System. Even if the
current maintenance problem is resolved by an infusion of equity, because of the
anticipated continuing losses, U.S. Drug will probably have the same compliance
problem for at least fiscal 1998 and fiscal 1999 (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 SAT, which owns 67.0% of U.S. Drug and holds the license to the
USN technology.
EFFECT OF MERGER
During April 1996, SAT filed the Good Ideas Registration Statement to
register shares of the SAT Common Stock to be issued to the Good Ideas Minority
Stockholders upon consummation of a proposed merger of a wholly-owned subsidiary
of SAT with and into Good Ideas. The effects of the proposed merger (i.e., the
Merger) are discussed below.
Management believes that, during the past three years, manufacturers in the
toy industry have faced the problem that distributors or retailers have been
requesting that the manufacturers maintain the inventory, thereby increasing
manufacturers' expenses, and have been minimizing the number of vendors which
sell to them, which has the effect of squeezing out the smaller companies like
Good Ideas with their limited product lines. Because of these problems which
management believes are characteristic of the toy industry generally and Good
Ideas' declining sales and increasing losses, the SAT Board of Directors
concluded on February 26, 1996 that Good Ideas was not likely to reverse the
trend of increasing losses during the next 12 months. The Board believed that,
whether or not the Merger was consummated, the only way to improve operational
results was to secure new toy products, whether through licensing arrangements
or otherwise; however, this type of program, even if successful, as to which
there can be no assurance, would require substantial cash investments, which is
contrary to the Board's conclusion that the 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 SAT Board authorized seeking
a purchaser for Good Ideas. In addition, the SAT Board suspended management fees
to SAT retroactive to January 1, 1996. The Board, believes that, pending receipt
of an acceptable offer, as to which there can be no assurance, Good Ideas' cash
resources and expected cash flow from operations, coupled with its cost
reduction actions (such as not renewing the lease for office and reducing its
warehouse facilities in December 1995 and eliminating all operations in December
1996), 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 SAT Board believes that
liquidation of Good Ideas by no later than the date on which the results of the
consent solicitation for the Merger are known would be preferable than investing
substantial additional funds in Good Ideas, other than repaying SAT's
indebtedness to Good Ideas due April 30, 1997. The Merger would terminate SAT's
obligation to make such repayment. Good Ideas received an informal offer to
purchase its remaining inventory for $225,000, but initially did not attempt to
finalize the offer into a binding agreement while exploring other alternatives.
Good Ideas had, however, sold to such prospective purchaser in September 1996
inventory for $50,000 and in January 1997 inventory for $62,870. The Good Ideas
Board now intends to consummate such sale during the month of April 1997 and
then, if no
106
<PAGE> 116
offer to purchase the stock of Good Ideas is received, which is not deemed
likely, to liquidate Good Ideas not later than the date on which the results of
the consent solicitation for the Good Ideas Merger are known and regardless of
whether or not the Good Ideas Merger is approved. Good Ideas would receive an
additional $112,130 if the sale is consummated. There can be no assurance that
any offer to purchase the Good Ideas Common Stock will be received.
If the Merger is not consummated, Good Ideas and SAT will continue to be
publicly-owned companies and Good Ideas will continue to be a majority-owned
subsidiary of SAT. However, SAT intends to seek to follow the same course of
action as described in the preceding paragraph. Accordingly, the Good Ideas
Minority Stockholder, by rejecting the Good Ideas Merger, is in effect choosing
a cash liquidation payment over .36 of a share of the SAT Common Stock for each
share of the Minority Good Ideas Common Stock.
LIQUIDITY AND CAPITAL RESOURCES
On November 8, 1996, SAT completed a $5,000,000 convertible note financing.
Under the terms of the Convertible Loan and Warrant Agreement, SAT issued the
Convertible Notes each in the amount of $2,500,000 to the Noteholders, Steven A.
Cohen and S.A.C. Capital Associates, LLC. The loans are for a term of three
years and are not secured by any assets of the Company. In addition, SAT issued
and sold to each of the Noteholders a Common Stock purchase warrant to purchase
1,250,000 shares of the SAT Common Stock at $2.00 per share between July 1, 1997
and June 30, 2000.
The Convertible Notes bear interest at the rate of 7% per annum, with
interest payments commencing on December 15, 1996 and paid quarterly thereafter.
After July 1, 1997, the Noteholders may convert all or any portion of the
Convertible Notes into shares of the SAT Common Stock. The conversion price is
initially set at the rate of $2.00 per share subject to adjustment downward
during the period May 1, 1997 through May 1, 1998 based on the average market
price for the SAT Common Stock over the previous 65 trading days, provided that
the conversion price will not be reduced below $1.375 per share as a result of
this adjustment.
Although the Company has a history of operating losses through December 31,
1996, the Company believes that it will have cash resources available to meet
all of its operating requirements for the next 12 months except those relating
to U.S. Drug. Management believes that the increased revenues generated by the
Employer Services Division, the expense reductions made in consolidating
operations in California and Florida and the termination of major contracts for
breath alcohol testing equipment will lead to a reduction in operating losses
over the next 12 months. Management is confident it can continue to attract
investment in the Company through exercise of warrants or other financing to the
extent necessary to meet its operating needs. No assurance can be provided that
future financing efforts will be successful or that the warrants will be
exercised.
The Board of Directors has agreed that SAT advance U.S.Drug up to a total
of $2,000,000 to continue funding research and development of a saliva based
drug testing instrument. Through December 31, 1996, SAT had advanced
approximately $1,200,000 of this amount. Additional financing will be required
for U.S. Drug during the next 12 months; however, the role of SAT in providing
financing beyond the $2,000,000 currently approved will not be determined until
the results of the consent solicitation for the proposed acquisition of the
shares of the Minority U.S. Drug Common Stock are known. Management believes
that, through the exercise of warrants or other financing, SAT can meet the cash
requirements of U.S. Drug if that is the Board's decision; however, there can be
no assurance that SAT's efforts will be successful.
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.
107
<PAGE> 117
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 $6,118,000 for the nine months ended December
31, 1996 as compared with $6,122,000 in the prior nine-month period. The net
loss for the nine months ended December 31, 1996 was $7,007,000 as compared with
a net loss of $5,851,000 in the same period last year. Adjustments necessary to
reconcile the net loss to net cash used in operations in the nine months ended
December 31, 1996 were $889,000. Significant components of this adjustment
included depreciation and amortization expense of $787,000, the write off of
$714,000 of goodwill arising out of the March 1995 acquisition of Alconet, the
value of the SAT Common Stock issued for services of $575,000 and increases in
accounts payable and accrued expenses of $452,000, offset by increases in
accounts receivable of $695,000, and the minority interest in the net loss of a
subsidiary of $624,000.
INVESTING CASH FLOWS
Cash used in investing activities was $2,444,000, which included the
purchase of RSA for $2,577,000 and capital expenditures of $384,000 offset by
proceeds from the disposal of assets of $517,000.
FINANCING CASH FLOWS
Cash provided by financing activities provided $9,704,000, including
proceeds from the issuance of shares of the SAT Common Stock of $5,075,000,
offset by expenses of $411,000 and proceeds from the issuance of the Convertible
Notes and sales of warrants, of which $3,700,000 was allocated to the
Convertible Notes and $1,300,000 to the Common Stock purchase warrants.
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 SAT'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
108
<PAGE> 118
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 SAT in connection with its settlement with the Committee of the
consent solicitation litigation. Additionally, a non-recurring settlement of
$250,000 was paid to two former owners of Alconet relating to a dispute over the
terms of their employment contracts.
Depreciation and amortization was $1,018,000 for fiscal 1996, representing
an increase of $322,000 or 46.3% over depreciation and amortization in fiscal
1995, which increase was attributable primarily to depreciation on SAT's alcohol
testing machines placed in testing sites in connection with the cost per test
agreements with major laboratories. The majority of these machines were placed
in service in the fourth quarter of fiscal 1995. These machines represented an
increase in depreciation expense of $514,000 for fiscal 1996 as compared to the
expense in the prior year based on a full year's depreciation in fiscal 1996.
The Company's operating loss of $9,006,000 for fiscal 1996 increased by
$2,029,000 over its operating loss of $6,977,000 for the prior year. The
increased operating loss can be attributed to: the lower level of revenues
generated from the alcohol testing business attributable to an unusually high
volume of alcohol breath analyzing machines sold in the third quarter of the
prior year; negative gross margins for fiscal 1996 resulting from higher labor
and supply costs necessary to support the start up of the cost per test
business; increased selling, general and administrative expenses and
nonrecurring losses from settlement of litigation in the amount of $1,138,000,
operating losses of $576,000 incurred by Alconet, a newly acquired subsidiary
not included in the prior year numbers; and increased depreciation cost relating
to the cost per test business.
Other income, net of other expenses, for fiscal 1996 was $409,000 as
compared to an expense of $499,000 reported for fiscal 1995. The trading
securities sold by the Company in fiscal 1996 generated a profit of $302,000
over their carrying value in the March 1995 balance sheet. During fiscal 1995,
these securities generated a loss of $155,000 and an unrealized loss of
$598,000. Interest income decreased by $134,000 for fiscal 1996 as compared to
the interest income in the prior year.
Management is of the opinion that it is too speculative to project at this
time when the Company will turn profitable because of the Company's history of
operational losses, the delay in completing and then marketing its urine sample
drug testing product in order to wait until a saliva sample drug testing product
is available, the fact that its human resource provider program is in its early
marketing stages and the discontinued operations of the toy subsidiary.
U.S. DRUG TESTING, INC. (SUBSTANCE ABUSE TESTING)
During fiscal 1996, U.S. Drug continued as a development stage enterprise
with no revenues. Selling, general and administrative expenses were $417,000 in
fiscal 1996 as compared with $850,000 in fiscal 1995 or a decrease of $433,000,
resulting primarily from a $325,000 reduction in the royalty payments on the SAT
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 SAT were $420,000 in both fiscal 1996 and fiscal 1995.
For a description of the services rendered under the management agreement
relating to these fees, see the "Business of the Company -- Subsidiaries -- U.S.
Drug Testing, Inc." Interest expenses on brokerage loans were $72,000 during
fiscal 1996 as compared with $42,000 during fiscal 1995 or an increase of
$30,000 resulting from increased borrowings during fiscal 1996. Other income
(expense) resulted in net income of $263,000 in fiscal 1996 as compared with net
income of $31,000 in the prior year or an increase of $232,000. Fiscal 1996
other income (expense) is comprised of a gain of $76,000 on the sale of REMIC
bonds over their earnings value at March 31, 1995, interest income
109
<PAGE> 119
primarily relating to the REMIC bonds of $105,000 and interest income on loans
to SAT 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
SAT 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. SAT will need to
provide the funding necessary to complete the development of the U.S. Drug
products and bring them to market.
DISCONTINUED OPERATIONS
GOOD IDEAS ENTERPRISES, INC. (TOY)
Net sales for fiscal 1996 were $1,508,000, a decrease of $3,098,000 or
67.3% from the net sales in the prior year. Of this decrease, $1,994,000 or
64.4% was attributable to Toys R Us, the major customer of Good Ideas, not
placing orders for Good Ideas' toy products. The customer attributed its
reduction in orders to its large inventories and declining sales and customer
traffic. Management believes that other manufacturers in the toy industry are
currently facing these same problems -- their distributors or retailers to which
they sell have large inventories of products and declining sales and customer
traffic. In addition, management believes that many retailers are minimizing
their number of vendors and reducing the number of items carried in inventory
which has the result of squeezing out the smaller companies with their limited
product lines.
Net sales from Good Ideas' wooden construction toy category for fiscal 1996
were $967,000, a decrease of $1,874,000 or 66.0% from the net sales in the
comparable period in fiscal 1995. Net sales from Good Ideas' equestrian line of
toys, consisting of horses, saddles and accessories, for fiscal 1996 were
$531,000, representing a decrease of $682,000 or 56.2% from those in the prior
year. Net sales of Good Ideas' other product lines for fiscal 1996 were $10,000,
a decrease of $542,000 or 98.2% from the prior year. The decrease was
attributable to the discontinuance of Good Ideas' line of corrugated cardboard
construction toys because of significant increases in the cost of materials.
Gross profit for fiscal 1996 was $163,000 or 10.8% of net sales as compared
with $1,324,000 or 28.7% of net sales for the prior year. The decrease in gross
profit as a percentage of net sales was primarily due to lower sales volumes in
relation to fixed cost and the write-off of obsolete inventory in the amount of
$192,000. Good Ideas had reviewed its inventory for obsolescence annually and
written off to cost of sales inventory determined to be obsolete. The fiscal
1996 write-off is more significant in relation to gross profit than past years
due to the lower sales level and the pending sale or liquidation of assets.
Prior year provisions for obsolescence were not significant in relation to
higher cost of sales and gross profit levels.
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 SAT 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 SAT'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.
110
<PAGE> 120
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 SAT Board
determined to sell or liquidate Good Ideas, a conclusion concurred with by the
Good Ideas Board. As a result of the above decision, the assets of Good Ideas
are included in the consolidated balance sheet at management's estimate of
liquidation value and the results of operations of Good Ideas are presented on a
discontinued basis. See "The Merger and Related Matters -- Sale of Good Ideas."
U.S. RUBBER RECYCLING, INC. (RECYCLED RUBBER PRODUCTS)
Net sales of USRR for fiscal 1996 were $892,000, a decrease of $1,244,000
or 58.2% as compared with sales of $2,136,000 in the prior year. This decrease
was attributable to the continuing effects of the cancellation of an agreement
with a distributor (Matworks, Inc.) by USRR in October 1994 because of
significant breaches of the contract by the distributor relating to its use of
competitors' flooring products in violation of a contractual requirement to use
only USRR's products. SAT does not intend to institute any legal action against
the distributor because USRR does not want to incur the protracted legal
expenses involved in litigation.
Gross margin for fiscal 1996 was $419,000 or 47.0% of net sales, up from a
gross margin of 41.8% of net sales for fiscal 1995. The increase in gross margin
was attributable to an increase in the selling price of USRR's product to its
customers. This offset an inventory write off of floor tiles which became
non-repairable during the six months ended September 30, 1995. Floor tiles not
meeting quality control standards are segregated in the inventory for future
repairs to correct the flaws and those not repairable are discarded. During
fiscal 1995, USRR worked a double shift to meet the production demand created by
the agreement with the distributor. Inexperienced labor resulted in an increase
in tiles not initially suitable for shipments.
Selling, general and administrative expenses were $605,000 for fiscal 1996,
representing a decrease of $214,000 from such expenses in fiscal 1995. Of this
amount, $162,000 represented a decrease in commissions and freight related to
the decline in sales revenue.
Management fees paid to SAT were $89,000 for fiscal 1996, representing a
decrease of $124,000 from such fees in the prior year.
Depreciation expense was $99,000 for fiscal 1996, representing an increase
of $40,000 over such expense in the comparable prior year, which increase was
attributable to the commencement of depreciation on additional manufacturing
equipment built in contemplation of potential expansion.
Interest expense was $123,000 for fiscal 1996 as compared with a $112,000
expense in the comparable period in 1995 as a result of borrowings from
affiliates.
The operating loss of $492,000 for fiscal 1996 represented a decrease of
approximately $131,000 from an operating loss of $623,000 for fiscal 1995. The
decrease was primarily attributable to the increased percentage of gross margin
and the decrease in selling, general and administrative expenses incurred during
fiscal 1996.
As indicated elsewhere in this Consent Solicitation Statement/Prospectus
(see the section "Effect of Merger" under this caption "The Company's
Management's Discussion and Analysis of Financial Condition and Results of
Operations"), the SAT 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.
111
<PAGE> 121
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 SAT's Alco
Analyzer 2100.
Cost of sales for fiscal 1995 was 82.4% of revenues as compared to 88.1% of
revenues for the prior year. This increase was attributable to the higher than
projected costs involved in building the initial alcohol testing machines that
were sold in fiscal 1995.
Selling, general and administrative expenses were $5,284,000 for fiscal
1995, representing an increase of $1,524,000 over the $3,760,000 in such
expenses reported for fiscal 1994. The Company incurred $1,230,000 of
development marketing and training costs in connection with the alcohol testing
machine during fiscal 1995.
Research and development expenses were $1,249,000 for fiscal 1995,
representing an increase of $301,000 over the expenses reported for fiscal 1994.
Of the total expenditures in fiscal 1995, $886,000 represented research and
development by U.S. Drug in connection with technology licensed to SAT from the
USN for drugs of abuse, representing an increase of $158,000 over the fiscal
1994 expenditures. The Company incurred research and development expenditures of
$363,000 during fiscal 1995 in connection with the development of its alcohol
testing machine, representing an increase of $143,000 over the expenditures for
fiscal 1994.
Depreciation and amortization was $695,000 for fiscal 1995, representing an
increase of $314,000 over the $381,000 in depreciation and amortization reported
for fiscal 1994, primarily attributable to depreciation of the alcohol testing
machines.
Losses from settlement of class action and other litigation were $4,650,000
for fiscal 1994. The Company incurred no similar costs during fiscal 1995.
Operating losses of $6,977,000 for fiscal 1995 decreased by $2,710,000 from
the losses of $9,687,000 reported for fiscal 1994, primarily attributable to the
litigation losses of $4,650,000 incurred for fiscal 1994. The contributions to
operating losses by subsidiaries, representing segments other than alcohol
testing, are detailed below.
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. SAT spent $678,000 on research and development and
$485,000 on selling, general and administrative expenses for the period from
January 24, 1992 through December 31, 1992, when the technology was transferred
or sublicensed to U.S. Drug.
112
<PAGE> 122
U.S. Drug paid management fees to SAT of $420,000 in both fiscal 1995 and
fiscal 1994. During fiscal 1995, the loss from operations of $2,363,000 also
reflected interest of $44,000 on brokerage loans and depreciation of $163,000.
During fiscal 1994, the loss from operations of $1,876,000 also reflected
interest and depreciation of $124,000.
U.S. Drug's operating loss was $2,363,000 in fiscal 1995 as compared to
operating losses of $1,876,000 in fiscal 1994. These operating losses were
attributable to the fact that U.S. Drug was expending funds for research and
development and selling, general and administrative expenses as indicated in the
second preceding paragraph, as well as incurring a management fee to SAT and the
other expenses as described in the preceding paragraph, while not realizing any
revenues.
DISCONTINUED OPERATIONS
GOOD IDEAS ENTERPRISES, INC. (TOY)
Net sales of Good Ideas for fiscal 1995 were $4,606,000, a decrease of
$938,000 or 16.9% from the sales in the prior year. Net sales from Good Ideas'
wooden construction toy category for fiscal 1995 were $2,841,000, a decrease of
$733,000 or 20.5% from the net sales in the comparable period in fiscal 1994,
which decrease was attributable to a decline in this category sales by Toys R
Us, Good Ideas' major customer, resulting in a reduction of orders placed by
such customer. The customer attributed its reduction in orders to its large
inventories and declining sales and customer traffic. At March 31, 1995,
management believed that other manufacturers in the toy industry were facing
these same problems A their distributors or retailers to which they sold have
large inventories of products and declining sales and customer traffic. In
addition, net sales from Good Ideas' equestrian line of toys, consisting of
horses, saddles and accessories, for fiscal 1995 were $1,123,000, representing
an increase of $198,000 or 19.5% over the sales in fiscal 1994. This increase
was attributable to the sales of a new product introduced into the equestrian
line at the end of fiscal 1994. Net sales of Good Ideas' other product lines for
fiscal 1995 were $344,000, a decrease of $69,000 or 16.7% from the net sales in
fiscal 1994. Price increases in the cost of the corrugated cardboard resulted in
price increases to Good Ideas' customers, with a resulting decline in sales.
This category was ultimately removed from the product line at the beginning of
fiscal 1996. The remaining decrease in net sales for fiscal 1995 as compared to
the net sales in fiscal 1994 was the result of sales of other products which had
been introduced into the line on an unsuccessful basis and sold at discontinued
prices in order to avoid carryover of slow-moving inventory.
Gross profit for fiscal 1995 was $1,324,000 or 28.7% of net sales as
compared to $1,487,000 or 26.8% of net sales for fiscal 1994. The increase in
gross profit as a percentage of net sales was primarily due to Good Ideas'
effort to increase its gross margins on product sold by either raising selling
prices or adjusting the quantity of parts in its playsets.
Selling, general and administrative expenses for fiscal 1995 increased to
$1,924,000 or 41.8% of net sales from $1,487,000 or 27.6% of net sales for
fiscal 1994. This increase was the result of two factors. First, the fixed
overhead was spread over a decreased sales volume. Second, Good Ideas
experienced increased legal and other public company expenses of $127,000,
increased payroll costs of $86,000 resulting from additional employees hired and
increased travel and promotion expenses in the amount of $97,000 resulting from
Good Ideas' efforts to expand its business base.
Pursuant to the Management Services Agreement, SAT'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, SAT'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
113
<PAGE> 123
decrease in sales and the increase in selling, general and administrative
expenses, offset by the decrease in the management fee, as described in the
preceding paragraphs.
U.S. RUBBER RECYCLING, INC. (RECYCLED RUBBER PRODUCTS)
USRR's net sales of $2,136,000 for fiscal 1995 increased by $941,000 or
78.7% over the net sales of $1,195,000 in fiscal 1994, which increase was
attributable to a new agreement with a distributor for product placed in a major
retailer. The agreement was canceled by USRR in October 1994 because of
significant breaches of the contract by the distributor relating to its use of
competitors' flooring products in violation of a contractual requirement to use
only USRR's products. USRR does not intend to institute any legal action against
the distributor because USRR does not want to incur the protracted legal
expenses involved in litigation.
Gross margin for fiscal 1995 was $581,000 or 27.2% of net sales, a decrease
from $460,000 or 38.5% of net sales for fiscal 1994. The decrease in gross
margin was attributable to manufacturing inefficiencies, resulting from running
a double shift which was necessitated by the increase in product demand arising
from the agreement with the distributor (Matworks, Inc.). As a result of the
double shift, an increase in the number of tires was required to supply the
second shift, resulting in additional costs to USRR to purchase tires to
maintain an adequate inventory, to remove waste from the increased volume of
tires processed and an increase in the number of irregular tiles produced
causing additional repair labor cost because of the training required for the
new labor force to staff the second shift.
Selling, general and administrative expenses were $819,000 for fiscal 1995,
representing an increase of $151,000 over the $668,000 of expenses for fiscal
1994. Of this amount, $131,000 represented additional payroll and consulting
fees resulting from an expansion of the business.
Management fees paid to SAT 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.
NINE MONTHS ENDED DECEMBER 31, 1996 AS COMPARED WITH NINE MONTHS ENDED DECEMBER
31, 1995
Revenues from continuing operations increased $1,169,000, or 130%, to
$2,070,000 in the nine months ended December 31, 1996 as compared with $901,000
in the same period of the prior year. The increase is attributed to the sales
increase of the Employer Services Division of $564,000 as compared with no
significant revenues in the prior year and sales of $463,000 from the Robert
Stutman & Associates Consulting Division acquired in May 1996.
Operating losses from continuing operations increased to $6,857,000 in the
nine months ended December 31, 1996 as compared with $5,209,000 in the same
period of the prior year, an increase of $1,647,000 or 32%. Major factors in the
increase are the write-off of $714,000 in goodwill arising from the March 1995
acquisition of Alconet, which management determined was impaired due to the
operation's declining sales volume; a charge of $575,000 from the issuance of
SAT Common Stock for financial public relations consulting services; a $220,000
increase in research and development expenditures of U.S. Drug, a 67%-owned
subsidiary, on a saliva based drug instrument; and increased interest expense of
$116,000 on the Convertible Notes issued in November 1996.
Cost of sales was $1,629,000 in the nine months ended December 31, 1996, or
79% of sales, as compared with $676,000, or 75% of sales, in the comparable
period of the prior year, an increase of $953,000. This
114
<PAGE> 124
increase is primarily due to costs related to the increased sales volume of the
Employer Services Division and the Robert Stutman & Associates Consulting
Division.
Selling and marketing expenses increased to $859,000 in the nine months
ended December 31, 1996 as compared with $722,000 for the same period of the
prior year. The increase or $183,000 or 27% reflects increased marketing efforts
of the Employer Services Division.
General and administrative expenses were $4,120,000 in the nine months
ended December 31, 1996 as compared with $3,770,000 in the prior year, an
increase of $350,000 or 9%. Current year general and administrative expenses
were higher in the current year to date period primarily due to the issuance of
SAT Common Stock valued at $575,000 for financial public relations consulting
services.
Research and development expenses for the nine months ended December 31,
1996 were $1,274,000 as compared to $790,000 in the same period of the prior
year, an increase of $484,000 or 61%. This increase reflects a $514,000 increase
in expenditures on the saliva based drug instrument offset by reductions in
breath alcohol related expenditures.
Interest expense for the nine months ended December 31, 1996 was $144,000
as compared with $74,000 in the comparable period of the prior year, an increase
of $70,000 or 95%. The primary cause of this increase was the $5,000,000 in
Convertible Notes issued in November 1996 resulting in interest charges for the
period of $116,000 and current year interest on the $400,000 notes payable
resulting from the May 1996 RSA acquisition and capital leases.
Prior year interest expense includes interest of $71,000 on brokerage loans
of a subsidiary which have been repaid.
Loss from discontinued operations was $151,000 in the nine months ended
December 31, 1996 as compared with $641,000 in the same period of the prior
year. This decrease reflects the sale of the USRR operation in April 1996 and
the inactive status of Good Ideas Enterprises, Inc. which is held for sale or
liquidation.
115
<PAGE> 125
GOOD IDEAS' SELECTED FINANCIAL DATA
The following table sets forth selected financial data of Good Ideas for
the three fiscal years ended March 31, 1996, 1995 and 1994, the three-month
period ended March 31, 1993, the twelve-month periods ended December 31, 1992
and 1991 and the nine-month periods ended December 31, 1996 and 1995. This
selected financial data should be read in conjunction with "Good Ideas'
Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Good Ideas Financial Statements and related notes thereto
included elsewhere in this Consent Solicitation Statement/Prospectus.
<TABLE>
<CAPTION>
THREE
MONTHS
ENDED YEAR ENDED
YEAR ENDED MARCH 31, MARCH 31, DECEMBER 31,
--------------------------- --------- -----------------
1996 1995 1994 1993(1) 1992 1991
------- ------- ------- --------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA(2):
Net Sales............................... $ 1,508 $ 4,606 $ 5,544 $ 436 $ 3,773 $ 2,295
Cost of sales........................... 1,345 3,282 4,057 325 2,845 1,698
-------- ------ ------ ------ ----- -----
Gross profit............................ 163 1,324 1,487 111 928 597
-------- ------ ------ ------ ----- -----
Operating expenses:
Selling, general and administrative... 1,278 1,924 1,488 297 1,015 359
Management fees -- parent............. 225 305 425 75 150 --
Write down of Fixed Assets and Inventory
to Net Realizable Value............... 258 -- -- -- -- --
Projected Cost through Sale or
Liquidation........................ 110 -- -- -- --
-------- ------ ------ ------ ----- -----
Total Operating Expenses................ 1,872 2,229 1,913 372 1,165 359
-------- ------ ------ ------ ----- -----
Income (Loss) from Operations........... (1,708) (905) (426) (261) (237) 238
Other income (expense).................. 142 107 (156) (57) (85) --
-------- ------ ------ ------ ----- -----
Net income (Loss)....................... $(1,566) $ (798) $ (582) $(318) $ (322) $ (238)
======== ====== ====== ====== ===== =====
Weighted Average Common Shares
Outstanding........................... 3,968 4,065 2,942 2,788 2,788 2,788
======== ====== ====== ====== ===== =====
Net Loss Per Common Share............... $(.39) $ (.20) $ (.20) $(.11) $ (.12) $ (.09)
======== ====== ====== ====== ===== =====
PRO FORMA DATA(3):
Income before pro forma provision for
income tax............................ -- -- -- -- -- $ 238
Pro forma provision for income taxes.... -- -- -- -- -- 82
-----
Pro forma net income after pro forma
provision for income taxes............ -- -- -- -- -- $ 156
=====
Pro forma net income per common share... -- -- -- -- -- $ .06
=====
</TABLE>
<TABLE>
<CAPTION>
AS OF AS OF
AS OF MARCH 31, MARCH 31, DECEMBER 31,
--------------------------- --------- -----------------
1996 1995 1994 1993(1) 1992 1991
------- ------- ------- --------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET(2):
Cash (overdraft) and cash equivalents... $ 83 $ 351 $ 3,608 $ 430 $ 322 $ (48)
Working capital (deficiency)............ 2,175 3,572 4,114 (769) (422) 182
Note receivable -- parent............... 2,052 1,196 -- -- -- --
Note receivable -- affiliated company... -- 1,027 -- -- -- --
Total assets............................ 2,423 3,951 5,604 1,909 1,857 340
Loan payable -- parent.................. -- -- 437 1,960 1,815 --
Stockholders' equity (deficit).......... 2,175 3,735 4,253 (650) (332) 183
</TABLE>
116
<PAGE> 126
- ---------------
(1) Good Ideas changed its fiscal year end date from December 31 to March 31
effective March 31, 1993.
(2) The numbers presented in this table have been rounded and, accordingly, may
not exactly reflect the numbers which appear in Good Ideas' financial
statements.
(3) Proforma Data for the year ended December 31, 1991 reflects income taxes
computed at the effective tax rate that would have been reported had Good
Ideas been subject to Federal and State income taxes as a Subchapter C
corporation during this period.
117
<PAGE> 127
GOOD IDEAS
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED DECEMBER 31,
-------------------------
1996 1995
--------- -----------
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net Sales.......................................................... $ 49,000 $ 1,473,000
Cost of Sales...................................................... 91,000 1,142,000
--------- -----------
Gross Profit (Loss)................................................ (42,000) 331,000
Operating Expenses:
Selling, General and Administrative Expenses..................... 196,000 1,139,000
Management Fees -- Parent........................................ -- 225,000
Projected Costs through Sale or Liquidation...................... (69,000) --
--------- -----------
Total Operating Expenses........................................... 127,000 1,364,000
Loss from Operations............................................... (169,000) (1,033,000)
Other Income....................................................... 120,000 101,000
--------- -----------
Net Profit (Loss).................................................. $ (50,000) $ (932,000)
========= ===========
Weighted Average Common Shares Outstanding......................... 3,949,000 3,975,000
--------- -----------
Net Loss Per Common Share.......................................... $ (0.01) $ (0.23)
========= ===========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1996 1995
---------- ----------
<S> <C> <C>
SELECTED BALANCE SHEET DATA:
Cash and Cash Equivalents........................................... $ -- $ 20,500
========== ==========
Working Capital (Deficiency)........................................ $2,117,717 $2,733,000
========== ==========
Note Receivable -- Parent........................................... $1,972,000 $1,927,000
========== ==========
Total Assets........................................................ $2,204,000 $3,023,000
========== ==========
Stockholders' Equity (Deficit)...................................... $2,125,000 $2,808,000
========== ==========
</TABLE>
118
<PAGE> 128
GOOD IDEAS' MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
SAT acquired an interest in Good Ideas in June 1992. For the period from
July 1992 through March 1993, SAT provided management and administrative
services to Good Ideas in exchange for a fixed monthly fee of $25,000. In April
1993, Good Ideas and SAT entered into a formal Management Agreement pursuant to
which the fee for such services from April through September 1993 was ten
percent of annual net sales. Pursuant to the Management Services Agreement
effective as of October 1, 1993, such fees are computed on the basis of a fixed
monthly charge of $25,000, plus five percent of annual gross sales in excess of
$5,000,000. On February 26, 1996, SAT suspended payment of management fees by
Good Ideas to SAT retroactive to January 1, 1996.
Because of the declining sales of Good Ideas and what management believes
to be the problems generally in the toy industry (see the sections "Liquidity
and Capital Resources" and "Results of Operations, Fiscal 1996 vs Fiscal 1995"
under this caption), the SAT Board of Directors concluded on February 26, 1996
that Good Ideas was not likely to reverse the trend of increasing losses during
the next 12 months. The Board believed that, whether or not the Merger was
consummated, the only way to improve operational results was to secure new toy
products, whether through licensing arrangements or otherwise; however, this
type of program, even if successful, as to which there can be no assurance,
would require substantial cash investments, which is contrary to the Board's
conclusion that the best opportunity for the Company maximizing revenues and
securing profitability was by concentrating on its alcohol and drug testing and
human resource provider segments as its core businesses. Accordingly, on
February 26, 1996, the SAT Board authorized management to seek a buyer for Good
Ideas. The Good Ideas Board believes that, pending receipt of an acceptable
offer, as to which there can be no assurance, Good Ideas' cash resources,
coupled with its cost reduction actions in December 1995 and February 1996 (such
as not renewing the lease for office and warehouse facilities and eliminating
the management fee) and the termination of all operations in December 1996 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 SAT Board and the Good Ideas
Board each believes that liquidation of Good Ideas would be preferable than
investing substantial additional funds in Good Ideas, other than repaying SAT's
indebtedness to Good Ideas if necessary to liquidate Good Ideas. The Merger
would terminate SAT's obligation to make such repayment. See the section "Effect
of Merger" under the caption "The Company's Management's Discussion and Analysis
of Financial Condition and Results of Operations."
LIQUIDITY AND CAPITAL RESOURCES
During the nine months ended December 31, 1996, Good Ideas accrued interest
income of approximately $120,000 on its loan to SAT. The loan bears interest at
8% and is evidenced by notes that become due March 31, 1997. These loans were
made with funds in excess of amounts required by Good Ideas and carry interest
rates in excess of those available to Good Ideas on short term money market
investments.
Even if the Note Receivable ($1,971,936 at December 31, 1996) was paid by
SAT, management does not believe that this amount would be sufficient for Good
Ideas to acquire all of the products necessary to turn Good Ideas around and, if
Good Ideas is liquidated as currently contemplated as the alternative to sale,
60.8% or approximately $1,199,000 of such payment would be returned to SAT and
only 39.2% or approximately $773,000 would go to Good Ideas Minority
Stockholders, assuming that all creditor claims were otherwise satisfied.
Cash used by operations during the nine months ended December 31, 1996 was
approximately $159,000 as compared with $469,000 in the same period of the prior
year. The net loss for the nine months ended December 31, 1996 was $50,000,
which represented an increase in the $110,000 reserve which was established in
fiscal 1996 to cover the expenses incurred while management attempted to sell or
liquidate the business.
119
<PAGE> 129
The additional reserve was established due to delays encountered in selling or
liquidating the business. Financing activities provided approximately $77,000
primarily from the partial repayment of the loan to SAT.
Good Ideas believes that its present cash resources are adequate to meet
its minimal needs while its assets are held for sale or liquidation.
RESULTS OF OPERATIONS
FISCAL 1996 VS. FISCAL 1995
Net sales for fiscal 1996 were $1,508,000, a decrease of $3,098,000 or
67.3% from the net sales in the prior year. Of this decrease, $1,944,000 or
62.8% was attributable to Toys R Us, the major customer of Good Ideas, not
placing orders for Good Ideas' toy products. The customer attributed its
reduction in orders to its large inventories and declining sales and customer
traffic. Management believes that other manufacturers in the toy industry are
currently facing these same problems -- their distributors or retailers to which
they sell have large inventories of products and declining sales and customer
traffic. In addition, management believes that many retailers are minimizing
their number of vendors and reducing the number of items carried in inventory,
which has the result of squeezing out the smaller companies with their limited
product lines. Net sales from Good Ideas' wooden construction toy category for
the fiscal 1996 were $967,000, a decrease of $1,874,000 or 66.0% from the net
sales in the comparable period in fiscal 1995. Net sales from Good Ideas'
equestrian line of toys, consisting of horses, saddles and accessories, for
fiscal 1996 were $531,000, representing a decrease of $682,000 or 56.2% from
those in the prior year. Net sales of Good Ideas' other product lines for fiscal
1996 were $10,000, a decrease of $542,000 or 98.2% from the prior year. The
decrease was attributable to the discontinuance of Good Ideas' line of
corrugated cardboard construction toys because of significant increases in the
cost of materials.
Gross profit for fiscal 1996 was $163,000, or 10.8% of net sales, as
compared to $1,324,000, or 28.7% of net sales, for the prior year. The decrease
in gross profit as a percentage of net sales was primarily due to lower sales
volumes in relation to fixed cost and the write-off of obsolete inventory in the
amount of $192,000. Good Ideas had reviewed its inventory for obsolescence
annually and written off to cost of sales inventory determined to be obsolete.
The fiscal 1996 write-off is more significant in relation to gross profit than
past years due to the lower sales level and the pending sale or liquidation of
assets. Prior year provisions for obsolescence were not significant in relation
to higher cost of sales and gross profit levels.
Selling, general and administrative expenses for fiscal 1996 decreased to
$1,279,000 from $1,924,000 in fiscal 1995, which decrease was attributable to
reductions in payroll and related costs during fiscal 1996.
Good Ideas recognized interest income from its loans to its major
shareholder, SAT, and USRR, a wholly owned subsidiary of SAT, of $158,000 during
fiscal 1996 compared to $68,000 during fiscal 1995. Good Ideas also recognized
interest income from money market investments of $3,500 and $42,000 in fiscal
1996 and 1995, respectively.
Management fees paid to SAT 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 SAT's suspension of the management fee retroactive to January 1,
1996.
The net loss for the fiscal 1996 was $1,566,000, representing an increase
of $768,000 from the net loss of $798,000 for fiscal 1995. The increase in the
net loss was due to the decreases in sales and gross profit offset by the
decreases in selling, general and administrative expenses and management fees,
all as described in the preceding paragraphs. The net loss for the current year
was also increased by writedown of assets in the amount of $258,000 and
projected costs through sale or liquidation in the amount of $110,000.
As March 31, 1996, Good Ideas had net operating loss carryforwards of
approximately $3,085,000 for federal income tax purposes. Good Ideas adopted
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes," effective January 1, 1992. The adoption of this statement did not have a
material effect on Good Ideas' financial condition or results of operations. Net
operating loss carryforwards can be used to offset federal taxable income during
a 15-year period from the date of the loss. Under the Tax
120
<PAGE> 130
Reform Act of 1986, the amounts of, and the benefit from, net operating losses
that can be carried forward may be impaired or limited in certain circumstances.
Events which may offset these carryforwards include, but are not limited to, a
cumulative stock ownership change of greater than 50%, as defined, over a
three-year period.
Unless Good Ideas were to add new products to its lines, as to which there
can be no assurance or there were a stronger demand for the toy products in the
industry generally, management does not believe that a turnaround in Good Ideas'
operations would occur during the next 12 months, if not at a later date.
Although management of Good Ideas' had considered plans to expand the product
line, it was reluctant to implement these plans absent a change in the industry
conditions described above. As indicated in the section "General" under this
caption "Good Ideas' Management Discussion and Analysis of Financial Condition
and Results of Operations" and "The Merger and Related Matters-Sale of Good
Ideas," on February 26, 1996, management determined to seek a buyer for Good
Ideas.
FISCAL 1995 VS. FISCAL 1994
Net sales for fiscal 1995 were $4,606,000, a decrease of $938,000 or 16.9%
from the net sales in the prior year. Net sales from Good Ideas' wooden
construction toy category for fiscal 1995 were $2,841,000, a decrease of
$733,000 or 20.5% from the net sales in fiscal 1994, which decrease was
attributable to a decline in this category sales by Toys R Us, Good Ideas' major
customer, resulting in a reduction of orders placed by such customer. The
customer attributed its reduction in orders to its large inventories and
declining sales and customer traffic. Management believes that other
manufacturers in the toy industry are currently facing these same
problems -- their distributors or retailers to which they sell have large
inventories of products and declining sales and customer traffic. In addition,
net sales from Good Ideas' equestrian line of toys for fiscal 1995 were
$1,123,000, representing an increase of $198,000, or 19.5%, over the sales in
fiscal 1994. This increase was attributable to the sales of a new product
introduced into the equestrian line at the end of fiscal 1994. Net sales of Good
Ideas' corrugated cardboard construction toy category for fiscal 1995 were
$344,000, a decrease of $69,000 or 16.7% from the net sales for fiscal 1994.
Price increases in the cost of the corrugated cardboard resulted in price
increases to Good Ideas' customers, with a resulting decline in sales. This
category was ultimately removed from the product line at the beginning of fiscal
1996. The remaining decrease in net sales for fiscal 1995 as compared to the net
sales in fiscal 1994 was the result of sales of other products which had been
introduced into the line on an unsuccessful basis and sold at discounted prices
in order to avoid carryover of slow-moving inventory.
Gross profit for fiscal 1995 was $1,324,000 or 28.7% of net sales as
compared to $1,487,000 or 26.8% of net sales for fiscal 1994. The increase in
gross profit as a percentage of net sales was primarily due to Good Ideas'
effort to increase its gross margins on product sold by either raising selling
prices or adjusting the quantity of parts in its playsets.
Selling, general and administrative expenses for fiscal 1995 increased to
$1,924,000 or 41.8% of net sales from $1,487,000 or 27.6% of net sales for
fiscal 1994. This increase was the result of two factors: First, the fixed
overhead was spread over a decreased sales volume. Second, Good Ideas
experienced increased legal and other public company expenses of approximately
$127,000, increased payroll costs of $86,000 resulting from additional employees
hired and increased travel and promotion expenses in the amount of $97,000
resulting from Good Ideas' efforts to expand its business base.
Pursuant to the Management Services Agreement, SAT'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, SAT's fees
were computed at ten percent of net sales through September 30, 1993, while such
fees were computed based on a flat monthly charge of $25,000 on the first
$5,000,000 of net sales during fiscal 1995. Second, the decline in net sales
volume for fiscal 1995 kept the management fee from becoming subject to a five
percent surcharge on all sales over $5,000,000.
During fiscal 1995, Good Ideas repaid its debt to SAT and made loans to SAT
in the amount of $1,196,000 and to USRR in the amount of $1,027,000. Good Ideas
recognized interest income of $68,000
121
<PAGE> 131
from these loans to related parties and also received interest income of $42,000
from money market investments. Good Ideas incurred minimal interest expense
during fiscal 1995.
Good Ideas had a loss from operations of $905,000 in fiscal 1995 as
compared with a loss from operations of $426,000 in fiscal 1994, an increase of
$479,000 or 112.4%. The increase in 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.
NINE MONTHS ENDED DECEMBER 31, 1996 AS COMPARED WITH NINE MONTHS ENDED DECEMBER
31, 1995
Net sales for the nine months ended December 31, 1996 were approximately
$49,000 as compared with sales of $1,473,000 in the comparable period of the
prior year. This decrease was a result of the concentration of management on the
sale or liquidation of Good Ideas' assets rather than pursuing traditional sales
efforts.
There was a negative gross profit of $42,000 in the nine months ended
December 31, 1996 as compared with a gross profit of $331,000 in the comparable
period of the prior year. The loss in the current period reflected the
insignificant level of sales during the period and warehouse rental and other
holding costs for the inventory and other assets of Good Ideas.
Selling, general and administrative expenses for the nine months ended
December 31, 1996 were $196,000 as compared with $1,139,000 in the comparable
period of its prior year reflecting the elimination of most employees and the
office facility in Texas and other related costs. Good Ideas incurred no
management fees in the nine months ended December 31, 1996 as SAT suspended
these charges retroactive to January 1, 1996.
During the nine months ended December 31, 1996, Good Ideas recognized
interest income of approximately $120,000 on its loans to Good Ideas as compared
with interest income from affiliates of $118,000 in the same period of the prior
year. The prior year net other income (expense) included a charge of $20,000 for
a loss on disposal of fixed assets.
Good Ideas provided a reserve for sale or liquidation costs of $110,000 in
its results of operations for fiscal 1996. However, due to the delay in the sale
or liquidation of the assets of Good Ideas, an additional provision of $50,000
was charged against the second quarter income to cover costs expected to be
incurred through sale or liquidation. Approximately $119,000 of the reserve was
utilized in the nine months ended December 31, 1996 to offset losses incurred.
COMMISSION POSITION ON INDEMNIFICATION
The SAT Board of Directors has authorized indemnification of directors and
officers of SAT to the fullest extent permitted by Delaware law.
Section 145(a) of the GCL permits a corporation to indemnify any person who
was or is a party or is threatened to be made a party to any threatened, pending
or completed action, suit or proceeding, whether civil, criminal, administrative
or investigative (other than an action by or in the right of the corporation),
by reason of the fact that he or she is or was a director, officer, employee or
agent of the corporation, or is or was serving at the request of the corporation
as a director, officer employee or agent of another corporation, partnership,
joint venture, trust or other enterprise against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred in connection with such action, suit or proceeding if he or she acted
in good faith and in a manner he or she reasonably believed to be in, or not
opposed to, the best interests of the corporation, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe his or her
conduct was unlawful.
Under Section 145(b) of the GCL, a corporation also may indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that he or
she is or was a director, officer, employee or agent of the corporation, or is
or was serving at the request of the corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise against expenses
122
<PAGE> 132
(including attorneys' fees) actually and reasonably incurred by him or her in
connection with the defense or settlement of such action or suit if he or she
acted in good faith and in a manner he or she reasonably believed to be in, or
not opposed to, the best interests of the corporation. However, in such an
action by or on behalf of a corporation, no indemnification may be in respect of
any claim, issue or matter as to which the person is adjudged liable to the
corporation unless and only to the extent that the court determines that,
despite the adjudication of liability but in view of all the circumstances, the
person is fairly and reasonably entitled to indemnity for such expenses which
the court shall deem proper.
In addition, under Section 145(f) of the GCL, the indemnification provided
by Section 145 shall not be deemed exclusive of any other rights to which those
seeking indemnification may be entitled under any by-law, agreement, vote of
stockholders or disinterested directors or otherwise, both as to action in his
official capacity and as to action in another capacity while holding such
office.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of SAT pursuant
to the foregoing provisions, or otherwise, SAT has been advised that in the
opinion of the Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by SAT of expenses incurred or paid by a director, officer or
controlling person of SAT in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, SAT will, unless in the opinion
of its counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Securities Act and will be
governed by the final adjudication of such issue.
LEGAL MATTERS
The validity of the securities offered hereby will be passed upon for SAT
by Gold & Wachtel, LLP, New York, New York.
Rosenman & Colin LLP, New York, New York have passed on certain legal
matters for Good Ideas relating to the Merger and the tax consequences thereof
to the Good Ideas Minority Stockholders.
EXPERTS
The audited financial statements, appearing in this Consent Solicitation
Statement/Prospectus and Registration Statement, of Substance Abuse
Technologies, Inc. (formerly U.S. Alcohol Testing of America, Inc.) and Good
Ideas Enterprises, Inc. at March 31, 1996, and for the year then ended, have
been audited by Ernst & Young LLP, independent auditors as set forth in their
report thereon appearing elsewhere herein, and are included in reliance upon
such report given upon the authority of such firm as experts in accounting and
auditing.
The audited financial statements, appearing in this Consent Solicitation
Statement/Prospectus and Registration Statement, of Substance Abuse
Technologies, Inc. (formerly U.S. Alcohol Testing of America, Inc.) and Good
Ideas Enterprises, Inc. at March 31, 1995, and for each of the two years in the
period ended March 31, 1995, have been audited by Wolinetz, Gottlieb & Lafazan,
P.C., independent certified public accountants, as set forth in their report
thereon appearing elsewhere herein, and are included in reliance upon such
report given upon the authority of such firm as experts in accounting and
auditing.
CHANGE IN ACCOUNTANTS
On November 3, 1995, SAT named Ernst & Young LLP ("E&Y") as SAT's new
independent auditors for fiscal 1996 replacing Wolinetz, Gottlieb & Lafazan,
P.C. ("Wolinetz"), which firm had served as SAT's independent auditors since
SAT's inception. The Board of Directors, which authorized the change on November
1, 1995, indicated that, in making the replacement, the directors were not
acting because of any
123
<PAGE> 133
criticism of, or dispute with, Wolinetz, but because they concluded that, at
this stage of development for SAT and its subsidiaries, the selection of a
national firm like E&Y was in SAT's best interests.
The reports of Wolinetz on the financial statements of SAT for fiscal 1994
and fiscal 1995 did not contain an adverse opinion or a disclaimer of opinion,
nor was either report qualified as to uncertainty, audit scope or accounting
principles. There had been no disagreements between SAT and Wolinetz in fiscal
1994 and fiscal 1995 and any subsequent interim period preceding the engagement
of E&Y as the principal auditors on any matter of accounting principles or
practice, financial statement disclosure, auditing scope or procedures.
Wolinetz has filed a letter to the Commission stating that it agreed with
the above statements.
SAT did not consult E&Y, prior to its engagement, regarding the application
of accounting principles to a specified transaction, either completed or
proposed, or the type of audit opinion that might be rendered on SAT's financial
statements, nor was a written report or oral advice provided to SAT that E&Y
concluded was an important factor considered by SAT in reaching a decision as to
an accounting, auditing or financial reporting issue.
124
<PAGE> 134
INDEX TO FINANCIAL STATEMENTS
SUBSTANCE ABUSE TECHNOLOGIES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
ITEM PAGE
- ---- ----
<S> <C> <C>
1. Report of Independent Auditors.................................................... F-1
2. Report of Independent Certified Public Accountants................................ F-2
3. Consolidated Balance Sheets as of March 31, 1996 and 1995......................... F-3
4. Consolidated Statements of Operations for the Years Ended March 31, 1996, 1995 and F-4
1994..............................................................................
5. Consolidated Statements of Stockholders' Equity for the Years Ended March 31, F-5
1996, 1995 and 1994...............................................................
6. Consolidated Statements of Cash Flows for the Years Ended March 31, 1996, 1995 and F-8
1994..............................................................................
7. Notes to Consolidated Financial Statements........................................ F-10
(Unaudited)
1. Consolidated Balance Sheets as of December 31, 1996 and March 31, 1996............ F-25
2. Consolidated Statements of Operations for the Nine Months Ended December 31, 1996 F-27
and 1995..........................................................................
3. Consolidated Statements of Cash Flows for the Nine Months Ended December 31, 1996 F-28
and 1995..........................................................................
4 Notes to Consolidated Financial Statements........................................ F-30
</TABLE>
GOOD IDEAS ENTERPRISES, INC.
<TABLE>
<CAPTION>
ITEM PAGE
- ---- ----
<S> <C> <C>
1. Report of Independent Auditors.................................................... F-33
2. Report of Independent Certified Public Accountants................................ F-34
3. Statement of Net Assets in Liquidation as of March 31, 1996....................... F-35
4. Balance Sheet as of March 31, 1995................................................ F-36
5. Statements of Operations for the Years Ended March 31, 1996, 1995 and 1994........ F-37
6. Statements of Stockholders' Equity for the Years Ended March 31, 1996, 1995 and F-38
1994..............................................................................
7. Statements of Cash Flows for the Years Ended March 31, 1996, 1995 and 1994........ F-39
8. Notes to Financial Statements..................................................... F-40
(Unaudited)
1. Statement of Net Assets in Liquidation as of December 31, 1996 and March 31, F-48
1996..............................................................................
2. Statements of Operations for the Nine Months Ended December 31, 1996 and 1995..... F-49
3. Statements of Cash Flows for the Nine Months Ended December 31, 1996 and 1995..... F-50
4. Notes to Financial Statements..................................................... F-51
</TABLE>
F-1
<PAGE> 135
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Substance Abuse Technologies, Inc.
We have audited the accompanying consolidated balance sheet of Substance
Abuse Technologies, 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.
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 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
Riverside, California
May 20, 1996
F-2
<PAGE> 136
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors and Shareholders
Substance Abuse Technologies, Inc.
Rancho Cucamonga, California
We have audited the accompanying consolidated balance sheet of Substance
Abuse Technologies, 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 Substance
Abuse Technologies, 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.
Rockville Centre, New York
May 26, 1995
F-3
<PAGE> 137
SUBSTANCE ABUSE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31,
-----------------------------
1996 1995
------------ ------------
<S> <C> <C>
ASSETS
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........................................................ 253,787 242,069
Current Assets of Discontinued Operations, net.......................... 256,654 --
------------ ------------
Total Current Assets.................................................. 2,677,650 8,235,761
------------ ------------
Property and Equipment (Net of Accumulated Depreciation of $1,845,015 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 Operations, net...................... 307,868 --
------------ ------------
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
------------ ------------
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-4
<PAGE> 138
SUBSTANCE ABUSE TECHNOLOGIES, 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-5
<PAGE> 139
SUBSTANCE ABUSE TECHNOLOGIES, 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 (Carried
Forward).......................... 502 88 240,522 30,375,782 (23,772,519) 6,844,375
---- ------- -------- ----------- ----------- -----------
</TABLE>
F-6
<PAGE> 140
SUBSTANCE ABUSE TECHNOLOGIES, 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 (Brought
Forward).......................... $ 502 $ 88 $240,522 $30,375,782 $(23,772,519) $ 6,844,375
Issuance of 39,375 Shares of Common
Stock Upon Conversion of 8,750
Shares of Class "B" Preferred
Stock............................. -- (88) 394 (306) -- --
Issuance of 40,725 Shares of Common
Stock Upon Conversion of 9,050
Shares of Class "A" Preferred
Stock............................. (90) -- 407 (317) -- --
Issuance of 812,018 Shares of Common
Stock Upon Exercise of Warrants... -- -- 8,121 1,762,397 -- 1,770,518
Dividend on Class "A" Preferred
Stock............................. -- -- -- (39,179) -- (39,179)
Dividend on Class "B" Preferred
Stock............................. -- -- -- (2,425) -- (2,425)
Issuance of 1,333,333 Shares of
Common Stock in Connection With
Settlement of Class Action
Litigation........................ -- -- 13,333 2,986,667 -- 3,000,000
Additional Paid-In Capital Arising
From Additional Investment in Good
Ideas Enterprises, Inc. by
Minority Interest................. -- -- -- 165,977 -- 165,977
Issuance of 931 Shares of Common
Stock in Payment of Class "B"
Preferred Stock Dividend.......... -- -- 10 2,415 -- 2,425
Issuance of 30,000 Shares of Common
Stock to Directors for Directors'
Fees.............................. -- -- 300 54,075 -- 54,375
Issuance of 782,321 Shares of Common
Stock in Connection With
Acquisitions...................... -- -- 7,823 1,556,819 -- 1,564,642
Issuance of 1,050,000 Shares of
Common Stock in Connection With a
Private Placement, Net of Related
Costs............................. -- -- 10,500 1,584,343 -- 1,594,843
Expenses of Warrant Exercise........ -- -- -- (25,213) -- (25,213)
Other............................... -- -- 1 (1) -- --
Net Loss For Year Ended March 31,
1995.............................. -- -- -- -- (7,236,396) (7,236,396)
---- ------- -------- ----------- ----------- -----------
Balance -- March 31, 1995 (Carried
Forward).......................... 412 0 281,411 38,421,034 (31,008,915) 7,693,942
---- ------- -------- ----------- ----------- -----------
</TABLE>
F-7
<PAGE> 141
SUBSTANCE ABUSE TECHNOLOGIES, 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 (Brought
Forward).......................... $ 412 $ -- $281,411 $38,421,034 $(31,008,915) $ 7,693,942
Dividend on Class "A" Preferred
Stock............................. -- -- -- (28,810) -- (28,810)
Additional Paid-In Capital Arising
From Surrender of Capital in Good
Ideas Enterprises, Inc. by
Minority Shareholder.............. -- -- -- 97,674 -- 97,674
Issuance of 2,152,469 Shares of
Common Stock in Connection with a
Private Placement to International
Investors......................... -- -- 21,524 3,016,981 -- 3,038,505
Issuance of 116,500 Shares of Common
Stock upon Exercise of Warrants... 1,165 165,440 -- 166,605
Issuance of 20,000 Shares of Common
Stock to Directors for Director's
Fees.............................. -- -- 200 37,300 -- 37,500
Issuance of 2,000,000 Shares of
Common Stock in Connection with a
Private Placement Under Regulation
D................................. -- -- 20,000 3,730,000 -- 3,750,000
Expenses of Stock Offerings and
Warrant Exercises................. -- -- (362,500) -- (362,500)
Issuance of 50,000 Shares of Common
Stock to Consultant for Investor
Relations and Financial Consulting
Services.......................... -- -- 500 99,500 -- 100,000
Net Loss For Year Ended March 31,
1996.............................. -- -- -- -- (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-8
<PAGE> 142
SUBSTANCE ABUSE TECHNOLOGIES, 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.............................. (11,625)
(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..... (564,522)
------------ ----------- ------------
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 from 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-9
<PAGE> 143
SUBSTANCE ABUSE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED MARCH 31,
---------------------------------------------
1996 1995 1994
------------ ----------- ------------
<S> <C> <C> <C>
Cash Flow From Financing Activities:
Sales and Issuances of Common and Preferred Stock......... 6,788,505 1,694,063 --
Proceeds of Long-Term Debt................................ 17,843 81,151 141,511
Payments of Long-Term Debt................................ (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................... 4,923,803 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-10
<PAGE> 144
SUBSTANCE ABUSE TECHNOLOGIES, 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 Substance
Abuse Technologies, Inc. (the "Company"), which prior to October 28, 1996 was
named U.S. Alcohol Testing of America, Inc., 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. ("U.S. Rubber") 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.
F-11
<PAGE> 145
SUBSTANCE ABUSE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
MARCH 31, 1996
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.
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.
F-12
<PAGE> 146
SUBSTANCE ABUSE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
MARCH 31, 1996
Impairments would be recognized in operating results if a permanent
diminution 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.
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.
F-13
<PAGE> 147
SUBSTANCE ABUSE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
MARCH 31, 1996
Net Loss Per Common Shares
Loss per common share is based upon the weighted average number of common
shares outstanding during the periods reported. Common stock equivalents have
not been included in this calculation since their inclusion would be
antidilutive.
Reclassification
The Company has reclassified certain prior year balances to conform with
the current year's presentation.
NOTE 2 -- CASH AND CASH EQUIVALENTS
Cash and cash equivalents are summarized as follows:
<TABLE>
<CAPTION>
MARCH 31,
---------------------------
1996 1995
---------- ----------
<S> <C> <C>
Cash in Banks..................................... $ 527,969 $ 160,939
Money Market Funds................................ 5,683 1,472,159
Commercial Paper.................................. 752,868 --
---------- ----------
$1,286,520 $1,633,098
========== ==========
</TABLE>
NOTE 3 -- TRADING SECURITIES
Trading securities at March 31, 1995 are summarized below. The Company
owned no trading securities at March 31, 1996.
<TABLE>
<CAPTION>
MARCH 31,
1995
----------
<S> <C>
Marketable Equity Securities..................................... $1,585,906
Federal Home Loan Mortgage Corporation REMIC Bonds............... 3,428,998
Federal National Mortgage Association REMIC Bonds................ 483,360
----------
5,498,264
Less: Unrealized Losses.......................................... 2,190,721
----------
Trading Securities at Aggregate Market Value..................... $3,307,543
==========
</TABLE>
At March 31, 1995, the trading securities were collateral for the brokerage
loan payable. The REMIC Bonds were sold for proceeds of $3,285,625 during July
1995 and the brokerage loan was paid off (See Note 6). The Company recorded a
gain of $76,441, net of amortization of bond discount, over the carrying value
on the March 31, 1995 Balance Sheet. The Company realized an overall loss of
$627,512 on its investment in REMIC bonds. Management will make no further
investments in any high risk trading securities.
F-14
<PAGE> 148
SUBSTANCE ABUSE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
MARCH 31, 1996
NOTE 4 -- INVENTORIES
Inventories are summarized as follows:
<TABLE>
<CAPTION>
MARCH 31,
---------------------------
1996 1995
---------- ----------
<S> <C> <C>
Finished Goods.................................... $ 246,261 $ 538,677
Work in Process................................... 378,162 497,583
Raw Materials..................................... 416,838 1,176,306
---------- ----------
$1,041,261 $2,212,566
========== ==========
</TABLE>
NOTE 5 -- PROPERTY AND EQUIPMENT
Property and equipment is summarized as follows:
<TABLE>
<CAPTION>
MARCH 31,
---------------------------
1996 1995
---------- ----------
<S> <C> <C>
Furniture and Fixtures............................ $ 464,010 $ 411,965
Equipment......................................... 1,254,435 1,339,602
Equipment -- Network/Per Test..................... 2,327,553 2,030,918
Test Equipment.................................... 476,765 460,978
Leasehold Improvements............................ 410,829 397,567
Vehicles.......................................... 124,042 183,562
---------- ----------
5,057,634 4,824,592
Less: Accumulated Depreciation.................... 2,060,568 1,081,606
---------- ----------
$2,997,066 $3,742,986
========== ==========
</TABLE>
NOTE 6 -- BROKERAGE LOAN PAYABLE
At March 31, 1995, the brokerage loan payable consisted of demand loans
from a major national stock brokerage firm, bearing interest at 8.5% per annum
and secured by certain trading securities held by the brokerage firm. The
purpose of these loans was for working capital. These loans could not exceed 75%
of the current market value of the REMIC Bonds (see Note 3). The loan was repaid
during the second quarter of the year ended March 31, 1996 from the proceeds of
the sale of the REMIC bonds.
F-15
<PAGE> 149
SUBSTANCE ABUSE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
MARCH 31, 1996
NOTE 7 -- LONG-TERM DEBT
Long-term debt is summarized as follows:
<TABLE>
<CAPTION>
MARCH 31,
--------------------
1996 1995
------- --------
<S> <C> <C>
Capitalized lease obligations, secured by certain
equipment, payable in various monthly installments due
from July 1995 to January 1999........................ $75,789 $112,735
Note payable, bearing interest at 6% per annum from
January 15, 1995, payable in semi-annual payments
including principal and interest of $1,771 from July
15, 1995 and due January 15, 2002..................... -- 20,000
------- --------
75,789 132,735
Less: Current Portion................................... 32,827 53,727
------- --------
$42,962 $ 79,008
======= ========
</TABLE>
Long-term debt matures as follows:
<TABLE>
<CAPTION>
MARCH 31,
-----------------------------------------------------------
<S> <C>
1997..................................................... $32,827
1998..................................................... 20,567
1999..................................................... 14,244
2000..................................................... 4,512
2001..................................................... 3,639
-------
$75,789
=======
</TABLE>
NOTE 8 -- MINORITY INTEREST
The Company's consolidated financial statements at March 31, 1995 include
100% of the assets, liabilities and losses of U.S.Drug, a 67.0%-owned publicly
traded subsidiary, and 100% of the assets, liabilities and losses of Good Ideas,
a 59%-owned publicly traded subsidiary. The percentage ownership in Good Ideas
decreased by 1% during the year ended March 31, 1995 by virtue of an additional
65,200 shares of common shares of the subsidiary sold pursuant to the
overallotment provision of its initial public offering. The $2,723,502 minority
interest reported on the balance sheet represents the minority stockholders'
interest in the equity of these subsidiaries.
At March 31, 1996, the Company's consolidated statements reflect an
increase in the minority interest in Good Ideas as a 60.8%-owned subsidiary as a
result of the surrender of 126,520 shares of common stock of Good Ideas in
connection with the resignation of Keith Parten, formerly Chief Operating
Officer, President and a director of Good Ideas, and the issuance of 10,000
shares of common stock of Good Ideas to an officer for compensation.
See Note 16 for information regarding the Company's registration statements
under the Securities Act of 1933, as amended (the "Securities Act"), in
connection with the offer to purchase the minority shares of U.S. Drug and Good
Ideas.
F-16
<PAGE> 150
SUBSTANCE ABUSE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
MARCH 31, 1996
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.
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.
F-17
<PAGE> 151
SUBSTANCE ABUSE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
MARCH 31, 1996
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-18
<PAGE> 152
SUBSTANCE ABUSE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
MARCH 31, 1996
Common shares reserved for stock options and for outstanding stock purchase
warrants are presented in the following table:
<TABLE>
<CAPTION>
WARRANT
INCENTIVE STOCK OPTIONS NON QUALIFIED OPTIONS AGREEMENTS
------------------------- ------------------------- -----------
NUMBER PRICE RANGE NUMBER PRICE RANGE NUMBER PRICE RANGE
OF SHARES PER SHARE OF SHARES PER SHARE OF SHARES PER SHARE
--------- ----------- --------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding -- April
1, 1993............. -0- $ -0- -0- $ -0- 5,345,875 $ .44-4.00
Granted............. -0- -0- -0- -0- 53,250 1.81-3.00
Exercised........... -0- -0- -0- -0- (1,210,442) 1.33
------- ------ ------ ------ ---------- ----------
Outstanding -- March
31, 1994............ -0- -0- -0- -0- 4,188,683 1.06-4.00
Granted............. 420,000 2.38 30,000 2.38 869,750 1.81-2.50
Canceled............ -0- -0- -0- -0- (6,000) 2.19
Exercised........... -0- -0- -0- -0- (812,018) 1.33-3.00
------- ------ ------ ----- ---------- ----------
Outstanding -- March
31, 1995............ 420,000 -0- 30,000 -0- 4,240,415 1.06-4.00
Granted............. -0- -0- -0- -0- 3,951,000 1.88-4.00
Exercised........... -0- -0- -0- -0- (116,500) 1.06-1.87
------- ------ ------ ---------- -----------
Outstanding -- March -----
31, 1996............ 420,000 $2.38 30,000 $2.38 8,074,915 $ 1.06-4.00
======= ====== ==========
</TABLE>
During October 1995, the Company issued five-year warrants for the purchase
of 100,000 shares of common stock at $2.17 to the placement agents for a private
placement pursuant to Regulation S under the Securities Act.
During November 1995, the Board of Directors authorized the issuance of
three-year warrants for the purchase of 60,000 shares of Common Stock at $1.94
to five new directors of the Company and to a consultant to the Board of
Directors.
During November 1995, the Board of Directors authorized the issuance of
three warrants to purchase an aggregate of 700,000 shares of the Common Stock to
a new director of the Company in connection with his services in a capacity
other than as a director, including those related to the private placement
pursuant to Regulation D under the Securities Act. The warrants were issued for
three to five-year periods at exercise prices ranging from $1.94 to $4.00.
During December 1995, the Board of Directors authorized the issuance of
four-year warrants to purchase 2,000,000 shares of Common Stock at $2.00 in
connection with the private placement completed pursuant to Regulation D under
the Securities Act.
During December 1995, the Board of Directors authorized the issuance of
three-year warrants for the purchase of 400,000 shares of Common Stock at $2.00
pursuant to a consulting agreement with ProActive Synergies, Inc. Pursuant to
this agreement, a Common Stock purchase warrant for 200,000 shares was issued on
December 14, 1995 to Robert Stutman and a warrant for the remaining 200,000
shares was issued to Robert Stutman & Associates, Inc. on April 1, 1996.
During January 1996, the Company issued four-year warrants for the purchase
of 150,000 shares of Common Stock at $2.25 to an individual in connection with
the settlement of litigation against the Company.
F-19
<PAGE> 153
SUBSTANCE ABUSE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
MARCH 31, 1996
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.
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."
F-20
<PAGE> 154
SUBSTANCE ABUSE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
MARCH 31, 1996
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.
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>
<S> <C>
Fiscal year ending March 31:
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.
F-21
<PAGE> 155
SUBSTANCE ABUSE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
MARCH 31, 1996
Although the purchaser of the discontinued U.S. Rubber business has assumed
the lease of the building the business occupied, the landlord did not release
U.S. Rubber 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, the Company'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 the Company and,
accordingly, has an obligation to the Company 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.
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>
F-22
<PAGE> 156
SUBSTANCE ABUSE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
MARCH 31, 1996
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 SFAS109............... 12,800,000 10,265,000
----------- -----------
Net Deferred Tax Assets......................... $ -- $ --
=========== ===========
</TABLE>
NOTE 14 -- RELATED PARTY 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 private 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.
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 U.S. Rubber 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 U.S. Rubber 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.
F-23
<PAGE> 157
SUBSTANCE ABUSE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
MARCH 31, 1996
Sales, related losses and minority share of losses associated with the
discontinued business units are as follows:
<TABLE>
<CAPTION>
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 U.S. Rubber 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.
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, USRR, 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 U.S. Rubber 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
F-24
<PAGE> 158
SUBSTANCE ABUSE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
MARCH 31, 1996
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 the Company 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 the Company
for a period of three years ending May 20, 1999.
Exercise of Warrants and Options
From April 1, 1996 through June 5, 1996, the Company has received gross
proceeds of $4,242,000 from the exercise of warrants and options to purchase
2,353,449 shares of the Common Stock. The cash portion of the RSA acquisition
agreement was paid from the proceeds of the warrant exercises.
F-25
<PAGE> 159
SUBSTANCE ABUSE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1996 1996
------------ ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current Assets:
Cash and Cash Equivalents................................................ $ 2,346,443 $ 1,204,646
Accounts Receivable (Net of Allowances for Bad Debts of $94,201 at
December 31, 1996 and $112,490 at March 31, 1996)...................... 974,031 278,874
Other Receivables........................................................ 50,000 1,850
Inventories.............................................................. 717,078 681,839
Prepaid Expenses......................................................... 373,129 253,787
Current Assets of Discontinued Operations, net........................... 139,667 256,654
----------- ----------
Total Current Assets................................................... 4,600,348 2,677,650
Property and Equipment (Net of Accumulated Depreciation of $2,334,630 at
December 31, 1996 and $1,845,015 at March 31, 1996)...................... 2,297,955 2,691,979
Non-Current Assets of Discontinued Operations, net......................... -- 307,868
Long-Term Note Receivable.................................................. 250,000 --
Intangible Assets.......................................................... 4,110,589 858,343
----------- ----------
Total Assets...................................................... $ 11,258,892 $ 6,535,840
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts Payable......................................................... $ 646,185 $ 487,320
Accrued Expenses and Taxes............................................... 753,960 468,150
Current Portion of Long-Term Debt........................................ 27,016 29,395
Preferred Stock Dividend Payable......................................... 14,404 7,202
----------- ----------
Total Current Liabilities.............................................. 1,441,565 992,067
Convertible Senior Promissory Notes, net of unamortized discount of
$1,236,204
(Note 8)................................................................. 3,763,796 --
Long-Term Debt -- Net of Current Portion................................... 86,951 32,935
----------- ----------
Total Liabilities................................................. 5,292,312 1,025,002
Commitments and Contingencies
Minority Interest.......................................................... 854,439 1,478,508
Stockholders' Equity:
Preferred Stock Class "A", $.01 Par Value, 500,000 Shares Authorized,
Issued and Outstanding 41,157 Shares at December 31, 1996 and March 31,
1996. (Liquidation Preference of $205,785 at December 31, 1996 and
March 31, 1996......................................................... 412 412
Preferred Stock Class "B", $.01 Par Value, 1,500,000 Shares Authorized,
Issued and Outstanding -0- Shares at December 31, 1996 and March 31,
1996..................................................................... -- --
Common Stock, $.01 Par Value, 50,000,000 Shares Authorized, Issued and
Outstanding 36,030,591 Shares at December 31, 1996 and 32,480,010 at
March 31, 1996........................................................... 360,306 324,800
Additional Paid-in Capital................................................. 53,228,326 45,176,619
Accumulated Deficit........................................................ (48,476,903) (41,469,501)
----------- ----------
Total Stockholders' Equity............................................. 5,112,141 4,032,330
----------- ----------
Total Liabilities and Stockholders' Equity........................ $ 11,258,892 $ 6,535,840
=========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-26
<PAGE> 160
SUBSTANCE ABUSE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
--------------------------- ---------------------------
1996 1995 1996 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Continuing Operations:
Sales -- Net........................ $ 733,069 $ 246,886 $ 2,070,206 $ 901,439
Costs and Expenses:
Cost of Sales....................... 635,416 204,395 1,628,825 675,726
Selling and Marketing Expenses...... 381,340 248,912 858,755 722,069
General and Administrative
Expense.......................... 1,606,287 1,055,737 4,119,837 3,770,005
Research and Development............ 497,837 308,411 1,273,822 789,506
Interest Expense.................... 134,119 3,886 143,855 74,311
Depreciation and Amortization....... 277,333 344,994 787,291 832,589
Write-off of Alconet Goodwill....... -- -- 714,377 --
----------- ----------- ----------- -----------
Loss from Operations................ (2,799,263) (1,919,449) (7,456,556) (5,962,767)
Other Income (Expense)................ (4,540) (55,478) (4,540) 359,395
----------- ----------- ----------- -----------
Loss before Minority Interest in Net
Loss of Subsidiary.................. (2,803,803) (1,974,927) (7,461,096) (5,603,372)
Minority Interest in Net Loss of
Subsidiary.......................... 237,985 165,919 604,570 394,148
----------- ----------- ----------- -----------
Loss from Continuing Operations....... (2,565,818) (1,809,008) (6,856,526) (5,209,224)
----------- ----------- ----------- -----------
Discontinued Operations:
Loss from Operations before Minority
Interest in Net Loss................ (39,418) (406,789) (170,377) (1,005,072)
Minority Interest................... -- 183,882 19,500 363,581
----------- ----------- ----------- ------------
Loss from Discontinued Operations..... (39,418) (222,907) (150,877) (641,491)
----------- ----------- ----------- ------------
Net Loss.............................. $(2,605,236) $(2,031,915) $(7,007,403) $(5,850,715)
=========== =========== =========== ============
Loss Applicable to Common Stock:
Net Loss............................ $(2,605,236) $(2,031,915) $(7,007,403) $(5,850,715)
Preferred Stock Dividend............ (7,202) (7,202) (21,606) (21,606)
----------- ----------- ----------- ------------
Loss Applicable to Common Stock..... $(2,612,438) $(2,039,117) $(7,029,009) $(5,872,321)
=========== =========== =========== ============
Loss per Common Share:
Loss from Continuing Operations..... $ (0.07) $ (0.06) $ (0.20) $ (0.18)
Loss from Discontinued Operations... -- (0.01) -- (0.02)
----------- ----------- ----------- ------------
Net Loss............................ $ (0.07) $ (0.07) $ (0.20) $ (0.20)
=========== =========== =========== ============
Weighted Average Common Shares
Outstanding......................... 35,714,967 30,359,251 34,978,113 29,248,777
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-27
<PAGE> 161
SUBSTANCE ABUSE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
DECEMBER 31,
---------------------------
1996 1995
----------- -----------
<S> <C> <C>
Cash Flow From Operating Activities:
Net Profit (Loss)............................................... $(7,007,403) $(5,850,715)
Adjustments to Reconcile Net Loss to Net Cash
Used by Operating Activities:
Write-off of Goodwill........................................ 714,377 --
Provision for Bad Debts...................................... 27,348 (12,337)
Loss on Disposition of Fixed Assets.......................... 41,938 28,635
Depreciation and Amortization................................ 787,291 959,795
Minority Interest in Net Loss of Subsidiary.................. (624,070) (757,729)
Unrealized Gain on Marketable Securities..................... -- (1,820,703)
Realized Loss on Marketable Securities....................... -- 1,550,792
Amortization of Senior Convertible Note Discount............. 63,796 (779)
Value of Common Stock Issued to Directors for Services....... -- 37,500
Value of Common Stock Issued for Services.................... 575,000 5,000
Change in Operating Assets and Liabilities:
(Increase) Decrease in Accounts Receivable................. (695,157) 76,389
(Increase) Decrease in Inventories......................... (35,239) 117,318
(Increase) Decrease in Prepaid Expenses.................... (119,342) (161,877)
(Increase) Decrease in Other Receivables................... (48,150) 21,810
(Increase) Decrease in Other Assets........................ (250,000) (18,022)
Increase (Decrease) in Accounts Payable.................... 158,865 (564,688)
Increase (Decrease) in Accrued Expenses and Taxes.......... 293,012 267,581
----------- -----------
Net Cash Provided (Used) by Operating Activities................ (6,117,734) (6,122,030)
----------- -----------
Cash Flow from Investing Activities:
Purchases of Property and Equipment.......................... (384,005) (212,373)
Purchase of Robert Stutman & Associates, Inc................. (2,577,495) --
Proceeds from Sale of Assets of Discontinued Operations...... 424,855 --
Proceeds from Sale of Fixed Assets........................... 92,451 48,188
Proceeds from the Sale of Trading Securities................. -- 3,536,045
Other -- Net................................................. -- --
----------- -----------
Net Cash (Used) Provided by Investing Activities................ (2,444,194) 3,371,860
----------- -----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-28
<PAGE> 162
SUBSTANCE ABUSE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
DECEMBER 31,
---------------------------
1996 1995
----------- -----------
<S> <C> <C>
Cash Flow from Financing Activities:
Sale and Issuance of Common Stock............................... 5,075,304 3,601,005
Expenses of Common Stock Issuance............................... (411,189) (237,500)
Proceed from Capitalized Leases................................. 77,476 17,843
Proceeds from Convertible Notes................................. 3,700,000 --
Proceeds from Sale of Common Stock Purchase Warrants............ 1,300,000 --
Payments of Capitalized Leases.................................. (23,461) (44,721)
Payment of Dividend on Class "A" Preferred Stock................ (14,405) (14,405)
Proceeds of Brokerage Loans Payable............................. -- 1,000,000
Payments of Brokerage Loans Payable............................. -- (2,569,592)
----------- -----------
Net Cash Provided by Financing Activities......................... 9,703,725 1,752,630
----------- -----------
Increase (Decrease) in Cash and Cash Equivalents.................. 1,141,797 (997,540)
Cash and Cash Equivalents -- Beginning of Period.................. 1,204,646 1,633,098
----------- -----------
Cash and Cash Equivalents -- End of Period........................ $ 2,346,443 $ 635,558
=========== ===========
Supplemental Disclosure of Cash Information:
Cash Paid for Interest.......................................... $ 80,059 $ 75,864
=========== ===========
Income Taxes Paid............................................... $ -- $ 0
=========== ===========
Non-cash Financing Activities:
Preferred Stock Dividends Accrued............................... $ 21,606 $ 21,606
=========== ===========
Issuance of Common Stock for Business Acquired.................... $ 1,562,500 $ --
=========== ===========
Issuance of Note Payable for Business Acquired.................... $ 400,000 $ --
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements
F-29
<PAGE> 163
SUBSTANCE ABUSE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
(UNAUDITED)
NOTE 1 -- BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Substance
Abuse Technologies, Inc. ("SAT"), formerly U.S. Alcohol Testing of America,
Inc., and its wholly and majority-owned subsidiaries. SAT and the subsidiaries
are collectively referred to herein as the Company. All significant intercompany
accounts and transactions are eliminated in consolidation.
In the opinion of the Company, the accompanying unaudited consolidated
financial statements reflect all adjustments (which include only normal
recurring adjustments) necessary to present fairly the financial position,
results of operations and cash flows for the periods presented.
Results of operations for interim periods are not necessarily indicative of
the results of operations for a full year due to external factors which are
beyond the control of the Company.
This Report should be read in conjunction with SAT's Annual Report on Form
10-K for the fiscal year ended March 31, 1996.
NOTE 2 -- CASH AND CASH EQUIVALENTS
Cash and cash equivalents are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1996 1996
------------ ----------
<S> <C> <C>
Cash in Banks...................................... $ 101,197 $ 450,845
Money Market Funds................................. 2,245,246 933
Commercial Paper................................... -- 752,868
---------- ----------
$2,346,443 $1,204,646
========== ==========
</TABLE>
NOTE 3 -- INVENTORIES
Inventories are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1996 1996
------------ ----------
<S> <C> <C>
Finished Goods..................................... $ 69,178 $ 64,437
Work in Process.................................... 352,976 334,699
Raw Materials...................................... 294,924 282,703
-------- --------
$ 717,078 $ 681,839
======== ========
</TABLE>
F-30
<PAGE> 164
SUBSTANCE ABUSE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996
(UNAUDITED)
NOTE 4 -- PROPERTY AND EQUIPMENT
Property and equipment is summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1996 1996
------------ ----------
<S> <C> <C>
Furniture and Fixtures............................. $ 601,424 $ 453,609
Equipment.......................................... 835,094 811,333
Equipment -- Network/Per Test...................... 2,212,279 2,327,553
Test Equipment..................................... 621,664 476,765
Leasehold Improvements............................. 343,691 343,692
Vehicles........................................... 18,433 124,042
---------- ----------
4,632,585 4,536,994
Less: Accumulated Depreciation..................... 2,334,630 1,845,015
---------- ----------
$2,297,955 $2,691,979
========== ==========
</TABLE>
NOTE 5 -- LONG-TERM DEBT
Long-term debt is summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1996 1996
------------ ----------
<S> <C> <C>
Capitalized lease obligations secured by certain
equipment, payable in various monthly
installments, and due through December 2001...... $ 113,967 $ 62,330
Less: Current Portion.............................. 27,016 29,395
------- -------
$ 86,951 $ 32,935
======= =======
</TABLE>
NOTE 6 -- MINORITY INTEREST
The consolidated financial statements at December 31, 1996 include 100% of
the assets, liabilities and losses of U.S. Drug Testing, Inc. ("USD"), a
67%-owned publicly traded subsidiary, and 100% of the assets, liabilities and
losses of Good Ideas Enterprises, Inc. ("Good Ideas"), a 61%-owned publicly
traded subsidiary. The $854,439 minority interest reported on the balance sheet
at December 31, 1996 represents the minority stockholders' interest in the
equity of these subsidiaries.
NOTE 7 -- ACQUISITION OF ROBERT STUTMAN & ASSOCIATES, INC.
On May 21, 1996, SAT completed the acquisition of Robert Stutman &
Associates, Inc. ("RSA"), a provider of corporate "Drug Free Workplace"
programs. The purchase price was comprised of $2,100,000 in cash; $400,000 in
notes bearing interest at 6% per annum and due May 21, 1997; 500,000 shares of
SAT's Common Stock; and Common Stock purchase warrants to acquire 900,000 shares
of SAT's Common Stock at $3.125 per share, which was the closing sales price of
the Common Stock on April 17, 1996. This transaction generated approximately $4
million of goodwill, which is being amortized over 15 years. Pro forma financial
information has not been presented since its effect on the nine months ended
December 31, 1996 would be immaterial. In December 1996, the Board of Directors
authorized in consideration of their having surrendered rights with respect to
their secured promissory notes in the aggregate amount of $400,000 in order for
SAT to close its offering of $5,000,000 in principal amount of convertible
notes, that the exercise price of Robert
F-31
<PAGE> 165
SUBSTANCE ABUSE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996
(UNAUDITED)
Stutman's Common Stock purchase warrants for 473,750 shares expiring May 20,
1999 and Brian Stutman's Common Stock purchase warrants of 317,250 shares
expiring May 20, 1999 shall be reduced from $3.125 to $2.125 per share. The
$400,000 note due May 21, 1997 was prepaid in December 1996 in connection with
the exercise of previously issued Common Stock purchase warrants.
NOTE 8 -- CONVERTIBLE SENIOR PROMISSORY NOTES
On November 8, 1996, SAT completed an agreement with Stephen A. Cohen and
S.A.C. Capital Associates, LLC to borrow $5 million evidenced by convertible,
unsecured senior notes (the "Convertible Notes") with a three-year term at 7%
annual interest payable quarterly commencing December 15, 1996, convertible at
$2.00 per share subject to adjustment. Additionally, SAT sold to the lenders
warrants to purchase 2,500,000 shares of Common Stock at $2.00 per share subject
to adjustment. Of the $5,000,000 proceeds, $1,300,000 was allocated as the fair
value of the warrants. This amount is being amortized over the three-year life
of the notes. The Convertible Loan and Warrant Agreement dated November 8, 1996
contain certain restrictive covenant regarding payment of dividends, purchase of
capital stock, making loans or guarantees, creating liens, limiting capital
expenditures, and certain other transactions.
NOTE 9 -- RECENT DEVELOPMENTS
On October 31, 1996, 1,175,856 Class B Warrants from a private placement in
1990 expired. On November 4, 1996, 437,500 options of former officers and
directors expired.
F-32
<PAGE> 166
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Good Ideas Enterprises, Inc.
We have audited the statement of net assets in liquidation of Good Ideas
Enterprises, Inc. (the "Company') as of March 31, 1996, and the related
statements of operations, stockholders' equity, and cash flows for the year 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.
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.
As more fully described in Note 14 to the financial statements, on February
26, 1996, the stockholders of the Company agreed to liquidate and dispose of the
net assets of the Company and commenced the liquidation process. As a result,
the Company has changed its basis of accounting as of March 31, 1996, and for
the periods subsequent to that date, from the going-concern basis to a
liquidation basis.
In our opinion, the financial statements present fairly, in all material
respects, the net assets in liquidation of Good Ideas Enterprises, Inc. as of
March 31, 1996, and the results of its operations and its cash flow for the year
ended, in conformity with generally accepted accounting principles applied on
the basis described in the preceding paragraph.
ERNST & YOUNG LLP
Riverside, California
May 20, 1996
F-33
<PAGE> 167
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors and Shareholders
Good Ideas Enterprises, Inc.
Rancho Cucamonga, California
We have audited the accompanying balance sheet of Good Ideas Enterprises,
Inc. as of March 31, 1995 and the related statements of operations,
stockholders' equity (deficit), and cash flows for each of the two years in the
period ended March 31, 1995. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Good Ideas Enterprises, Inc.
as of March 31, 1995, and the results of its operations and its cash flows for
the two years in the period ended March 31, 1995 in conformity with generally
accepted accounting principles.
WOLINETZ, GOTTLIEB & LAFAZAN, P.C.
Rockville Centre, New York
May 26, 1995
F-34
<PAGE> 168
GOOD IDEAS ENTERPRISES, INC.
STATEMENT OF NET ASSETS IN LIQUIDATION
<TABLE>
<CAPTION>
MARCH 31,
1996
-----------
<S> <C>
ASSETS
Cash and Cash Equivalents..................................................... $ 82,701
Accounts Receivable (Net of Allowance For Bad Debts of $77,061)............... 61,612
Inventories................................................................... 196,209
Prepaid Expenses.............................................................. 7,358
Note Receivable -- Parent..................................................... 2,052,243
Property and Equipment (Net of Accumulated Depreciation of $11,287)........... 15,801
Other Assets.................................................................. 6,808
-----------
Total Assets.......................................................... 2,422,732
-----------
LIABILITIES
Accounts Payable.............................................................. 86,830
Accrued Expenses.............................................................. 28,858
Capital Lease Obligations..................................................... 22,519
Reserve for Sale or Liquidation Costs......................................... 110,000
-----------
Total Liabilities..................................................... 248,207
-----------
Commitments and Contingencies
NET ASSETS IN LIQUIDATION (NOTE 1)*............................................. $ 2,174,525
===========
*Comprised of the following:
Preferred Stock, $.001 Par Value, 2,000,000 Shares Authorized, None Issued and
Outstanding................................................................ $ --
Common Stock, $.001 Par Value, 20,000,000 Shares Authorized, Issued and
Outstanding 3,948,680 Shares at March 31, 1996............................. 3,949
Additional Paid-In Capital.................................................... 5,768,662
Accumulated Deficit........................................................... (3,598,086)
-----------
$ 2,174,525
===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-35
<PAGE> 169
GOOD IDEAS ENTERPRISES, INC.
BALANCE SHEET
<TABLE>
<CAPTION>
MARCH 31,
1995
--------------
<S> <C>
ASSETS
Current Assets:
Cash and Cash Equivalents.................................................... $ 351,355
Accounts Receivable (Net of Allowance For Bad Debts of $72,486).............. 317,207
Inventories.................................................................. 763,609
Prepaid Expenses............................................................. 109,957
Note Receivable -- Affiliated Company........................................ 1,027,334
Note Receivable -- Parent.................................................... 1,195,580
-----------
Total Current Assets...................................................... 3,765,042
-----------
Property and Equipment (Net of Accumulated Depreciation of $78,402)............ 170,597
Other Assets................................................................... 15,343
-----------
Total Assets......................................................... $ 3,950,982
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts Payable............................................................. $ 142,222
Accrued Expenses............................................................. 41,317
Current Portion of Long-Term Debt............................................ 9,098
-----------
Total Current Liabilities................................................. 192,637
Long-Term Debt -- Net of Current Portion....................................... 22,529
Total Liabilities.................................................... 215,166
-----------
Commitments and Contingencies
Stockholders' Equity:
Preferred Stock, $.001 Par Value, 2,000,000 Shares Authorized, None Issued
and Outstanding........................................................... --
Common Stock, $.001 Par Value, 20,000,000 Shares Authorized, Issued and
Outstanding 4,065,200 Shares.............................................. 4,065
Additional Paid-In Capital................................................... 5,763,545
Accumulated Deficit.......................................................... (2,031,794)
-----------
Total Stockholders' Equity................................................ 3,735,816
-----------
Total Liabilities and Stockholders' Equity........................... $ 3,950,982
===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-36
<PAGE> 170
GOOD IDEAS ENTERPRISES, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED MARCH 31,
-----------------------------------------
1996 1995 1994
----------- ---------- ----------
<S> <C> <C> <C>
Net Sales............................................. $ 1,508,819 $4,606,039 $5,544,221
Cost of Sales......................................... 1,345,349 3,281,999 4,057,259
----------- ---------- ----------
Gross Profit.......................................... 163,470 1,324,040 1,486,962
----------- ---------- ----------
Operating Expenses:
Selling, General and Administrative Expenses........ 1,278,633 1,924,078 1,487,811
Management Fees -- Parent........................... 225,000 305,121 425,150
Writedown of Fixed Assets and Inventory to Net
Realizable Value................................. 258,388 -- --
Projected Costs Through Sale or Liquidation......... 110,000 -- --
----------- ---------- ----------
Total Operating Expenses.................... 1,872,021 2,229,199 1,912,961
----------- ---------- ----------
Loss From Operations.................................. (1,708,551) (905,159) (425,999)
----------- ---------- ----------
Other Income (Expense):
Loss on Sale of Assets.............................. (19,930) -- --
Interest Expense -- Parent.......................... -- (3,862) (163,554)
Interest Income..................................... 3,516 41,930 --
Interest Income -- Parent........................... 157,813 20,803 --
Interest Income -- Affiliated Company............... -- 47,379 --
Other Income........................................ 860 602 7,222
----------- ---------- ----------
Total Other Income (Expense)................ 142,259 106,852 (156,332)
----------- ---------- ----------
Net Loss.............................................. $(1,566,292) $ (798,307) $ (582,331)
Weighted Average Common Shares Outstanding............ 3,968,372 4,065,200 2,942,000
Net Loss Per Common Share............................. $ (.39) $ (.20) $ (.20)
=========== ========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-37
<PAGE> 171
GOOD IDEAS ENTERPRISES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED MARCH 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
ADDITIONAL CAPITAL
COMMON PAID-IN CONTRIBUTIONS ACCUMULATED
STOCK CAPITAL RECEIVABLE DEFICIT TOTAL
------ ---------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance -- April 1, 1993..................... $2,788 $ -- $(1,788) $ (651,156) $ (650,156)
Issuance of 170,000 Shares to Parent as
Payment for $748,682 of Debt to Parent... 170 748,512 -- -- 748,682
Surrender of 157,500 Shares as
Consideration for New Employment
Agreements............................... (158) 158 -- -- --
Sale of 1,200,000 Shares of Common Stock in
Connection With Initial Public Offering,
Net of Offering Costs of $1,265,129...... 1,200 4,733,671 -- -- 4,734,871
Payment of Capital Contributions Receivable
by Parent................................ -- -- 1,788 -- 1,788
Net Loss for the Year Ended March 31,
1994..................................... -- -- -- (582,331) (582,331)
------ ---------- ------- ----------- -----------
Balance -- March 31, 1994.................... 4,000 5,482,341 -- (1,233,487) 4,252,854
Sale of 65,200 Shares of Common Stock in
Connection With Over-allotment Provision
of Initial Public Offering, Net of
Offering Costs of $44,731................ 65 281,204 -- -- 281,269
Net Loss for the Year Ended March 31,
1995..................................... -- -- -- (798,307) (798,307)
------ ---------- ------- ----------- -----------
Balance -- March 31, 1995.................... 4,065 5,763,545 -- (2,031,794) 3,735,816
Issuance of 10,000 Shares of Common Stock
to Officer for Compensation.............. 10 4,990 -- -- 5,000
Surrender of 126,520 Shares of Common Stock
By Former Officer in Connection With
Resignation.............................. (126) 127 -- -- 1
Net Loss for the Year Ended March 31,
1996..................................... -- -- -- (1,566,292) (1,566,292)
------ ---------- ------- ----------- -----------
Balance -- March 31, 1996.................... $3,949 $5,768,662 $ -- $(3,598,086) $ 2,174,525
====== ========== ======= =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-38
<PAGE> 172
GOOD IDEAS ENTERPRISES, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED MARCH 31,
---------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Cash Flow From Operating Activities:
Net Loss........................................................ $(1,566,292) $ (798,307) $ (582,331)
----------- ----------- -----------
Adjustments to Reconcile Net Loss To Net Cash Used By Operating
Activities:
Provision For Bad Debts and Allowances........................ 4,575 27,273 45,213
Depreciation.................................................. 60,137 45,038 26,146
Loss on Sale of Assets........................................ 19,930 -- --
Value of Common Stock Issued to Officer for Services.......... 5,000 -- --
Writedown of Fixed Assets and Inventory to Net Realizable
Value....................................................... 258,388 -- --
Projected Costs Through Sale or Liquidation................... 110,000 -- --
Changes in Operating Assets and Liabilities:
(Increase) Decrease in Accounts Receivable.................... 251,020 713,198 (689,676)
(Increase) Decrease in Inventories............................ 370,400 (90,235) 248,702
(Increase) Decrease in Prepaid Expenses....................... 102,599 (15,764) (69,623)
(Increase) Decrease in Other Assets........................... 8,535 (5,508) (2,990)
Increase (Decrease) in Accounts Payable....................... (55,391) (585,791) 231,118
Increase (Decrease) in Accrued Expenses....................... (12,459) (102,101) 67,729
----------- ----------- -----------
Total Adjustments........................................ 1,122,734 (13,890) (143,381)
----------- ----------- -----------
Net Cash Used By Operating Activities............................. (443,558) (812,197) (725,712)
----------- ----------- -----------
Cash Flow From Investing Activities:
Purchase of Property and Equipment.............................. (14,846) (54,715) (126,310)
Disposition of Property and Equipment........................... 28,187 -- --
----------- ----------- -----------
Net Cash Provided (Used) By Investing Activities.................. 13,341 (54,715) (126,310)
----------- ----------- -----------
Cash Flow From Financing Activities:
Proceeds of Long-Term Debt...................................... -- 21,703 51,646
Payments of Long-Term Debt...................................... (9,108) (32,819) (8,903)
Proceeds From Sale of Common Stock Pursuant to Initial Public
Offering...................................................... -- 326,000 6,000,000
Expenses of Initial Public Offering............................. -- (44,731) (1,265,129)
Net Repayment of Loan From Parent............................... -- (437,283) (720,282)
Repayments of Notes Payable..................................... -- -- (26,518)
Net Loans to Parent............................................. 170,671 (1,195,580) --
Loans to Affiliated Company..................................... -- (1,027,334) --
----------- ----------- -----------
Net Cash Provided (Used) by Financing Activities.................. 161,563 (2,390,044) 4,030,814
----------- ----------- -----------
Increase (Decrease) in Cash and Cash Equivalents.................. (268,654) (3,256,956) 3,178,792
Cash and Cash Equivalents -- Beginning of year.................... 351,355 3,608,311 429,519
----------- ----------- -----------
Cash and Cash Equivalents -- End of year.......................... $ 82,701 $ 351,355 $ 3,608,311
=========== =========== ===========
Supplemental Disclosure of Cash Information:
Cash Paid for Interest.......................................... $ 1,047 $ 1,999 $ 5,150
=========== =========== ===========
Income Taxes Paid............................................... $ -- $ -- $ --
=========== =========== ===========
Non-Cash Financing Activities:
Value of Common Stock Issued as Payment of Debt to Parent....... $ -- $ -- $ 748,682
=========== =========== ===========
Payment of Capital Contribution Receivable by Parent............ $ -- $ -- $ 1,788
=========== =========== ===========
Repayment of Debt to Parent..................................... $ -- $ -- $ 51,667
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-39
<PAGE> 173
GOOD IDEAS ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1996
NOTE 1 -- PLAN OF SALE OR LIQUIDATION AND BASIS OF PRESENTATION
The Board of Directors of Substance Abuse Technologies, formerly U.S.
Alcohol Testing of America, Inc., ("SAT"), owner of 60.8% of the Common Stock of
Good Ideas Enterprises, Inc. ("Good Ideas" or "the Company"), decided in its
February 26, 1996 meeting to focus on its drug and alcohol testing and human
resource provider business and to dispose of what it considered to be non core
businesses, such as the Company. The SAT directors concluded that, because of
the history of losses in the Company and what it believed to be the problems
general in the toy industry, it would be difficult to make the Company's
operations profitable in a reasonable amount of time, if ever. SAT management
was authorized by its Board to seek offers to purchase the Company. There is no
assurance that an acceptable offer will be received or as to the terms of such
offer. If no acceptable offer is received, the SAT board intends to liquidate
the Company by December 31, 1996. To facilitate this plan, in April 1996, SAT
filed a Registration Statement on Form S-4 under the Securities Act of 1933, as
amended (the "Securities Act") to register shares of SAT's common stock to be
issued to the minority stockholders of the Company upon consummation of a
proposed merger of a wholly-owned subsidiary of SAT with and into the Company.
(see Note 15 -- Subsequent Events)
Although there are no assurances that the minority stockholders will
approve the merger, effective March 31, 1996 the Company changed its basis of
accounting from the going concern basis to a liquidation basis. Under the
liquidation basis of accounting assets are adjusted to amounts estimated to be
realizable, liabilities are stated at anticipated settlement amounts and
estimated costs of liquidating the Company are provided to the extent reasonably
determinable. Accordingly, the Company has recorded a reserve for the estimated
costs to sell or liquidate the Company. The historical cost basis balance sheet
as of March 31, 1995 and the statements of operations, statements of
stockholders equity and cash flows for the years ended March 31, 1996, 1995 and
1994 have been prepared using the historical cost (going concern) basis of
accounting on which the Company had previously been reporting its financial
condition and results of operations.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Business
The Company was incorporated in Texas in December 1987 and reincorporated
in Delaware in December 1993. The Company, which operates in a single industry
segment, designed, manufactures, markets and distributes a variety of toy
products for children.
The Company is a 60.8%-owned subsidiary of SAT, a publicly-owned company
(see Note 9).
Concentration of Credit Risk
The Company sells its products to a number of retailers, with one customer
Toys R Us, Inc. accounting for 51% of the fiscal 1996 sales. No significant
amounts were outstanding from this major customer at March 31, 1996. The
Company's customer base is comprised primarily of major national retailers. The
financial strength of those customers are routinely reviewed and evaluated. The
Company maintains reserves for potential credit losses, and such losses have
been within management's expectations.
Financial instruments that potentially subject the Company to concentration
of credit risk consist principally of cash and cash equivalents, trade
receivables and note receivable from SAT.
Use of Estimates
Liquidation accounting includes management's best estimates of the amounts
expected to be realized on the sale or liquidation of the Company's business.
The amounts the Company will ultimately receive could
F-40
<PAGE> 174
GOOD IDEAS ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
MARCH 31, 1996
differ in the near term from the amounts assumed in evaluating the
collectibility of accounts receivable and in arriving at the writedown of fixed
assets and inventory to net realizable value and the projected costs through
sale or liquidation.
Cash and Cash Equivalents
The Company considers all highly liquid cash investments with an original
maturity of three months or less when purchased to be cash equivalents.
Inventories
In accordance with liquidation accounting described in Note 1, inventories
at March 31, 1996 are stated at net realizable value. At March 31, 1995,
inventories are stated at the lower of cost or market. Cost is determined by the
first-in, first-out method.
Property and Equipment
In accordance with liquidation accounting described in Note 1, property and
equipment is stated at net realizable value at March 31, 1996. At March 31,
1995, property and equipment were stated at cost. Depreciation is computed by
straight-line method over the estimated useful lives of the related assets which
range from 5 to 7 years. Expenditures for maintenance and repairs are charged to
expense as incurred whereas major betterments and renewals are capitalized.
Management Services Agreement
The amount of management fees charged to the Company by SAT has been
determined by the anticipated diversion of SAT resources required to provide
such services to the Company. Payments pursuant to this agreement were suspended
after December 31, 1995 by SAT.
Stock Splits and Recapitalizations
In December 1993, the Board of Directors approved the Company's
reincorporation in the State of Delaware, including an increase in the common
shares authorized from 1,000 shares, no par value, to 20,000,000 shares, $.001
par value, and 2,000,000 shares of preferred stock $.001 par value. The Board of
Directors also approved a 27,875-for-1 stock split on the new Delaware common
shares. All references to the number of shares of Common Stock and to per share
data have been adjusted to reflect the stock split on a retroactive basis.
Revenue Recognition
Sales are recorded as products are shipped. The Company provides a reserve
for returns and allowances as a percentage of recorded sales. The Company does
not make consignment sales.
Income Taxes
The Company accounts for income taxes under Statement of Financial
Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes." The
objective of the asset and liability method is to establish deferred tax assets
and liabilities for the temporary differences between the financial reporting
basis and the tax basis of the Company's assets and liabilities at enacted tax
rates expected to be in effect when such amounts are realized or settled.
F-41
<PAGE> 175
GOOD IDEAS ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
MARCH 31, 1996
Accounting for Stock Based Compensation
The Company accounts for shares of Common Stock and warrants issued to
employees as compensation in accordance with the provisions of the Accounting
Principles Board Opinion No. 25 (APB 25) "Accounting for Stock Issued to
Employees." In 1995, the Financial Accounting Standards Board released SFAS No.
123, "Accounting for Stock-Based Compensation." SFAS No. 123 provides an
alternative to APB 25 and is effective for fiscal years beginning after December
15, 1995. The Company expects to continue to account for its grants of Common
Stock or warrants to employees in accordance with the provisions of APB 25.
Accordingly, SFAS No. 123 is not expected to have any material impact on the
Company's financial position or results of operations.
Net Loss Per Common Share
Loss per common share is based upon the weighted average number of common
shares outstanding during the periods reported. Common stock equivalents have
not been included in this calculation since their inclusion would be
antidilutive.
NOTE 3 -- CASH AND CASH EQUIVALENTS
Cash and cash equivalents are summarized as follows:
<TABLE>
<CAPTION>
MARCH 31,
--------------------
1996 1995
------- --------
<S> <C> <C>
Cash in Banks........................................... $77,951 $ 94,483
Money Market Funds...................................... 4,750 256,872
------- --------
$82,701 $351,355
======= ========
</TABLE>
NOTE 4 -- INVENTORIES
Inventories are summarized as follows:
<TABLE>
<CAPTION>
MARCH 31,
---------------------
1996 1995
-------- --------
<S> <C> <C>
Finished Goods......................................... $ 74,976 $293,282
Work in Process........................................ 43,463 91,010
Raw Materials.......................................... 274,770 379,317
-------- --------
393,209 763,609
Less: Reserve for Writedown to Net Realizable Value.... 197,000 --
-------- --------
$196,209 $763,609
======== ========
</TABLE>
F-42
<PAGE> 176
GOOD IDEAS ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
MARCH 31, 1996
NOTE 5 -- PROPERTY AND EQUIPMENT
Property and equipment is summarized as follows:
<TABLE>
<CAPTION>
MARCH 31,
--------------------
1996 1995
------- --------
<S> <C> <C>
Furniture and Fixtures.................................. $ -- $ 7,233
Office Equipment........................................ -- 46,567
Warehouse Equipment..................................... 27,088 176,685
Vehicle................................................. -- 18,514
------- --------
27,088 248,999
Less: Accumulated Depreciation.......................... 11,287 78,402
------- --------
$15,801 $170,597
======= ========
</TABLE>
NOTE 6 -- NOTE RECEIVABLE -- AFFILIATED COMPANY
The note receivable from affiliated company at March 31, 1995 consisted of
demand loans bearing interest at the rate of 8% per annum, due December 31, 1995
and was guaranteed by SAT, the common parent of both the Company and the
affiliate. The note was assumed by SAT on September 30, 1995 (see note 7 below).
NOTE 7 -- NOTE RECEIVABLE -- PARENT
The note receivable from SAT consisted of demand loans bearing interest at
the rate of 8% per annum, due June 30, 1996 and secured by SAT's shares in the
Company. The balance includes the assumption of a note receivable from an
affiliated company (see Note 6). Subsequent to March 31, 1996, the due date of
the note was extended to December 31, 1996 (see Note 15).
NOTE 8 -- CAPITAL LEASE OBLIGATIONS
As of March 31, 1996 and 1995, the Company had capital lease obligations
totaling $22,519 and $31,627, respectively. The capital leases are payable in
monthly installments due from February 1988 to January 1999.
NOTE 9 -- STOCKHOLDERS' EQUITY
On May 7, 1992, the original two stockholders of the Company entered into a
Stock Exchange Agreement and Plan of Reorganization with a subsidiary of SAT and
an investor. This transaction made the Company a 55%-owned subsidiary of SAT,
effective June 29, 1992. In November 1993, SAT acquired 100% ownership of the
subsidiary and the subsidiary transferred all of its shares of Common Stock to
SAT pursuant to the terms of a settlement agreement between SAT and the
investor.
In December 1993, William D. Robbins and Keith Parten surrendered to the
Company for cancellation an aggregate of 157,500 shares of Common Stock as
consideration for their new employment agreements.
In December 1993, the Board of Directors approved the Company's
reincorporation in the State of Delaware, including an increase in the common
shares authorized from 1,000 shares, no par value, to 20,000,000 shares $.001
par value, and 2,000,000 shares of preferred stock, $.001 par value. The Board
of Directors also approved a 27,875-for-1 stock split on the new Delaware common
shares. All references to the number of shares of Common Stock and per share
data have been adjusted to reflect the stock split on a retroactive basis.
F-43
<PAGE> 177
GOOD IDEAS ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
MARCH 31, 1996
In December 1993, the Board of Directors approved the issuance of an
additional 170,000 shares as payment for $749,000 of indebtedness to SAT.
Concurrently therewith, capital contributions receivable were offset against
loan payable-parent.
On February 17, 1994, the Company completed an initial public offering of
its Common Stock. The Company sold 1,200,000 shares at $5.00 per share and
netted approximately $4,735,000. In connection with the offering, the
underwriters were granted for a nominal fee Common Stock Purchase Warrants
entitling the underwriters to purchase up to 120,000 shares at $7.50 per share.
As a result of the sales of these securities, SAT had its ownership reduced to
60%.
In April 1994, an additional 65,200 shares of Common Stock were sold
pursuant to the initial public offering's over-allotment provision and the
Company netted approximately $281,000. As a result of the sales of these
securities, SAT had its ownership reduced to 59%.
On May 5, 1995, Keith Parten resigned as director, Chief Operating Officer
and President of the Company. Mr. Parten returned to the Company 126,520 shares
of his Common Stock. Such shares were canceled by the Company. The cancellation
of these shares increased SAT ownership interest in the Company from 59% to
60.8%.
On December 1, 1995, 10,000 shares of Common Stock were issued to an
officer for compensation.
NOTE 10 -- STOCK OPTION/STOCK ISSUANCE PLAN
In December 1993, the Board of Directors approved a stock option/stock
issuance plan which covers 500,000 shares of the Company's Common Stock. Both
the Discretionary Option Grant Program and the Stock Issuance Program call for
options to be granted at an exercise price not less than 85% of fair market
value of such shares on the grant date. Each option granted will have a maximum
term of ten years, subject to earlier termination following the optionee's
cessation of service with the Company. The vesting period may vary subject to
each program's terms.
In December 1993, a total of 37,000 stock options with an exercise price of
$4.40 per share were granted to five directors.
A summary of stock option activity follows:
<TABLE>
<CAPTION>
INCENTIVE STOCK OPTIONS NON-STATUTORY OPTIONS
------------------------- -------------------------
NUMBER PRICE RANGE NUMBER PRICE RANGE
OF SHARES PER SHARE OF SHARES PER SHARE
--------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Outstanding -- April 1, 1993............ -0- -0- -0- $ -0-
Granted............................... -0- -0- 37,500 4.40
--- ---- ------- ----
Outstanding -- March 31, 1994........... -0- -0- 37,500 4.40
Granted............................... -0- -0- -0- -0-
--- ---- ------- ----
Outstanding -- March 31, 1995........... -0- -0- 37,500 4.40
Granted............................... -0- -0- -0- -0-
Expired............................... -0- -0- (15,000) 4.40
--- ---- ------- ----
Outstanding -- March 31, 1996........... -0- $ -0- 22,500 $4.40
=== ==== ======= ====
</TABLE>
F-44
<PAGE> 178
GOOD IDEAS ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
MARCH 31, 1996
NOTE 11 -- MAJOR CUSTOMERS AND SUPPLIERS
During the years ended March 31, 1996, 1995 and 1994, a small group of
customers accounted for the major share of the Company's net sales for such
periods. The following is a summary of customers comprising 10% or greater of
the Company's net sales:
<TABLE>
<CAPTION>
PERCENTAGE
NUMBER OF OF
YEAR ENDED MARCH 31, CUSTOMERS NET SALES
--------------------------------------------------- --------- -----------
<S> <C> <C>
1996............................................... One 51%
1995............................................... Two 59% and 21%
1994............................................... Two 57% and 10%
</TABLE>
Included in account receivable as of March 31, 1996 and 1995 are amounts
due from its major customers totaling $3,000 and $268,000, respectively.
During the year ended March 31, 1996, the Company contracted for the
manufacture of a majority of its products from three suppliers.
NOTE 12 -- COMMITMENTS AND CONTINGENCIES
Concentration of Credit Risk
The Company's financial instruments that are exposed to concentration of
credit risk consist of cash and cash equivalents. At times, such amounts are in
excess of the FDIC insurance limits.
The Company's customer base is comprised primarily of major national
retailers. The financial strength of those customers are routinely reviewed and
evaluated.
Employment Agreements
In December 1993, the Company entered into a new employment agreement with
one of its officers which became effective on January 1, 1994 and terminates on
December 31, 1996. The agreement provides for an aggregate annual minimum salary
of $160,000 as well as for reimbursement of related business expenses incurred.
Effective April 1, 1994, the Company entered into a three-year employment
agreement with an executive providing for an aggregate annual minimum salary of
$55,000 as well as for reimbursement of related business expenses incurred. The
executive resigned in April 1996 (see Note 15).
On May 12, 1995, the Company entered into a two-year employment agreement,
effective June 1, 1995, with a new Chief Operating Officer. The agreement
provides for an aggregate minimum annual salary of $110,000 as well as
reimbursement of related business expenses incurred. The executive and his
employment agreement were transferred to another subsidiary of SAT, the common
Parent, during September 1995.
Management Agreement -- Parent
On April 1, 1993, the Company entered into a Management Agreement with SAT
which obligates the Company to pay ten (10.0%) percent of its product sales as
consideration for administrative management services to be provided by SAT.
Prior to April 1, 1993, the Company paid management fees at the rate of $25,000
per month.
In December 1993, the Company entered into a new Management Services
Agreement with SAT. Under the terms of the revised agreement, which is
retroactive to October 1, 1993, the Company is obligated to pay a management fee
of $25,000 per month plus five (5.0%) percent of its annual gross revenue in
excess of
F-45
<PAGE> 179
GOOD IDEAS ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
MARCH 31, 1996
$5,000,000. The new agreement expired on September 30, 1994, and pursuant to the
terms of the agreement, was automatically renewed for one year. At September 30,
1995, the agreement was automatically renewed for another year. The Board of
Directors of SAT suspended the management fee retroactive to January 1, 1996, at
its February 26, 1996 meeting in view of its decision to sell or liquidate the
Company by December 31, 1996.
NOTE 13 -- INCOME TAXES
For income tax purposes the Company has net operating loss carryforwards at
March 31, 1996 of approximately $3,085,000, expiring from December, 2007 to
March 31, 2011 if not offset against future federal taxable income.
Pursuant to Section 382 of the Internal Revenue Code, due to changes in the
ownership of the Company, the utilization of these loss carryforwards may be
subject to an annual limitation based on a long-term tax exempt rate.
Income tax benefit attributable to net loss differed from the amounts
computed by applying the statutory Federal Income tax rate as a result of the
following:
<TABLE>
<CAPTION>
MARCH 31,
-------------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Computed "Expected" Tax Benefit................. $ 401,000 $ 263,000 $ 204,000
Decrease in Tax Benefit Resulting from:
Net Operating Loss for which no Benefit is
Currently Available........................ (401,000) (263,000) (204,000)
-------- -------- --------
$ -- $ -- $ --
======== ======== ========
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the net deferred tax asset are presented below.
<TABLE>
<CAPTION>
MARCH 31,
------------------------------------
1996 1995 1994
---------- -------- --------
<S> <C> <C> <C>
Net Operating Loss Carryforward................... $1,085,000 $684,000 $421,000
Less: Valuation Allowance
Under SFAS No. 109.............................. 1,085,000 684,000 421,000
---------- -------- --------
Net Deferred Tax Assets........................... $ -- $ -- $ --
========== ======== ========
</TABLE>
NOTE 14 -- SALE OR LIQUIDATION OF THE COMPANY
The Board of Directors of SAT, at its February 26, 1996, meeting reached a
decision to either sell or liquidate the Company.
Accordingly, the financial statements reflect a writedown of inventory and
fixed assets in the amount of approximately $258,000 to reduce the carrying
values of these assets to estimated net realizable value.
In addition, the Company in fiscal 1996 projected cost of operations
through the date of sale or liquidation totaling $110,000.
F-46
<PAGE> 180
GOOD IDEAS ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
MARCH 31, 1996
NOTE 15 -- SUBSEQUENT EVENTS
During April 1996, SAT filed a Registration Statement on Form S-4 under the
Securities Act in an attempt, through a consent solicitation, to acquire the
common shares owned by the minority interest and thus own 100% of the Company.
There is no assurance that such solicitation will be successfully completed.
During April 1996, an executive of the Company with an employment contract
scheduled to terminate on March 31, 1997 resigned her position and will receive
$10,000 in severance compensation.
On June 25, 1996, the Board of Directors extended the due date of the note
receivable from SAT to December 31, 1996. All other terms and conditions of the
note remain unchanged.
F-47
<PAGE> 181
GOOD IDEAS ENTERPRISES, INC.
STATEMENTS OF NET ASSETS IN LIQUIDATION
<TABLE>
<CAPTION>
DECEMBER
31, MARCH 31,
1996 1996
----------- -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Cash and Cash Equivalents......................................... $ 532 $ 82,701
Accounts Receivable (Net of Allowance for Bad Debts of $76,427 and
$77,061 at December 31, 1996 and March 31, 1996)................ 75,156 61,612
Inventories....................................................... 146,735 196,209
Prepaid Expenses.................................................. 2,494 7,358
Note Receivable -- Parent......................................... 1,971,936 2,052,243
Property and Equipment (Net of Accumulated Depreciation of $11,287
at March 31, 1996).............................................. -- 15,801
Other Assets...................................................... 6,808 6,808
----------- -----------
Total Assets............................................ 2,203,661 2,422,732
----------- -----------
LIABILITIES
Accounts Payable.................................................. 18,371 86,830
Accrued Expenses.................................................. 20,018 28,858
Capital Lease Obligations......................................... -- 22,519
Reserve for Sale or Liquidation Costs............................. 40,747 110,000
----------- -----------
Total Liabilities....................................... 79,136 248,207
----------- -----------
Commitments and Contingencies
NET ASSETS IN LIQUIDATION (Note 1)*............................... $ 2,124,525 $ 2,174,525
=========== ===========
*Comprised of the following:
Preferred Stock, $.001 Par Value, 2,000,000 Shares Authorized,
None Issued and Outstanding.................................. $ -- $ --
Common Stock, $.001 Par Value, 20,000,000 Shares Authorized,
Issued and Outstanding 3,948,680 Shares at December 31 and
March 31, 1996............................................... 3,949 3,949
Additional Paid-In Capital...................................... 5,768,662 5,768,662
Accumulated Deficit............................................. (3,648,086) (3,598,086)
----------- -----------
$ 2,124,525 $ 2,174,525
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-48
<PAGE> 182
GOOD IDEAS ENTERPRISES, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED ENDED
DECEMBER 31, DECEMBER 31,
------------------------- --------------------------
1996 1995 1996 1995
---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Net Sales................................ $ -- $ 377,866 $ 48,868 $ 1,473,416
Cost of Sales............................ 8,945 439,013 91,327 1,142,298
---------- ---------- ---------- ----------
Gross Profit (Loss)...................... (8,945) (61,147) (42,459) 331,118
Operating Expenses:
Selling, General and Administrative
Expenses............................ 45,905 352,563 196,486 1,139,095
Management Fees -- Parent.............. -- 75,000 -- 225,000
Projected Costs through Sale or
Liquidation......................... (15,431) -- (69,252) --
---------- ---------- ---------- ----------
Total Operating Expenses................. 30,474 427,563 127,234 1,364,095
Loss from Operations..................... (39,419) (488,710) (169,693) (1,032,977)
Other Income............................. 39,419 17,217 119,693 100,718
---------- ---------- ---------- ----------
Net Profit (Loss)........................ $ -- $ (471,493) $ (50,000) $ (932,259)
========== ========== ========== ==========
Weighted Average Common Shares
Outstanding............................ 3,948,680 3,942,013 3,948,680 3,974,936
---------- ---------- ---------- ----------
Net Loss Per Common Share................ $ -- $ (0.12) $ (0.01) $ (0.23)
========== ========== ========== ==========
</TABLE>
F-49
<PAGE> 183
GOOD IDEAS ENTERPRISES, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED
DECEMBER 31,
-----------------------
1996 1995
--------- ---------
<S> <C> <C>
Cash Flow From Operating Activities:
Net Profit (Loss).................................................. $ (50,000) $(932,259)
Adjustments to Reconcile Net Loss to Net Cash:
Used by Operating Activities:
Depreciation.................................................... -- 53,012
Provisions for Sales Returns and Allowances..................... -- (15,683)
Value of Common Stock Issued to Officer as Compensation......... -- 5,000
Excess of Capital Lease Liability Assumed by Parent Over Book
Value of Leased Assets Transferred............................. (3,703) --
Changes in Operating Assets and Liabilities:
(Increase) Decrease in Accounts Receivable.................... (13,544) 140,816
(Increase) Decrease in Inventories............................ 49,474 168,658
(Increase) Decrease in Prepaid Expenses....................... 4,864 97,301
(Increase) Decrease in Other Assets........................... -- 8,535
Increase (Decrease) in Accounts Payable....................... (68,459) 30,934
Increase (Decrease) in Accrued Expenses....................... (8,840) (24,924)
Increase (Decrease) in Reserve for Sale or Liquidation
Costs........................................................ (69,253) --
--------- ---------
Total Adjustments.......................................... (109,461) 463,649
--------- ---------
Net Cash Used by Operating Activities................................ (159,461) (468,610)
--------- ---------
Cash Flow from Investing Activities:
Purchase of Property and Equipment................................. -- (14,846)
Disposal of Property and Equipment................................. -- 48,117
--------- ---------
Net Cash Provided (Used) by Investing Activities..................... -- 33,271
Cash Flows from Financing Activities:
Net Payments Received on Loan to Parent............................ 80,307 295,905
Payments of Capital Lease Obligations.............................. (3,015) (6,828)
--------- ---------
Net Cash Provided (Used) by Financing Activities..................... 77,292 289,077
--------- ---------
Net Increase (Decrease) in Cash and Cash Equivalents................. (82,169) (146,262)
Cash and Cash Equivalents -- Beginning of Period................... 82,701 351,355
--------- ---------
Cash and Cash Equivalents -- End of Period........................... $ 532 $ 205,093
========= =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-50
<PAGE> 184
GOOD IDEAS ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 -- PLAN OF SALE OR LIQUIDATION AND BASIS OF PRESENTATION
The Board of Directors of Substance Abuse Technologies, Inc. ("SAT" or the
"Parent"), formerly U.S. Alcohol Testing of America, Inc., owner of 60.8% of the
Common Stock of Good Ideas Enterprises, Inc., ("Good Ideas" or the "Company"),
decided at its February 26, 1996 meeting to focus on its drug and alcohol
testing and human resource provider businesses and to dispose of what it
considered to be noncore businesses, such as the Company. The SAT directors
concluded that, because of the history of losses in the Company and what they
believed to be problems generally in the toy industry, as well as the belief
that new products were necessary to turn the Company around, it would be
difficult to make the Company's operations profitable in a reasonable amount of
time, if ever. SAT management was authorized by its Board to seek offers to
purchase the Company. There can be no assurance that an acceptable offer will be
received or as to the terms of such offer. If no acceptable offer is received,
the SAT Board intends to liquidate the Company after the results of a consent
solicitation for the merger hereinafter described are known. To facilitate this
plan, in April 1996, SAT filed a Registration Statement on Form S-4 under the
Securities Act of 1993, as amended (the "Securities Act"), to register shares of
SAT's common stock to be issued to the minority stockholders of the Company upon
consummation of a proposed merger of a wholly-owned subsidiary of SAT with and
into the Company. There can be no assurances that the minority stockholders will
approve the merger.
Effective March 31, 1996, the Company changed its basis of accounting from
the going concern basis to a liquidation basis. Under the liquidation basis of
accounting, assets are adjusted to amounts estimated to be realizable,
liabilities are stated at anticipated settlement amounts and estimated costs of
liquidating the Company are provided to the extent reasonably determinable.
Accordingly, at March 31, 1996, the Company recorded a reserve for the estimated
costs to sell or liquidate the Company and has reflected the expenses applied to
the reserve as a separate line on the statement of operations. The statements of
operations and cash flows for the period ended December 31, 1995 have been
prepared using the historical cost (going concern) basis of accounting on which
the Company had previously been reporting its financial condition and results of
operations.
In the opinion of Good Ideas, the accompanying unaudited financial
statements reflect all adjustments (which include only normal recurring
adjustments) necessary to present fairly the financial position, results of
operations and cash flows for the periods presented.
Results of operations for interim periods are not necessarily indicative of
the results of operations for full year due to external factors which are beyond
the control of the Company.
The Report should be read with the Company's Annual Report on Form 10-K for
the fiscal year March 31, 1996.
NOTE 2 -- CASH AND CASH EQUIVALENTS
Cash and cash equivalents are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1996 1996
------------ ---------
<S> <C> <C>
Cash in Bank......................................... $532 $77,951
Money Market Funds................................... -- 4,750
---- ------
$532 $82,701
==== ======
</TABLE>
F-51
<PAGE> 185
GOOD IDEAS ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3 -- INVENTORIES
Inventories are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1996 1996
------------ ---------
<S> <C> <C>
Finished Goods......................................... $ 91,022 $ 74,976
Work in Process........................................ 33,785 43,463
Raw Materials.......................................... 218,928 274,770
-------- --------
343,735 393,209
-------- --------
Less: Reserve for write down and Net Realizable
Value................................................ 197,000 197,000
-------- --------
Total Inventory........................................ $146,735 $ 196,209
======== ========
</TABLE>
NOTE 4 -- PROPERTY AND EQUIPMENT
Property and equipment is summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1996 1996
------------ ---------
<S> <C> <C>
Warehouse Equipment.................................... $ -- $27,088
Less: Accumulated Depreciation......................... -- 11,287
---- ------
Total Property and Equipment........................... $ -- $15,801
==== ======
</TABLE>
NOTE 5 -- NOTE RECEIVABLE
The note receivable from the Parent consists of demand loans bearing
interest at the rate of 8% per annum, due March 31, 1997 and secured by the
Parent's shares in the Company.
NOTE 6 -- CAPITAL LEASE OBLIGATIONS
As of March 31, 1996, the Company had capital lease obligations totaling
$22,519. The leases were payable in monthly installments due from February 1988
to January 1999. These leases, together with the equipment financed, were
transferred to the Parent during the quarter ended September 30, 1996.
NOTE 7 -- RECENT DEVELOPMENTS
The Board of Directors of SAT, at its February 26, 1996 meeting, reached a
decision to either sell or liquidate the Company. Accordingly, the financial
statements for the year ended March 31, 1996 reflected a writedown of inventory
and fixed assets in the amount of approximately $258,000 to reduce the carrying
values of these assets to estimated net realizable value. In addition, the
Company provided in the results of operations for the year ended March 31, 1996
the projected cost of operations through the date of sale or liquidation
totaling $110,000. During the quarter ended September 30, 1996, the Company
provided an additional $50,000 to cover the projected cost of operation through
date of liquidation.
Effective December 31, 1996, the employment contract with William D.
Robbins, Chief Executive Officer, expired and his employment was terminated.
F-52
<PAGE> 186
APPENDIX A
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER dated as of February 17, 1997 by and among
Substance Abuse Technologies, Inc., a Delaware corporation ("SAT"), Good Ideas
Acquisition Corp., a Delaware corporation ("Acquisition Corp."), and Good Ideas
Enterprises, Inc., a Delaware corporation ("Good Ideas").
WITNESSETH:
WHEREAS, of the 3,948,680 shares of the common stock, $.001 par value (the
"Good Ideas Common Stock"), of Good Ideas outstanding as of the date hereof, SAT
is the owner of 2,400,000 shares and 1,548,680 shares (the "Minority Good Ideas
Common Stock") are owned by persons other than SAT (the "Good Ideas Minority
Stockholders");
WHEREAS, the Board of Directors of each of SAT and Acquisition Corp. have
each adopted, approved and authorized the execution and delivery of this
Agreement and Plan of Merger (the "Agreement") so as to implement the subject
merger in compliance with the provisions of Section 251 of the General
Corporation Law of the State of Delaware (the "GCL");
WHEREAS, because of the relationships of three of the four directors of
Good Ideas to SAT as current directors and/or officers thereof and of all four
directors of Good Ideas as securityholders of SAT, the Board of Directors of
Good Ideas has only authorized execution and delivery of the Agreement on the
condition that approval of the subject merger by Good Ideas shall only be
effected as a result of the obtaining of consents thereto from the holders of
more than 50% of the Minority Good Ideas Common Stock;
WHEREAS, the Board of Directors of Good Ideas intends to, and shall, submit
this Agreement and the subject merger to the stockholders of Good Ideas for
approval to the extent required by the applicable provision of GCL; and
WHEREAS, in connection with the subject merger and solicitation of
stockholder consent thereto, SAT has filed a Registration Statement on Form S-4,
File No. 333-3734 (the "Registration Statement"), pursuant to the Securities Act
of 1933, as amended (the "Securities Act"), the Registration Statement to
include as Part I thereof the prospectus and consent solicitation statement to
be transmitted to the Good Ideas Minority Stockholders (such prospectus and
consent solicitation statement, as from time to time amended and/or
supplemented, hereinafter referred to as the "Consent Solicitation
Statement-Prospectus") (a) with respect to the solicitation of consents from the
Good Ideas Minority Stockholders to the subject merger pursuant to Section 228
of the GCL and Section 14(a) of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), and (b) with respect to the distribution of the shares of
the SAT common stock, $.01 par value (the "SAT Common Stock"), to the Good Ideas
Minority Stockholders in exchange for their shares of the Good Ideas Common
pursuant to the terms of this Agreement and the subject merger;
NOW THEREFORE, in consideration of the premises and the mutual
representations, warranties, covenants and agreements herein contained, the
parties hereto do hereby agree as follows:
1. THE MERGER. Subject to the terms and conditions hereinbelow set
forth, on the Effective Date (as hereinafter defined in Section 10 hereof)
Acquisition Corp. shall be merged with and into Good Ideas (the "Merger")
and, in connection therewith:
(a) except to the extent provided or permitted by applicable law,
the separate existence of Acquisition Corp. shall cease and terminate;
(b) Good Ideas, as the surviving corporation, shall continue its
corporate existence under the laws of the State of Delaware and shall
possess all of the rights, privileges, immunities, powers, franchises
and authority (both public and private) of, and be subject to all of the
restrictions, disabilities and duties of, Acquisition Corp.;
A-1
<PAGE> 187
(c) all of the assets and property of Acquisition Corp. of every
kind, nature and description (real, personal and mixed and both tangible
and intangible) and every interest therein, wheresoever located,
including, without limitation, all debts or other obligations belonging
or due to Acquisition Corp., all stock subscriptions, claims and chooses
in action shall be, and be deemed to be, vested, absolutely and
unconditionally, in Good Ideas (to the same extent, degree and manner as
previously vested in Acquisition Corp.); and
(d) all debts and obligations of Acquisition Corp., all rights of
creditors of Acquisition Corp. and all liens or security interests
encumbering any of the property of Acquisition Corp. shall be vested in
Good Ideas and shall remain in full force and effect without
modification or impairment and shall be, and be deemed to be,
enforceable against Good Ideas and its assets and properties with the
same full force and effect as if such debts, obligations, liens or
security interests had been originally incurred or created by Good Ideas
in its own name and for its own behalf. Without limiting the generality
of the foregoing, Good Ideas specifically assumes all continuing
obligations which Acquisition Corp. would otherwise have to indemnify
its officers and directors, to the fullest extent currently provided in
Acquisition Corp.'s By-Laws and/or by resolution of its Board of
Directors and pursuant to the GCL, with respect to any and all claims
arising out of actions taken or omitted by such officers and directors
prior to the Effective Date.
2. INSTRUMENTS OF CONVEYANCE. Without limiting the generality of the
provisions of Section 1 hereof and/or the succession provisions of
applicable law, the officers and directors of Acquisition Corp. last in
office shall (to the extent they, or any of them, possess and/or may
exercise the power to do so) execute, deliver and/or record such deeds
and/or other instruments of transfer and/or conveyance, and take or cause
to be taken, such other and further actions, as the case may be, as shall
be reasonably requested by Good Ideas or SAT, or their legal counsel, to
vest, perfect, confirm, implement the transfer of, or establish in the
name, on behalf or for the account or the benefit of Good Ideas, title
and/or possession of any or all of the assets, property, property
interests, rights, privileges, immunities, powers and franchises owned
and/or exercisable by Acquisition Corp. (or in which Acquisition Corp. had
an interest and/or the power to exercise immediately prior to the Effective
Date) and which was vested, or intended to be vested, in Good Ideas
pursuant to the provisions of this Agreement and the Merger.
3. CONSTITUTIONAL DOCUMENTS, DIRECTORS AND OFFICERS. On and as of
the Effective Date:
(a) The Certificate of Incorporation of Good Ideas on such date in
full force and effect shall be the Certificate of Incorporation of Good
Ideas, as the surviving corporation, until the same shall be altered,
amended, modified, terminated or rescinded in the manner provided by the
GCL, which rights of alteration, amendment, modification, termination
and/or rescission are hereby expressly reserved by Good Ideas;
(b) The By-Laws of Good Ideas on such date in full force and effect
shall be the By-Laws of Good Ideas, as the surviving corporation, until
the same shall be altered, amended, modified, terminated or rescinded in
the manner provided in the Certificate of Incorporation of Good Ideas
and/or the GCL, which rights of alteration, amendment, modification,
termination and/or rescission are hereby expressly reserved by Good
Ideas.
(c) The members of the Board of Directors and the officers of Good
Ideas, the surviving corporation, shall consist of the persons described
on Exhibit "A" annexed hereto and made a part hereof, each of such
persons to hold such membership and/or officership as provided in the
By-Laws and/or the GCL.
(d) The Certificate of Incorporation of SAT on such date in full
force and effect shall be the Certificate of Incorporation of SAT until
the same shall be altered, amended, modified, terminated or rescinded in
the manner provided by the GCL, which rights of alteration, amendment,
modification, termination and/or rescission are hereby expressly
reserved by SAT.
(e) The By-Laws of SAT on such date in full force and effect shall
be the By-Laws of SAT until the same shall be altered, amended,
modified, terminated or rescinded in the manner provided
A-2
<PAGE> 188
in the Certificate of Incorporation of SAT and/or the GCL, which rights
of alteration, amendment, modification, termination and/or rescission
are hereby expressly reserved by SAT.
4. CONVERSION RATES. On the Effective Date the shares of the Good
Ideas Common Stock shall be converted and exchanged into shares of the SAT
Common Stock (and warrants and similar rights exercisable with respect to
shares of the Good Ideas Common Stock shall become exercisable with respect
to shares of the SAT Common Stock) in the following manner:
(a) Each issued and outstanding share of the Good Ideas Common
Stock shall, by virtue of the Merger and without any action on the part
of the holder thereof, be converted and exchanged into .36 of a share of
the SAT Common Stock; provided, however, that to the extent any holder
of the Good Ideas Common Stock shall be entitled, as a result of the
foregoing conversion and exchange, to receive less than a whole share of
the SAT Common Stock, then and in any such event:
(i) no fractional share and/or fractional interest in a whole
share shall be issued and
(ii) the fractional interest of such holder shall be liquidated
for cash equivalent calculated on the basis of the closing sales
price of the SAT Common Stock on the Effective Date or on the first
day thereafter that such price is available.
The portion of a share of the SAT Common Stock to be exchanged for each
share of the Good Ideas Common Stock was determined by assuming that a share of
the SAT Common Stock has a market value of $1.625 per share (which was the
closing sales price reported by the American Stock Exchange on February 14,
1997, the last trading date before the date of this Agreement) and that the Good
Ideas Minority Stockholder should receive between .25 of a share if the market
value of the SAT Common Stock was $2.50 per share and .375 of a share if the
market value of the SAT Common Stock was $1.50 per share for each share of the
Minority Good Ideas Common Stock.
(b) Each outstanding warrant expiring February 16, 1999 (the
"Warrant") to purchase shares of the Good Ideas Common Stock shall, by
virtue of the Merger and without any action on the part of the holder
thereof, be converted and exchanged into a warrant to purchase shares of
the Good Ideas Common Stock equal to the number of shares that the
holder would have received under Section 4(a) hereof had the warrant
been exercised immediately prior to the Effective Date. The exercise
price shall be adjusted to the product of $7.50 and a fraction, the
numerator of which shall be the number of shares of the Good Ideas
Common Stock issuable upon the exercise of the Warrant prior to the
Merger and the denominator of which shall be the number of shares of the
SAT Common Stock issuable upon the exercise of the Merger Warrant. The
expiration date of the Warrant shall not be changed.
(c) Anything in this Section 4 to the contrary notwithstanding:
(i) Any and all issued shares of the Good Ideas Common Stock
owned by Good Ideas and held as treasury stock shall be canceled and
retired and no shares of the SAT Common Stock shall be issued with
respect thereto;
(ii) Any and all issued shares of the Good Ideas Common Stock
owned by SAT, except for ten (10) shares, shall be canceled and
retired and no shares of the SAT Common Stock shall be issued to SAT
with respect thereto;
(iii) Upon the issuance of shares of the SAT Common Stock to the
Good Ideas Minority Stockholders in exchange for their shares of the
Good Ideas Common Stock, there shall be credited to the capital
account of SAT an amount equal to $1.625 and, of the amount so
credited, the portion thereof in excess of the aggregate par value
thereof shall be credited to the capital surplus account; and
(iv) Upon the issuance of shares of the SAT Common Stock to the
Good Ideas Minority Stockholders all shares of the Good Ideas Common
Stock shall be canceled except for the ten (10) shares held by SAT as
described in subsection (d)(ii) of this Section 4.
A-3
<PAGE> 189
5. APPOINTMENT OF EXCHANGE AGENT. Prior to the Effective Date SAT
shall, subject to the provisions of Paragraph 8 hereof:
(a) Designate U.S. Stock Transfer Corporation (the "Exchange
Agent") to implement the exchange (subsequent to the Effective Date) of
certificates representing shares of the Good Ideas Common Stock (the
"Old Certificates") for certificates representing shares of the SAT
Common Stock (the "New Certificates");
(b) engage the Exchange Agent for a period of the lesser of (i) 12
consecutive months following the Effective Date and (ii) the date on
which all of the Old Certificates held by the Good Ideas Minority
Stockholders have been surrendered for the New Certificates; and
(c) provide to the Exchange Agent sufficient supplies of New
Certificates so as to enable a holder of an Old Certificate(s) to
surrender such Certificate(s) and receive New Certificate(s).
6. CERTIFICATE EXCHANGE. Subsequent to the Effective Date the
issuance and distribution of New Certificates in exchange for Old
Certificates shall be implemented as follows:
(a) As promptly after the Effective Date as shall be reasonably
possible, the Exchange Agent shall be directed to, and shall, notify
(the "Notification") each holder of an Old Certificate of the
consummation of the Merger, the availability of New Certificates and a
description of the procedure to be followed (and documents to be
executed and submitted) in connection with the surrender of the Old
Certificate and the issuance of the New Certificate. Upon compliance by
a holder thereof with the requirements for the certificate surrender and
issuance specified in the Notification, the Exchange Agent shall be
directed to, and shall, issue and transmit to such holder New
Certificates (representing that number of shares of the SAT Common Stock
to which such holder shall be entitled as herein provided). Until
surrendered and replaced as aforesaid:
(i) each Old Certificate shall, and be deemed to, represent and
evidence (for all corporate purposes other than the payment of
dividends and other distributions) that number of shares of the SAT
Common Stock into which the shares of the Good Ideas Common Stock
therein referred to are convertible and exchangeable as herein
provided and
(ii) each Old Certificate shall not be transferable on the books
and records of Good Ideas and/or SAT.
(b) From and after the Effective Date any and all dividends and/or
distributions of every kind, nature or description declared and payable
by SAT on, or with respect to, the SAT Common Stock to any holder of an
Old Certificate (collectively "Distributions") shall be paid, retained,
invested and paid over as follows:
(i) Until such time as the Old Certificate is surrendered for
replacement by a New Certificate(s) as herein provided, no
Distribution shall be paid over by SAT and/or the Exchange Agent to
such holder on, or with respect to, the shares of the SAT Common
Stock evidenced by such Old Certificate;
(ii) All Distributions payable on, or with respect to, shares of
the SAT Common Stock represented by Old Certificates shall be paid
over by SAT to the Exchange Agent and dealt in and with by the
Exchange Agent as follows:
(A) All Distributions in cash shall be deposited by the
Exchange Agent in an interest bearing account (the "Distribution
Account") and retained and disposed of as hereinbelow provided;
(B) Upon surrender by, or on behalf of, a holder of an Old
Certificate for surrender and replacement as hereinabove provided
(or satisfactory proof of loss and an indemnity in favor of, and
acceptable to, SAT and the Exchange Agent), the Exchange Agent
shall pay over and/or deliver to such holder (in addition to the
New Certificate(s) to which such holder shall be entitled) (y)
the principal amount of any cash dividends and any property
A-4
<PAGE> 190
(other than shares of the SAT Common Stock) previously received
by the Exchange Agent with respect to the shares of the SAT
Common Stock evidenced by such Old Certificate and (z) a
certificate representing any shares of the SAT Common Stock
forming part of any Distribution made prior to the date of any
such surrender;
(C) Any and all interest earned and/or credited on, or with
respect to, Distributions shall be applied by the Exchange Agent
to the payment of its fees and disbursements and the remainder,
if any, paid over to SAT upon the termination of the engagement
of the Exchange Agent.
(c) From and after the Effective Date the sole rights of the
holders of Old Certificates (except as otherwise provided by law) shall
be those to which they are entitled as owners of the SAT Common Stock
into which the shares of the Good Ideas Common Stock evidenced by such
Old Certificates shall have been converted as herein provided.
7. TRANSFERS. If the holder of any Old Certificate desires that the
New Certificate to be issued in replacement therefor (as hereinabove
provided) is to be issued in a name other than that on the Old Certificate
which it replaces, any such issuance shall be subject to and conditioned
upon:
(a) Delivery to the Exchange Agent of the Old Certificate duly
endorsed in blank or accompanied by a duly executed stock assignment
power and otherwise in form for transfer acceptable to the Exchange
Agent and
(b) Payment to SAT or the Exchange Agent of any and all transfer
and/or other taxes payable, in the opinion of the Exchange Agent, by
reason of the issuance and/or transfer of such New Certificate and/or
the shares of the SAT Common Stock evidenced thereby.
8. TERMINATION OF EXCHANGE AGENT. Upon the termination of the
Exchange Agent's engagement as hereinabove provided, the Exchange Agent
shall deliver to SAT the then balance of the Distribution Account and, upon
such delivery, the Exchange Agent shall have no further duties or
obligations as exchange agent to SAT, Acquisition Corp., Good Ideas or
their respective stockholders. Thereafter, the duties to be performed by
the Exchange Agent as described in Sections 6 and 7 hereof shall be
performed by SAT in lieu of, and instead of, the Exchange Agent. All blank
stock certificates evidencing the SAT Common Stock shall be retained by the
Exchange Agent for utilization by it in the performance of its duties as
transfer agent for, and with respect to, the SAT Common Stock.
9. THE CLOSING. The closing of the transactions contemplated by this
Agreement shall take place on such date, at such place and at such time
within five (5) business days after the satisfaction or waiver of the last
of the conditions set forth in Sections 17 and 18 hereof as shall be
designated by SAT. The closing of such transactions shall be referred to
herein as the "Closing" and the date of the Closing shall be referred to
herein as the "Closing Date"; and the Closing Date may be the same as the
Effective Date.
10. THE EFFECTIVE DATE. Subject to the satisfaction and/or waiver of
the conditions herein described, the Merger shall become effective (the
"Effective Date") as at the close of business on the date specified in the
Certificate of Merger to be filed in the manner required by the GCL or, if
none, on the date of filing. Upon the receipt by Good Ideas of consents
from the holders of more than 50% of the outstanding shares of the Minority
Good Ideas Common Stock held by the Good Ideas Minority Stockholders and of
a consent from SAT to the Merger, Good Ideas and Acquisition Corp. shall
cause to be filed the Certificate of Merger in the manner required by the
GCL. Subject to the provisions of Section 19 hereof, such filing shall be
made on, or as soon as practicable after, the Closing Date; and the parties
hereto shall thereafter execute, acknowledge, deliver and/or record such
other and further instruments, documents or certificates and/or take and
perform such other and further actions as may be required to effect and/or
implement the Merger. If the Merger is consummated, SAT will take such
actions as are necessary to deregister the Good Ideas Common Stock pursuant
to Section 12(b) of the Exchange Act.
A-5
<PAGE> 191
11. THE REGISTRATION STATEMENT AND CONSENT SOLICITATION
STATEMENT. In connection with the preparation, utilization and/or
distribution of the Consent Solicitation Statement-Prospectus to be issued
and distributed to the Good Ideas Minority Stockholders in connection with
the Merger and the preparation and utilization of the Registration
Statement of which the Consent Solicitation Statement-Prospectus
constitutes Part I thereof, the parties shall follow the procedures as
provided in this Section 11.
(a) The parties hereto shall cooperate in the preparation thereof
consistent with the applicable requirements of the GCL, the Securities
Act and the Exchange Act and the rules and regulations promulgated under
the Securities Act and the Exchange Act by the Securities and Exchange
Commission (the "SEC"); and, without limiting the generality of the
foregoing, each of SAT and Good Ideas shall promptly supply to the other
any and all information and material (relating to itself and/or the
subject transaction) as may be requested or required in connection with
the preparation and filing of the Registration Statement, including,
without limitation, all information concerning their respective
officers, directors and principal stockholders that is reasonably
requested for inclusion in the Consent Solicitation
Statement-Prospectus; and each shall take and perform such other and
further acts and actions as shall be necessary or appropriate to cause
the prompt preparation, completion, filing, review, finalization and
clearance of the Registration Statement.
(b) Subject to the Registration Statement being declared effective
by the SEC, the Consent Solicitation Statement-Prospectus and any other
communication required by the Exchange Act or the rules and regulations
promulgated thereunder or reasonably requested by SAT shall be mailed by
Good Ideas or its transfer agent to the Good Ideas Minority Stockholders
as soon after such effective date as is reasonably possible. Subsequent
thereto Good Ideas shall transmit to the Good Ideas Minority
Stockholders such amended and/or supplemental consent solicitation
materials as may be necessary, in light of subsequent developments or
otherwise, to render the Consent Solicitation StatementProspectus, as so
amended or supplemented, not false or misleading with respect to any
material fact and so as not to omit to state any information necessary
to make the statements made, within the context made, not misleading.
Prior to the Effective Date (or earlier termination of this Agreement)
neither party hereto shall distribute any material (other than the
Consent Solicitation Statement-Prospectus as herein provided) which
might constitute, or be deemed to constitute, a "prospectus" relating to
the Merger within the meaning of the Securities Act without the prior
written consent of all of the parties hereto in each instance.
(c) Good Ideas hereby authorizes the utilization by SAT in the
Registration Statement or in any filing with a state securities
administrator of all information concerning Good Ideas either provided
to SAT by Good Ideas in connection with or contained in the Consent
Solicitation Statement-Prospectus and/or contained in any filings
heretofore made by Good Ideas pursuant to the Securities Act and/or the
Exchange Act. Good Ideas shall promptly advise SAT if at any time any of
such information or material is or becomes incorrect, inaccurate or
incomplete in any material respect and, in connection therewith, Good
Ideas shall provide SAT with such information and material as shall be
needed to correct any such inaccuracy or omission. SAT shall promptly
advise Good Ideas if at any time any of the information or material
contained in the Registration Statement and supplied by SAT is or
becomes incorrect, inaccurate or incomplete in any material respect. SAT
shall cause the preparation, review, clearance, approval and
distribution of such amended or supplemented material as shall be
necessary to correct or eliminate any such inaccuracies and/or omissions
as provided in this Section 11(c).
(d) Each of SAT and Good Ideas covenants and warrants to the other
that any and all information and/or material supplied by it to the other
and/or in connection with the Registration Statement and/or the within
transactions (i) will, at the time made and at each Relevant Date (as
hereinafter defined), be true and correct in all material respects; (ii)
will comply in all material respects with the requirements of the
Securities Act and the Exchange Act and the rules and regulations
promulgated thereunder by the SEC; and (iii) will not contain any
statement which, at the time made and at each Relevant Date and in light
of the circumstances under which it is made,
A-6
<PAGE> 192
is false or misleading with respect to any material fact, or which omits
to state any material fact necessary in order to make the statements
therein made not false or misleading. For the purposes of this
Agreement, the term "Relevant Date" shall be and mean each of (x) the
effective date of the Registration Statement, (y) the mailing date of
the Consent Solicitation Statement-Prospectus and (z) the Effective
Date. Each of SAT and Good Ideas specifically agrees to indemnify and
hold harmless the other (and their respective officers, directors,
employees, agents and representatives) from and against any and all
costs, expenses, losses, demands, claims and liabilities of every kind,
nature and description (including reasonable attorneys' fees) arising
out of, or relating to, any breach or anticipatory breach by it of its
duties and obligations pursuant to this Section 11(d).
(e) SAT does hereby agree to indemnify and hold harmless Good Ideas
and each of its directors and officers, and each person, if any, other
than SAT who controls Good Ideas within the meaning of Section 15 of the
Securities Act, from and against any and all losses, claims, damages,
expenses or liabilities, joint or several (including, without
limitation, reasonable attorneys' fees as herein provided), to which
they or any of them may become subject under the Securities Act, any
other statute, common law or otherwise and, except as provided below,
shall reimburse Good Ideas and each such director, officer or
controlling person for any legal or other expenses reasonably incurred
by them or any of them in connection with investigating or defending any
actions and/or claims, whether or not resulting in any liability,
insofar as such losses, claims, damages, expenses, liabilities or
actions result from a breach or alleged breach of the representations
and warranties contained in Sections 13 or 14 hereof or are based upon
any untrue statement of alleged untrue statement of a material fact
contained in the Registration Statement or the Consent
Solicitation/Prospectus or arise out of, or are based upon, the omission
or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not
misleading, but only insofar as any such untrue statement or omission or
alleged untrue statement or omission is with respect to the description
of SAT or as to the terms of its offer. Promptly after receipt by a
party to be indemnified pursuant to this Section 11(e) (the
"Indemnitee") of notice of the commencement of any action in respect of
which indemnity may be sought against SAT hereunder, the Indemnitee will
promptly notify SAT in writing of the commencement thereof and SAT
shall, subject to the provisions stated below, assume the defense of the
action (including the employment of counsel, who shall be counsel
reasonable satisfactory to Good Ideas), and shall make payment of
expenses (including attorneys' fees as herein provided) insofar as such
action shall relate to any alleged liability in respect of which
indemnity may be sought against SAT. The Indemnitee or Indemnitees shall
have the right to employ separate counsel in any such action and to
participate in the defense thereof, but the fees and expenses of such
separate counsel shall not be at the expense of SAT unless the
employment of such separate counsel has been specifically authorized by
SAT or there is a conflict of interest which under the canon of ethics
requires the employment of separate counsel. SAT shall not be liable to
any Indemnitee for any settlement of any action effected without SAT's
consent. Notwithstanding any provision of this Agreement to the
contrary, the obligations of SAT hereunder shall survive the
consummation of the transactions contemplated by this Agreement.
12. GOOD IDEAS REPRESENTATIONS AND WARRANTIES. In order to induce
SAT and Acquisition Corp. to execute and perform this Agreement, Good Ideas
does hereby represent, warrant, covenant and agree (which representations,
warranties, covenants and agreements shall be, and be deemed to be,
continuing and survive the execution and delivery of this Agreement, the
Closing and the Effective Date) as follows:
(a) Good Ideas is a corporation duly organized, validly existing
and in good standing under the laws of the State of Delaware, with full
power and authority, corporate and otherwise, and with all licenses,
permits, certifications, registrations, approvals, consents and
franchises necessary to own or lease and operate its properties and to
conduct its business as presently being conducted.
(b) Subject only to the consent of its stockholders as required by
the GCL: (i) Good Ideas has the full power and authority, corporate and
otherwise, to execute, deliver and perform this Agreement and to
consummate the transactions contemplated hereby; (ii) the execution,
delivery and performance of this Agreement, the consummation by Good
Ideas of the transactions herein
A-7
<PAGE> 193
contemplated and the compliance by Good Ideas with the terms of this
Agreement have been duly authorized by Good Ideas; (iii) this Agreement
is the valid and binding obligation of Good Ideas, enforceable in
accordance with its terms, subject, as to enforcement of remedies, to
applicable bankruptcy, insolvency, reorganization, moratorium and other
laws affecting the rights of creditors generally and the discretion of
courts in granting equitable remedies; (iv) the execution, delivery and
performance of this Agreement by Good Ideas and the consummation by Good
Ideas of the transactions herein contemplated do not, and will not, with
or without the giving of notice or the lapse of time, or both, (A)
result in any violation of the Certificate of Incorporation or By-Laws
of Good Ideas or (B) result in a breach of, or a conflict with, any of
the terms or provisions of, or constitute a default under, or result in
the modification or termination of, or result in the creation or
imposition of any lien, security interest, charge or encumbrance upon
any of the properties or assets of Good Ideas pursuant to, any
indenture, mortgage, note, contract, commitment or other agreement or
instrument to which Good Ideas is a party or by which it is, or any of
its respective properties or assets are, or may be, bound or affected.
13. SAT REPRESENTATIONS AND WARRANTIES. In order to induce Good
Ideas to execute and perform this Agreement, SAT does hereby represent,
warrant, covenant and agree (which representations, warranties, covenants
and agreements shall be, and be deemed to be, continuing and survive the
execution and delivery of this Agreement, the Closing and the Effective
Date) as follows:
(a) SAT is a corporation duly organized, validly existing and in
standing under the laws of the State of Delaware, with full power and
authority, corporate and otherwise, and with all licenses, permits,
certifications, registrations, approvals, consents and franchises
necessary to own or lease and operate its properties and to conduct its
business as presently being conducted. SAT is duly qualified to do
business as a foreign corporation, and is in good standing, in all
jurisdictions, if any, wherein such qualification is necessary and where
failure so to qualify would have a material adverse effect on the
business, properties or financial conditions of SAT. SAT has no
subsidiaries other than as set forth on Exhibit "B" annexed hereto and
made a part hereof (the "Subsidiaries"). SAT owns and has and marketable
title in and to 100% of the issued and outstanding capital stock (of all
classes) of each of the Subsidiaries, free and clear of all liens,
security interests, claims and encumbrances and rights and options of
others, except as set forth on Exhibit "B".
(b) Each of the Subsidiaries (other than Good Ideas as to which SAT
makes no representation) is a corporation duly organized, validly
existing and in good standing under the laws of the state of its
incorporation, with full power and authority, corporate and otherwise,
and with all licenses, permits, certifications, registrations,
approvals, consents and franchises necessary to own or lease and operate
its properties and to conduct its business as presently being conducted.
Each such Subsidiary is duly qualified to do business as a foreign
corporation, and is in good standing, in all jurisdictions, if any,
wherein such qualification is necessary and where failure so to qualify
would have a material adverse effect on the business, properties or
finances of such Subsidiary.
(c) (i) SAT has the full power and authority, corporate and
otherwise, to execute, deliver and perform this Agreement and to
consummate the transactions contemplated hereby; (ii) the execution,
delivery and performance of this Agreement, the consummation by SAT of
the transactions herein contemplated and the compliance by SAT with the
terms of this Agreement have been duly authorized by SAT; (iii) this
Agreement is the valid and binding obligation of SAT, enforceable in
accordance with its terms, subject, as to enforcement of remedies, to
applicable bankruptcy, insolvency, reorganization, moratorium and other
laws affecting the rights of creditors generally and the discretion of
courts in granting equitable remedies; (iv) the execution, delivery and
performance of this Agreement by SAT and the consummation by SAT of the
transactions herein contemplated do not, and will not, with or without
the giving of notice or the lapse of time, or both, (A) result in any
violation of the Certificate of Incorporation (except possibly as
indicated in Section 16(g) hereof) or By-Laws of SAT, (B) result in a
breach of, or a conflict with, any of the terms or provisions of, or
constitute a default under, or result in the modification or termination
of, or result in the creation or imposition of any lien, security
interest, charge or encumbrance upon any of
A-8
<PAGE> 194
the properties or assets of SAT pursuant to, any indenture, mortgage,
note, contract, commitment or other agreement or instrument to which SAT
is a party or by which it is, or any of its respective properties or
assets are, or may be, bound or affected; (C) to the best knowledge of
SAT, after due investigation, violate any existing applicable law, rule,
regulation, judgment, order or decree of any governmental agency or
court, domestic or foreign, having jurisdiction over SAT and/or any of
the Subsidiaries (other than Good Ideas as to which SAT makes no
representation), or any of their respective properties or businesses; or
(D) have any effect on any license, permit, certification, registration,
approval, consent or other authorization necessary for SAT and/or any of
the Subsidiaries (other than Good Ideas as to which SAT makes no
representation) to own or lease and operate any of its respective
properties and to conduct its businesses or the ability of SAT and/or
any of the Subsidiaries (other than Good Ideas as to which SAT makes no
representation) to make use thereof. No consent, approval, authorization
or order of any court, governmental agency, authority or body (other
than as required pursuant to the Securities Act, the Exchange Act and/or
state securities or "take over" statutes and the rules and regulations
promulgated under any of the foregoing and/or any party to an agreement
to which SAT is a party and/or by which it is bound) is required in
connection with the execution, delivery and performance of this
Agreement and/or the consummation by SAT of the transactions
contemplated by this Agreement.
(d) Neither SAT nor any of the Subsidiaries (other than Good Ideas
as to which SAT makes no representation) is in violation of, or in
default under, (i) any term or provision of its Certificate of
Incorporation or By-Laws; (ii) any material term or provision of any
financial covenant of any indenture, mortgage, contract, commitment or
other agreement or instrument to which it is a party or by which it or
any or its properties or business is, or may be, bound or affected; or
(iii) any existing applicable law, rule, regulation, judgment, order or
decree of any governmental agency or court, domestic or foreign, having
jurisdiction over it or any of its properties or business, including,
without limitation, all reporting obligations pursuant to the Exchange
Act and the rules and regulations promulgated thereunder. SAT and each
Subsidiary (other than Good Ideas as to which SAT makes no
representation) owns, possesses or has obtained all governmental and
other licenses, permits, certifications, registrations, approvals or
consents and other authorizations necessary to own or lease, as the case
may be, and to operate its properties and to conduct its business or
operations as presently conducted and all such governmental and other
licenses, permits, certifications, registrations, approvals, consents
and other authorizations are outstanding and in good standing and there
are no proceedings pending or, to the best of its knowledge, threatened
or any basis therefor existing, seeking to cancel, terminate or limit
such licenses, permits, certifications, registrations, approvals or
consents or authorizations.
(e) Prior to the date hereof SAT has delivered to Good Ideas the
audited consolidated financial statements (the "SAT Audited Financial
Statements") and unaudited interim financial statements (the "SAT
Interim Financial Statements") described on Exhibit "C" annexed hereto
and made a part hereof (collectively the "SAT Financial Statements). The
SAT Audited Financial Statements fairly present the financial position
of SAT and the Subsidiaries as of the respective dates thereof and the
results of operations, and the changes in financial position of SAT and
the Subsidiaries, for each of the periods covered thereby. The SAT
Audited Financial Statements have been prepared in conformity with
generally accepted accounting principles, applied on a consistent basis
throughout the entire periods involved. The SAT Unaudited Financial
Statements have been prepared in accordance with generally accepted
accounting principles for interim financial information and the
instructions to Form 10-Q and Item 310 of Regulation S-K of the SEC.
Accordingly, the interim financial statements may not include all of the
information and footnotes required by generally accepted accounting
principles. In the opinion of SAT's management, all adjustments
(consisting of normal recurring adjustments) considered necessary for a
fair presentation have been included. As of the date of any balance
sheet forming a part of the SAT Financial Statements and, except as and
to the extent reflected or reserved against therein, neither SAT nor any
of the Subsidiaries (other than Good Ideas as to which SAT makes no
representation) had any material liabilities, debts, obligations or
claims (absolute or contingent) asserted against it or them and/or
A-9
<PAGE> 195
which should have been reflected in a balance sheet or the notes
thereto; and all assets reflected thereon are properly reported and
present fairly the value of the assets therein stated in accordance with
generally accepted accounting principles.
(f) The financial and other books and records of SAT and each of
the Subsidiaries (other than Good Ideas as to which SAT makes no
representation) are in all material respects true, complete and correct
and have, at all times, been maintained in accordance with good business
and accounting practices.
(g) SAT and the Subsidiaries (other than Good Ideas as to which SAT
makes no representation) own and have good and marketable title in and
to all of their respective assets, properties and interests in
properties (both real and personal) which are reflected in the latest
balance sheet included in the SAT Financial Statements and/or are
utilized in connection with the operation of the business of SAT and
such Subsidiaries as presently constituted and/or acquired after that
date (except to the extent any of the same were disposed of since such
date in the ordinary course of business), in all cases free and clear of
all liens, security interests, claims and encumbrances of every kind,
nature and description and rights and options of others except as
expressly set forth in such balance sheet.
(h) Except as is set forth on Exhibit "D" hereto, SAT and the
Subsidiaries (other than Good Ideas as to which SAT makes no
representation) own all trademarks, service marks, tradenames,
copyrights, similar rights and their registrations, trade secrets,
methods, practices, systems, ideas, know how and confidential materials
used or proposed to be used in the conduct of their respective
businesses as conducted as of the date hereof (collectively the
"Intangibles") free and clear of all liens, security interests, claims
and encumbrances and rights and options of third parties (including,
without limitation, former or current officers, directors, stockholders,
employees and agents); neither SAT nor any such Subsidiary has licensed
or leased any of the Intangibles and/or any interest therein to any
person and/or entity except a Subsidiary; neither SAT nor any such
Subsidiary has infringed, nor is infringing, upon the rights of others
with respect to the Intangibles; neither SAT nor any such Subsidiary has
received any notice of conflict with the asserted rights of others with
respect to the Intangibles which could, singly or in the aggregate,
materially adversely affect its business as currently conducted or
prospects, financial condition or results of operations and SAT knows of
no basis therefor; and, to the best of the knowledge of SAT, no others
have infringed upon the Intangibles.
(i) Except as and to the extent reflected or reserved against in
the SAT Financial Statements and/or as set forth on Exhibit "E" annexed
hereto and made a part hereof, neither SAT nor any of the Subsidiaries
(other than Good Ideas as to which SAT makes no representation) had, as
at the respective date of such SAT Financial Statements, any material
liabilities, debts, obligations or claims asserted against it, whether
accrued, absolute, contingent or otherwise, and whether due or to become
due, including, but not limited to, liabilities on account of due and
unpaid taxes, other governmental charges or lawsuits.
(j) Since the date of the most recent balance sheet included in the
SAT Financial Statements, neither SAT nor any Subsidiary (other than
Good Ideas as to which SAT makes no representation) has, except as set
forth on Exhibit "F" annexed hereto and made a part hereof, (i) incurred
any obligation or liability (absolute or contingent, secured or
unsecured) except obligations and liabilities incurred in the ordinary
course of the operation of its business as carried on at and prior to
such date; (ii) canceled, without payment in full, any notes, loans or
other obligations receivable or other debts or claims held by it other
than in the ordinary course of business; (iii) sold, assigned,
transferred, abandoned, mortgaged, pledged or subjected to lien or
security interest any of its material properties, tangible or
intangible, or rights under any contract, permit, license, franchise or
other agreement other than sales or other dispositions of goods or
services in the ordinary course of business at customary prices; (iv)
entered into any line of business other than that conducted by it on
such date or entered into any transaction not in the ordinary course of
its business; (v) conducted
A-10
<PAGE> 196
any line of business in any manner except by transactions customary in
the operation of its business as conducted on such date; or (vi)
declared, made or paid, or set aside for payment, any cash or non-cash
dividends or other distribution on any shares of its capital stock.
(k) Except as set forth on Exhibit "G" annexed hereto and made a
part hereof, neither SAT nor any of the Subsidiaries (other than Good
Ideas as to which SAT makes no representation) is in default, in any
material respect, under the terms of any outstanding agreement which is
material to the business, operations, properties, assets or condition of
SAT and/or the Subsidiaries (other than Good Ideas as to which SAT makes
no representation); and there exists no event of default or event which,
with notice and/or the passage of time, or both, would constitute any
such default.
(l) Except as reported in the SAT Financial Statements and/or as
set forth on Exhibit "H" hereto and made a part hereof, there are no
claims, actions, suits, proceedings, arbitrations, investigations or
inquiries before any court or governmental agency, court or tribunal,
domestic, or foreign, or before any private arbitration tribunal,
pending or, to the best of the knowledge of SAT, threatened against SAT
and/or any Subsidiary (other than Good Ideas as to which SAT makes no
representation) or involving their respective properties or businesses
which, if determined adversely to SAT or such Subsidiary, would,
individually or in the aggregate, result in a material adverse change in
the financial position, stockholders' equity, results of operations,
properties, business, management or affairs of SAT or such Subsidiary,
or which question the validity of this Agreement or of any action taken,
or to be taken, by SAT pursuant to, or in connection with, this
Agreement; nor, to the best of the knowledge of SAT, is there any basis
for any such claim, action, suit, proceeding, arbitration, investigation
or inquiry to be made by any person and/or entity, including, without
limitation, any customer, supplier, lender, stockholder, former or
current employee, agent or landlord. There are no outstanding orders,
judgments or decrees of any court, governmental agency or other tribunal
specifically naming SAT and/or any Subsidiary (other than Good Ideas as
to which SAT makes no representation) and/or enjoining SAT and/or any
such Subsidiary from taking, or requiring SAT and/or any such Subsidiary
to take, any action and/or by which SAT and/or any such Subsidiary is,
and/or their respective properties or businesses are, bound or subject.
(m) SAT and each of the Subsidiaries (other than Good Ideas as to
which SAT makes no representation) has filed all federal, state,
municipal and local tax returns (whether relating to income, sales,
franchise, withholding, real or personal property or otherwise) required
to be filed under the laws of the United States and all applicable
states and has paid in full all taxes which are due pursuant to such
returns or claimed to be due by any taxing authority or otherwise due
and owing. No penalties or other charges are, or will become, due with
respect to the late filing of any such return. To the best of the
knowledge of SAT, after due investigation, each such tax return
heretofore filed by SAT and each of such Subsidiaries correctly and
accurately reflects the amount of its tax liability thereunder. SAT has
withheld, collected and paid all other levies, assessments, license fees
and taxes to the extent required and, with respect to payments, to the
extent that the same have become due and payable.
(n) The authorized and outstanding capitalization of SAT is as set
forth on Exhibit "I" annexed hereto and made a part hereof; as of the
date hereof and the Closing Date, there shall not be authorized and/or
issued and outstanding any shares of capital stock of SAT and/or rights
to purchase shares of capital stock of SAT except as set forth on
Exhibit "I" or upon the exercise of outstanding warrants or the
conversion of outstanding shares of preferred stock or convertible
notes. The issued and outstanding shares of the SAT Common Stock and
outstanding options, warrants and other similar rights to purchase or
convert into the SAT Common Stock have been duly authorized and validly
issued. All such outstanding shares of the SAT Common Stock are fully
paid and nonassessable. All such outstanding warrants and similar rights
to purchase or convert into the SAT Common Stock constitute the valid
and binding obligations of SAT, enforceable in accordance with their
respective terms, subject, as to enforcement of remedies, to applicable
bankruptcy, insolvency, reorganization, moratorium and other laws
affecting the rights of creditors generally and the discretion of courts
in granting equitable remedies. There are no preemptive rights. SAT has
no
A-11
<PAGE> 197
reason to believe that any holder of such outstanding shares of the SAT
Common Stock is subject to personal liability solely by reason of being
such a holder. The offers and sales of such outstanding shares of the
SAT Common Stock and outstanding warrants and similar rights to purchase
or convert into the SAT Common Stock were, at all relevant times, either
registered under the applicable provisions of the Securities Act and the
applicable state securities laws or exempt from such registration or
prospectus filing requirements pursuant to an exemption for which SAT
and/or such offering or sale fully qualified, or any claim arising out
of, or relating to, any such offering and/or sale are barred by the
statute of limitations. The authorized shares of the SAT Common Stock
and outstanding warrants and similar rights to purchase or convert into
the SAT Common Stock conform to the description thereof contained in the
current filings by SAT pursuant to the Exchange Act. No dividends or
other distributions of the assets of SAT have been or will be declared
and/or paid prior to the Closing Date on or with respect to the SAT
Common Stock.
(o) Except as is set forth on Exhibit "J" hereto, since the date of
the most recent balance sheet included in the SAT Financial Statements,
there has not been, with respect to SAT and/or the Subsidiaries (other
than Good Ideas as to which SAT makes no representation), except as set
forth in or permitted by this Agreement, or, in the ordinary course of
business:
(i) Any change in their respective business, operations or
financial condition, or the manner of managing or conducting their
respective business and operations; none of which changes, if any,
has had a material adverse effect on such business, operations or
financial condition, taken as a whole;
(ii) Any change in their respective accounting methods or
practices (including, without limitation, any change in depreciation,
amortization and/or good will policies or rates);
(iii) Any damage, destruction or loss (whether or not covered by
insurance) materially and adversely affecting their respective
assets, business, operations or financial condition;
(iv) Any declaration, setting, or payment of a dividend or other
distribution with respect to the SAT Common Stock or any direct or
indirect redemption, purchase or other acquisition by SAT of any of
the shares of the SAT Common Stock;
(v) Any issuance or sale of any shares of their respective
capital stock of any class or any other securities, except for the
exercise of warrants to purchase shares of the SAT Common Stock
outstanding prior to the date hereof;
(vi) Any loan by any of them to any person or entity and/or the
issuance of any guaranty by any of them for or with respect to their
own or another's obligations;
(vii) Any waiver or release of any material right or claim;
(viii) Any sale, lease, abandonment, assignment, transfer,
license or other disposition (including any agreement and/or option
for, or with respect to, any of the foregoing) by any of them of any
material real property or tangible or intangible assets, property or
rights (and/or interest therein);
(ix) Any incurrence of any material obligation or liability,
absolute or contingent;
(x) Any payment of any material obligation or liability,
absolute or contingent, except for current liabilities reflected in,
or shown on, the SAT Financial Statements and/or incurred subsequent
to the date thereof in the ordinary course of business and/or in
connection with the transactions contemplated by this Agreement;
(xi) Any labor problems and/or other events or conditions of any
character materially and/or adversely affecting, or which might
materially and/or adversely affect, the financial condition,
business, assets or prospects of any of them;
A-12
<PAGE> 198
(xii) Any amendment, termination or modification of any material
agreement or license to which any of them is a party which has or may
have a material affect on the financial condition, business, assets
or prospects of any of them; and
(xiii) Any agreement by any of them to do or perform any of the
things described in this Section 13(o).
(p) At the Closing, all of the shares of the SAT Common Stock to be
issued by SAT pursuant to this Agreement shall be, and be deemed to be,
duly and validly authorized and, when issued to the Good Ideas Minority
Stockholders in exchange for their shares of the Good Ideas Common
Stock, duly and validly issued, fully paid and nonassessable and free
and clear of all federal and state issuance, stock and/or company taxes,
liens, claims, encumbrances and charges.
14. ACQUISITION CORP. REPRESENTATIONS AND WARRANTIES. In order to
induce Good Ideas to execute and perform this Agreement, Acquisition Corp.
does hereby represent, warrant, covenant and agree (which representations,
warranties, covenants and agreements shall be, and be deemed to be,
continuing and survive the execution and delivery of this Agreement, the
Closing and the Effective Date) as follows:
(a) Acquisition Corp. is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware,
with full power and authority, corporate and otherwise, and with all
licenses, permits, certifications, registrations, approvals, consents
and franchises necessary to own or lease and operate its properties and
to conduct its business as presently being conducted. Neither prior to
the date hereof has Acquisition Corp. engaged, nor prior to the Closing
Date will Acquisition Corp. engage, in any business activity of any kind
nature or description except in connection with the implementation of
the transactions herein described. Acquisition Corp. has no
subsidiaries, nor, at the present time is it, or at the Closing will it
be, a partner or joint venturer with any other person or entity.
(b) (i) Acquisition Corp. has the full power and authority,
corporate and otherwise, to execute, deliver and perform this Agreement
and to consummate the transactions contemplated hereby; (ii) the
execution, delivery and performance of this Agreement, the consummation
by Acquisition Corp. of the transactions herein contemplated and the
compliance by Acquisition Corp. with the terms of this Agreement have
been duly authorized by Acquisition Corp.; (iii) this Agreement is the
valid and binding obligation of Acquisition Corp., enforceable in
accordance with its terms, subject, as to enforcement of remedies, to
applicable bankruptcy, insolvency, reorganization, moratorium and other
laws affecting the rights of creditors generally and the discretion of
courts in granting equitable remedies; (iv) the execution, delivery and
performance of this Agreement Corp. by Acquisition Corp. and the
consummation by Acquisition Corp. of the transactions herein
contemplated do not, and will not, with or without the giving of notice
or the lapse of time, or both, (A) result in any violation of the
Certificate of Incorporation or By-Laws of Acquisition, (B) result in a
breach of, or a conflict with, any of the terms or provisions of, or
constitute a default under, or result in the modification or termination
of, or result in the creation or imposition of any lien, security
interest, charge or encumbrance upon any of the properties or assets of
Acquisition Corp. pursuant to, any indenture, mortgage, note, contract,
commitment or other agreement or instrument to which Acquisition Corp.
is a party or by which it is, or any of its respective properties or
assets are, or may be, bound or affected; or (C) to the best knowledge
of Acquisition, after due investigation, violate any existing applicable
law, rule, regulation, judgment, order or decree of any governmental
agency or court, domestic or foreign, having jurisdiction over
Acquisition Corp. or its assets. No consent, approval, authorization or
order of any court, governmental agency, authority or body (other than
as required pursuant to the Securities Act, the Exchange Act and/or
state securities or "take over" statutes and/or any party to an
agreement to which Acquisition Corp. is a party and/or by which it is
bound, is required in connection with the execution, delivery and
performance of this Agreement, and/or the consummation by Acquisition
Corp. of the transactions contemplated by this Agreement.
A-13
<PAGE> 199
(c) Acquisition is not in violation of, or in default under, (i)
any term or provision of its Certificate of Incorporation or By-Laws;
(ii) any material term or provision of any financial covenant of any
indenture, mortgage, contract, commitment or other agreement or
instrument to which it is a party or by which it or any or its
properties is, or may be, bound or affected; or (iii) any existing
applicable law, rule, regulation, judgment, order or decree of any
governmental agency or court, domestic or foreign, having jurisdiction
over it or any of its assets.
(d) Acquisition was incorporated on December 18, 1995 and its sole
asset is the $1,000 which SAT paid in subscription for 100 shares of its
authorized 1,500 shares of common stock, without par value, and it has
incurred no liabilities other than its incorporation costs. Prior to the
date hereof, Acquisition Corp. has conducted no business operations and,
prior to the Effective Date, its sole activities will be in connection
with the transactions contemplated by this Agreement.
(e) The financial and other books and records of Acquisition Corp.
are in all material respects true, complete and correct and have, at all
times, been maintained in accordance with good business and accounting
practices.
(f) Except as set forth on Exhibit "K" hereto and made a part
hereof, there are no claims, actions, suits, proceedings, arbitrations,
investigations or inquiries before any court or governmental agency,
court or tribunal, domestic, or foreign, or before any private
arbitration tribunal, pending or, to the best of the knowledge of
Acquisition, threatened against Acquisition Corp. or involving its
assets which, if determined adversely to Acquisition, would,
individually or in the aggregate, result in a material adverse change in
the financial position, stockholders' equity, results of operations,
properties, business, management or affairs of Acquisition, or which
question the validity of this Agreement or of any action taken or to be
taken by Acquisition Corp. pursuant to, or in connection with, this
Agreement; nor, to the best of the knowledge of Acquisition, is there
any basis for any such claim, action, suit, proceeding, arbitration,
investigation or inquiry to be made by any person and/or entity. There
are no outstanding orders, judgments or decrees of any court,
governmental agency or other tribunal specifically naming Acquisition
Corp. and/or enjoining Acquisition from taking, or requiring Acquisition
Corp. to take, any action, and/or by which Acquisition Corp. is, and/or
its assets are, bound or subject.
15. GOOD IDEAS COVENANTS, Good Ideas shall, during the period
commencing on the date hereof and terminating immediately following the
close of business on the Effective Date (or earlier, upon the failure or
refusal of the Good Ideas Minority Stockholders to approve this Agreement
and/or the termination of this Agreement as herein provided):
(a) Take and perform any and all actions necessary to render
accurate, and/or maintain the accuracy of, all of the representations
and warranties of Good Ideas herein contained and/or satisfy each
covenant or condition required to be performed or satisfied by Good
Ideas at or prior to the Closing and/or to cause or permit the
implementation of the Merger;
(b) Not take or perform any action which would or might cause any
representation or warranty made by Good Ideas herein to be rendered
inaccurate, in whole or in part, and/or which would prevent, inhibit or
preclude the satisfaction, in whole or in part, of any covenant required
to be performed or satisfied by Good Ideas at or prior to the Closing
and/or the implementation of the Merger;
(c) Not make, or permit to be made on its behalf, any announcement
to the public in general and/or within its industry and/or otherwise
with respect to this Agreement, the Merger and the current or future
business or operations of any party hereto without the prior written
consent of SAT or, in the case of an announcement required by applicable
securities laws, prior consultation with SAT; and
(d) Immediately advise SAT of any event, condition or occurrence
which constitutes, or may, with the passage of time and/or giving of
notice, constitute, a breach of any representation or warranty of Good
Ideas herein contained and/or which prevents, inhibits or limits or may
prevent,
A-14
<PAGE> 200
inhibit or limit Good Ideas from satisfying, in full and on a timely
basis, any covenant, term or condition herein contained and/or
implementing this Agreement; and
(e) Extend the terms of the notes due from SAT to Good Ideas, if
and only if the consent solicitation for the Merger is still in progress
on April 30, 1997, to the earlier of (i) five business days after the
results of the solicitation are known and the results are that the
Merger has not been approved or (ii) the Effective Date.
16. SAT COVENANTS. SAT shall, during the period commencing on the
date hereof and terminating immediately following the close of business on
the Effective Date (or earlier, upon the failure or refusal of the Good
Ideas Minority Stockholders to approve this Agreement and/or the
termination of this Agreement as herein provided):
(a) Take and perform any and all actions necessary to render
accurate, and/or maintain the accuracy of, all of the representations
and warranties of SAT herein contained and/or satisfy each covenant or
condition required to be performed or satisfied by SAT at or prior to
the Closing and/or to cause or permit the implementation of the Merger;
(b) Not take or perform any action which would or might cause any
representation or warranty made by SAT herein to be rendered inaccurate,
in whole or in part, and/or which would prevent, inhibit or preclude the
satisfaction, in whole or in part, of any covenant required to be
performed or satisfied by SAT at or prior to the Closing and/or the
implementation of the Merger;
(c) Carry on and maintain its business in substantially the same
form, style and manner as heretofore operated by it; perform, in all
material respects, all of its obligations under all material agreements,
leases and documents relating to or affecting its assets, properties and
business; and use its best efforts to preserve intact its business
organization and the good will and relationships with its suppliers,
customers and others having business relations with it;
(d) Not make any announcement to the public in general and/or
within its industry and/or otherwise with respect to this Agreement, the
Merger and the current or future business or operations of any party
hereto without the prior written consent of Good Ideas or, in the case
of an announcement required by applicable securities laws, prior
consultation with Good Ideas; and
(e) Immediately advise Good Ideas of any event, condition or
occurrence which constitutes, or may, with the passage of time and/or
giving of notice, constitute, a breach of any representation or warranty
of SAT herein contained and/or which prevents, inhibits or limits or may
prevent, inhibit or limit SAT from satisfying, in full and on a timely
basis, any covenant, term or condition herein contained and/or
implementing this Agreement.
(f) Subject to Good Ideas' compliance with its obligations under
Section 11 hereof, use its best efforts to have the Registration
Statement declared effective under the Securities Act; and
(g) Call a Special Meeting of Stockholders to approve an amendment
to SAT's Certificate of Incorporation to increase the authorized shares
of the SAT Common Stock in an amount sufficient to permit the Merger,
the merger of U.S. Drug Testing with and into U.S. Drug Acquisition
Corp., the conversion of all outstanding convertible notes and shares of
the preferred stock and the exercise of all outstanding warrants.
17. SAT AND ACQUISITION CORP. CONDITIONS PRECEDENT. The obligations
of SAT and Acquisition to implement this Agreement and consummate the
Merger are, at their respective elections, subject to, and conditioned
upon, the satisfaction (and/or waiver except as to Section 17(a), (b) and
(g)) of each of the following conditions:
(a) Prior to the Closing Date the holders of more than 50% of the
shares of the Good Ideas Common Stock owned by the Good Ideas Minority
Stockholders shall have adopted this Agreement by consenting to the
adoption of this Agreement pursuant to the Consent Solicitation
Statement-Prospectus.
A-15
<PAGE> 201
(b) The Registration Statement shall have been declared effective
by the SEC and all appropriate state securities administrators and no
"stop orders" shall have been issued and/or be in effect or a proceeding
for such purpose shall have been instituted and be pending.
(c) The representations and warranties of Good Ideas contained in
this Agreement shall be true and correct in all respects as of the
Effective Date with the same effect as if made on and as of the
Effective Date and Good Ideas shall have performed in all material
respects all of its covenants and obligations contemplated hereunder to
be performed on or prior to the Effective Date. At the Closing, SAT
shall have received a certificate, executed by the President and the
Secretary of Good Ideas (effective as of the Closing and the Effective
Date) and in form reasonably acceptable to SAT, certifying as of both
the date of this Agreement and the Closing Date, the truth and accuracy
of (and the remaking of) the representations and warranties of Good
Ideas herein contained, including, without limitation, those set forth
in Section 12 hereof.
(d) Prior to the Closing, all corporate and other proceedings in
connection with the transactions contemplated by this Agreement and all
documents and instruments incident to such transactions shall be in form
and content reasonably satisfactory to SAT and its counsel and SAT and
its counsel shall have received all counterpart originals or certified
or other copies of such documents and instruments as they may reasonably
request.
(e) No action or proceeding shall have been instituted and be
pending by any private party and/or governmental agency or authority
challenging the legality of this Agreement or the Merger and/or seeking
to prevent or delay consummation of the transactions herein
contemplated, which action or proceeding shall have resulted in an order
granting preliminary or permanent injunctive relief prohibiting
consummation of this Agreement and/or the Merger and which order shall
not have been vacated as of the Closing.
(f) All statutory requirements for the valid consummation by Good
Ideas of the transactions herein described shall have been fully and
timely satisfied; all authorizations, consents and approvals of all
Federal, state and local governmental agencies and authorities required
to be obtained in order to permit consummation by Good Ideas of the
transactions herein described and/or to permit the businesses currently
carried on by Good Ideas to continue unimpaired in all material respects
immediately following the Effective Date shall have been obtained and
shall be in full force and effect; and no action or proceeding to
suspend, revoke, cancel, terminate, modify or alter any of such
authorizations, consents or approvals shall be pending or threatened.
(g) Good Ideas shall have received a written opinion from Whale
Securities Co., L.P., satisfactory to SAT in form and content, regarding
the fairness, from a financial point of view, to the Good Ideas Minority
Stockholders of (i) the terms of the Merger and (ii) the agreements
among SAT, Good Ideas and Acquisition Corp. described in this Agreement.
18. GOOD IDEAS CONDITIONS PRECEDENT. The obligation of Good Ideas to
implement this Agreement and consummate the Merger is, at its election,
subject to, and conditioned upon, the satisfaction (and/or waiver except as
to Section 18(a), (c) and (i)) of each of the following conditions:
(a) Prior to the Closing Date the holders of a majority of the
shares of Good Ideas Common owned by the Good Ideas Minority
Stockholders shall have adopted this Agreement by consenting to the
adoption of this Agreement pursuant to the Consent
Solicitation/Prospectus.
(b) Prior to the Closing Date SAT shall have adopted this Agreement
by filing with Good Ideas a consent to its adoption.
(c) The Registration Statement shall have been declared effective
by the SEC and all appropriate state securities administrators and no
"stop orders" shall have been issued and/or be in effect or a proceeding
for such purpose shall have been instituted and be pending.
(d) The representations and warranties of SAT and Acquisition Corp.
contained in this Agreement shall be true and correct in all material
respects as of the Effective Date with the same
A-16
<PAGE> 202
effect as if made on and as of the Effective Date. At the Closing, Good
Ideas shall have received a certificate, executed by the Chairman of the
Board and the Secretary of SAT and Acquisition Corp. (effective as of
the Closing and the Effective Date) and in form and content reasonably
acceptable to Good Ideas, certifying, as to both the date of this
Agreement and the Closing Date the truth and accuracy of (and the
remaking of) the representations and warranties of SAT and Acquisition
Corp. herein contained, including, without limitation, those set forth
in Sections 13 and 14 hereof.
(e) Prior to the Closing, there shall not have occurred any
material adverse change in the financial condition, business or
operations of SAT and the Subsidiaries (excluding Good Ideas) as a
consolidated entity, nor shall any event have occurred or condition
exist which, with the passage of time or the giving of notice, may cause
or create any such adverse material change.
(f) Prior to the Closing, all corporate and other proceedings in
connection with the transactions contemplated by this Agreement and all
documents and instruments incident to such transactions shall be in form
and content reasonably satisfactory to Good Ideas and its counsel and
Good Ideas and its counsel shall have received all counterpart originals
or certified or other copies of such documents and instruments as they
may reasonably request.
(g) No action or proceeding shall have been instituted and be
pending by any private party and/or governmental agency or authority
challenging the legality of this Agreement or the Merger and/or seeking
to prevent or delay consummation of the transactions herein
contemplated, which action or proceeding shall have resulted in an order
granting preliminary or permanent injunctive relief prohibiting
consummation of this Agreement and/or the Merger and which order shall
not have been vacated as of the Closing.
(h) All statutory requirements for the valid consummation by SAT of
the transactions herein described shall have been fully and timely
satisfied; all authorizations, consents and approvals of all Federal,
state and local governmental agencies and authorities required to be
obtained in order to permit consummation by SAT of the transactions
herein described and/or to permit the businesses currently carried on by
SAT to continue unimpaired in all material respects immediately
following the Effective Date shall have been obtained and shall be in
full force and effect; and no action or proceeding to suspend, revoke,
cancel, terminate, modify or alter any of such authorizations, consents
or approvals shall be pending or threatened.
(i) Good Ideas shall have received a written opinion from Whale
Securities Co., L.P., satisfactory to Good Ideas in form and content,
regarding the fairness, from a financial point of view, to the Good
Ideas Minority Stockholders of (i) the terms of the Merger and (ii) the
agreements among SAT, Good Ideas and Acquisition Corp. described in this
Agreement.
19. TERMINATION.
(a) This Agreement may be terminated and the Merger abandoned at
any time prior to the Effective Date, whether before or after submission
to, or approval by, the Good Ideas Minority Stockholders as herein
provided either: (a) by mutual agreement of the Boards of Directors of
Good Ideas and SAT; or (b) by the Board of Directors of either Good
Ideas or SAT if either (i) the Closing shall not have taken place by
September 30, 1997 (other than by reason of the default hereunder by the
terminating party) or (ii) there is any statute, rule or regulation
which makes consummation of the Merger illegal or otherwise prohibited
or any order, decree, injunction or judgment enjoining SAT, Good Ideas
or Acquisition Corp. from consummating the Merger is issued by a court
of competent jurisdiction and such order, decree, injunction or judgment
has become final and non-appealable; or (c) by the Board of Directors of
either SAT or Good Ideas if, based upon the opinion of its outside
counsel, the Board of Directors determines that making a recommendation
to the Good Ideas Minority Stockholders to adopt the Merger Agreement
would reasonably cause the members of such Board of Directors to breach
their fiduciary duties under applicable law to their respective
stockholders.
A-17
<PAGE> 203
(b) If this Agreement shall be terminated and/or the Merger
abandoned pursuant to the provisions of subsection (a) of this Section
19 hereof (other than by reason of the default of any party hereunder),
then and in that event SAT shall bear all of the costs and its special
expenses except for those of Whale Securities Co., L.P. and of special
counsel to Good Ideas and there shall be no liability on the part of any
party hereto (and/or their respective officers, directors, agents and
employees) to any other party hereto (and/or their respective officers,
directors, agents and employees).
20. COSTS AND EXPENSES. SAT shall pay all costs and expenses
relating to the transactions contemplated by this Agreement, including,
without limitation, the costs and expenses relating to the preparation of
this Agreement and the Registration Statement, such as attorneys' fees,
accounting fees, printing expenses and consent solicitation expenses,
except that Good Ideas will pay all costs and expenses of Whale Securities
Co., L.P. and of its special counsel.
21. NOTICES. Any and all notices, requests or instructions desired
to be given by any party hereto to any other party hereto shall be in
writing and shall be either be hand delivered or mailed to the recipient
first class, postage prepaid, certified, return receipt requested at the
following respective addresses:
To: Good Ideas Enterprises, Inc.
10410 Trademark Street
Rancho Cucamonga, California 91730
Attn: President
With a copy to:
Rosenman & Colin LLP
575 Madison Avenue
New York, New York 10022
Attn: Edward H. Cohen, Esq.
To: SAT or Acquisition Corp.
4517 N.W. 31st Avenue
Fort Lauderdale, Florida 33309
Attn: Chairman of the Board
With a copy to:
Gold & Wachtel, LLP
110 East 59th Street
New York, New York 10022
Attn: Robert W. Berend, Esq.
or to such other address as any party hereto shall designate in a writing
complying with the provisions of this Section 21.
22. WAIVER. Each of the parties hereto may, by written instrument, (a)
extend the time for the performance of any of the obligations or other acts of
any party hereto; (b) waive any inaccuracies of such other party in the
representations and warranties contained herein or in any document delivered
pursuant to this Agreement; (c) waive compliance with any of the covenants of
such other party contained in this Agreement; (d) waive such other party's
performance of any of such party's obligations set out in this Agreement; and
(e) waive any condition to its obligation to effect the Merger. Anything in this
Section 22 to the contrary notwithstanding, no party hereto may waive the
requirement that the holders of a majority of the shares of the Good Ideas
Common owned by the Good Ideas Minority Stockholders must consent to the
adoption of this Agreement and the Merger.
23. AMENDMENTS. This Agreement may be amended at any time prior to the
Effective Date (whether before or after the consent of stockholders of Good
Ideas as herein provided) by a writing executed by the
A-18
<PAGE> 204
respective Presidents of SAT, Good Ideas and Acquisition (upon due authorization
by their respective Boards of Directors); provided, however, that after the
satisfaction of the condition set forth in Sections 17(a) and 18(a) in no event
may the amount or the form of the consideration to be received by the holders of
the Good Ideas Minority Stockholders be changed without the approval of the Good
Ideas Minority Stockholders.
24. GOVERNING LAW. This Agreement shall be governed by, and construed in
accordance with, the laws of the State of Delaware applicable to contracts
executed and to be fully performed therein and without regard to principles of
conflicts of laws.
25. EFFECTIVENESS. This Agreement shall inure to the benefit of, and be
binding upon, the parties hereto and any controlling person of any party hereof
as provided in Section 15 of the Securities Act and their respective successors,
transferees, heirs, assigns and beneficiaries.
26. COUNTERPARTS. This Agreement may be executed in multiple copies, each
of which shall constitute an original, but all of which shall constitute one and
the same agreement.
27. PARTIAL INVALIDITY. If any term, covenant or condition in this
Agreement, or the application thereof to any person or circumstance, shall be
invalid or unenforceable, the remainder of this Agreement or the application of
such term, covenant or condition to persons or circumstances, other than those
as to which it is held invalid, shall be unaffected thereby and each term,
covenant or condition of this Agreement shall be enforced to fullest extent
permitted by law.
28. INTEGRATION. This Agreement (including the Exhibits hereto, the
documents and instruments delivered by the parties hereto and any other
documents executed and delivered and/or to be executed and delivered pursuant to
the provisions of this Agreement as herein provided) sets forth the entire
agreement among the parties hereto with respect to the subject matter herein
contained. There are no covenants, promises, agreements, conditions or
understandings, either oral or written, between or among the parties hereto with
respect to the subject matter hereof except as herein and in such ancillary
documents provided. This Agreement can only be altered, amended, modified,
terminated or rescinded by a writing executed by the party to be charged.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement and
Plan of Merger as of the date first above written.
<TABLE>
<S> <C> <C>
ATTEST: SUBSTANCE ABUSE TECHNOLOGIES, INC.
- --------------------------------------------- By:
---------------------------------------------
Secretary Chairman of the Board
GOOD IDEAS ACQUISITION CORP.
- --------------------------------------------- By:
---------------------------------------------
Secretary Chairman of the Board
GOOD IDEAS ENTERPRISES, INC.
- --------------------------------------------- By:
---------------------------------------------
Secretary President
</TABLE>
A-19
<PAGE> 205
APPENDIX B
Draft
March , 1997
The Board of Directors
Good Ideas Enterprises, Inc.
10410 Trademark Street
Rancho Cucamonga, CA 91730
Members of the Board:
You have requested our opinion as investment bankers as to the fairness to
the minority stockholders of Good Ideas Enterprises, Inc. ("Good Ideas"), from a
financial point of view, of the exchange ratio to be offered to the minority
stockholders of Good Ideas under the Agreement and Plan of Merger dated as of
February 17, 1997 (the "Merger Agreement") among Good Ideas, Substance Abuse
Technologies, Inc. ("SAT") and Good Ideas Acquisition Corp., a wholly-owned
subsidiary of SAT ("Acquisition Corp."), pursuant to which Acquisition Corp.
will be merged ("Proposed Merger") with and into Good Ideas with the result that
Good Ideas will become a wholly-owned subsidiary of SAT. As more specifically
set forth in the Merger Agreement, holders of the 1,548,680 issued and
outstanding common stock of Good Ideas, par value $.001 per share ("Good Ideas
Common Stock"), not owned by SAT ("Minority Good Ideas Common Stock"), will
receive 0.36 ("Exchange Ratio") of SAT common stock, par value $.01 per share
("SAT Common Stock"), for each share of Minority Good Ideas Common Stock. Cash
will be paid in the Proposed Merger in lieu of fractional shares of SAT Common
Stock. The terms and conditions of the Proposed Merger are more fully set forth
in the Merger Agreement.
In arriving at our opinion, we have reviewed and considered, among other
things: (i) the Merger Agreement; (ii) Good Ideas' and SAT's Annual Reports and
Forms 10-K for the two fiscal years ended March 31, 1996 and 1995, and Quarterly
Reports on Form 10-Q for the quarterly periods ended June 30, 1996, September
30, 1996 and December 31, 1996; (iii) certain information, including financial
forecasts, relating to the businesses, earnings and prospects of Good Ideas and
SAT, furnished to us by senior management; (iv) the historical market prices and
trading activity for Good Ideas and SAT shares; (v) publicly available
information concerning certain other companies and transactions we consider
relevant to our analysis; and (vi) such other matters as we deemed appropriate.
In addition, we have held discussions with the management of Good Ideas and SAT
for the purpose of reviewing the historical and current operations of such
companies and the business prospects for each.
In conducting our analysis and in arriving at our opinion, we have, with
your consent, relied upon and assumed the accuracy and completeness of the
financial and other information that was publicly available or provided to us
and we have not undertaken to independently verify the same. We have not
prepared or obtained any independent evaluation or appraisal of Good Ideas' or
SAT's assets (including, without limitation, technology) or liabilities. We have
assumed and relied upon the senior management of Good Ideas and SAT as to the
reasonableness and achievability of the financial and operating forecasts
furnished by management (and the assumptions and bases therefor). Our opinion is
necessarily based on economic, market and other conditions as in effect on, and
the information made available to us as of, the date hereof. We have been
retained by the Board of Directors of Good Ideas to act as financial advisor to
Good Ideas only with respect to this fairness opinion. We have not in the past
three years previously acted on behalf of Good Ideas or SAT. We are currently
separately engaged to render a fairness opinion to the Board of Directors of
U.S. Drug Testing, Inc. ("U.S. Drug"), an affiliate of Good Ideas and SAT, for
which we will receive a customary fee. This opinion was prepared by us
independently of such separate opinion relating to U.S. Drug and this opinion
should be evaluated without regard to such other opinion even if the reader is a
stockholder in both subsidiaries of SAT. In addition, this opinion does not
assume that the transaction involving U.S. Drug will be effected either
simultaneously with the transaction described herein or at all. In addition, in
the ordinary course of our securities business, we may actively trade equity
securities of Good Ideas and/or SAT and their affiliates for our own account and
the accounts of customers, and we therefore may from time to time hold a long or
short position in such securities. Our opinion is directed to the Board of
Directors of Good Ideas and
B-1
<PAGE> 206
does not constitute a recommendation to any stockholder of Good Ideas as to how
such a stockholder should on any stockholder vote of Good Ideas held in
connection with the Proposed Merger. SAT Common Stock and Good Ideas Common
Stock had closing prices on today's date of $---- and $---- per share,
respectively. Our findings as to the fairness of the Exchange Ratio assumes a
minimum value of the SAT Common Stock of $1.625 per share. Should the value of
the SAT Common Stock decline below this level between the date hereof and the
closing of the Merger, the holders of the Minority Good Ideas Common Stock will
receive less valuable consideration than the amount contemplated in this
opinion.
On the basis of and subject to the foregoing, as of the date hereof, we are
of the opinion that the Exchange Ratio in the Proposed Merger is fair to the
minority stockholders of Good Ideas from a financial point of view.
Very truly yours,
Whale Securities Co., L.P.
B-2
<PAGE> 207
APPENDIX C
SECTION 262 OF THE GENERAL CORPORATION LAW OF THE STATE OF DELAWARE
APPRAISAL RIGHTS. (a) Any stockholder of a corporation of this State who
holds shares of stock on the date of the making of a demand pursuant to
subsection (d) of this section with respect to such shares, who continuously
holds such shares through the effective date of the merger or consolidation, who
has otherwise complied with subsection (d) of this section and who has neither
voted in favor of the merger or consolidation nor consented thereto in writing
pursuant to sec.228 of this title shall be entitled to an appraisal by the Court
of Chancery of the fair value of his shares of stock under the circumstances
described in subsections (b) and (c) of this section. As used in this section,
the word "stockholder" means a holder of record of stock in a stock corporation
and also a member of record of a nonstock corporation; the words "stock" and
"share" mean and include what is ordinarily meant by those words and also
membership or membership interest of a member of a nonstock corporation; and the
words "depository receipt" mean a receipt or other instrument issued by a
depository representing an interest in one or more shares, or fractions thereof,
solely of stock of a corporation, which stock is deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation
to be effected pursuant to sec.251 (other than a merger effected pursuant
to subsection (g) of Section 251), 252, 254, 257, 258, 263 or 264 of this
title:
(1) Provided, however, that no appraisal rights under this section
shall be available for the shares of any class or series of stock, which
stock, or depository receipts in respect thereof, at the record date
fixed to determine the stockholders entitled to receive notice of and to
vote at the meeting of stockholders to act upon the agreement of merger
or consolidation, were either (i) listed on a national securities
exchange or designated as a national market system security on an
interdealer quotation system by the National Association of Securities
Dealers, Inc. or (ii) held of record by more than 2,000 holders; and
further provided that no appraisal rights shall be available for any
shares of stock of the constituent corporation surviving a merger if the
merger did not require for its approval the vote of the holders of the
surviving corporation as provided in subsection (f) of sec.251 of this
title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal
rights under this section shall be available for the shares of any class
or series of stock of a constituent corporation if the holders thereof
are required by the terms of an agreement of merger or consolidation
pursuant to sec.sec.251, 252, 254, 257, 258, 263 and 264 of this title
to accept for such stock anything except:
a. Shares of stock of the corporation surviving or resulting
from such merger or consolidation, or depository receipts in respect
thereof;
b. Shares of stock of any other corporation, or depository
receipts in respect thereof, which shares of stock or depository
receipts at the effective date of the merger or consolidation will be
either listed on a national securities exchange or designated as a
national market system security on an interdealer quotation system by
the National Association of Securities Dealers, Inc. or held of
record by more than 2,000 holders;
c. Cash in lieu of fractional shares or fractional depository
receipts described in the foregoing subparagraphs a. and b. of this
paragraph; or
d. Any combination of the shares of stock, depository receipts
and cash in lieu of fractional shares or fractional depository
receipts described in the foregoing subparagraphs a., b. and c. of
this paragraph.
(3) In the event all of the stock of a subsidiary Delaware
corporation party to a merger effected under sec.253 of this title is
not owned by the parent corporation immediately prior to the merger,
appraisal rights shall be available for the shares of the subsidiary
Delaware corporation.
C-1
<PAGE> 208
(c) Any corporation may provide in its certificate of incorporation
that appraisal rights under this section shall be available for the shares
of any class or series of its stock as a result of an amendment to its
certificate of incorporation, any merger or consolidation in which the
corporation is a constituent corporation or the sale of all or
substantially all of the assets of the corporation. If the certificate of
incorporation contains such a provision, the procedures of this section,
including those set forth in subsections (d) and (e) of this section, shall
apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal
rights are provided under this section is to be submitted for approval
at a meeting of stockholders, the corporation, not less than 20 days
prior to the meeting, shall notify each of its stockholders who was such
on the record date for such meeting with respect to shares for which
appraisal rights are available pursuant to subsections (b) or (c) hereof
that appraisal rights are available for any or all of the shares of the
constituent corporations, and shall include in such notice a copy of
this section. Each stockholder electing to demand the appraisal of his
shares shall deliver to the corporation, before the taking of the vote
on the merger or consolidation, a written demand for appraisal of his
shares. Such demand will be sufficient if it reasonably informs the
corporation of the identity of the stockholder and that the stockholder
intends thereby to demand the appraisal of his shares. A proxy or vote
against the merger or consolidation shall not constitute such a demand.
A stockholder electing to take such action must do so by a separate
written demand as herein provided. Within 10 days after the effective
date of such merger or consolidation, the surviving or resulting
corporation shall notify each stockholder of each constituent
corporation who has complied with this subsection and has not voted in
favor of or consented to the merger or consolidation of the date that
the merger or consolidation has become effective; or
(2) If the merger or consolidation was approved pursuant to sec.228
or sec.253 of this title, each constituent corporation, either before
the effective date of the merger or consolidation or within ten day
thereafter, shall notify each of the holders of any class or series of
stock of such constituent corporation who are entitled to appraisal
rights of the approval of the merger or consolidation and that appraisal
rights are available for any or all shares of such class or series of
stock of such constituent corporation, and shall include in such notice
a copy of this section; provided that, if the notice is given on or
after the effective date of the merger or consolidation, such notice
shall be given by the surviving or resulting corporation to all such
holders of any class or series of stock of a constituent corporation
that are entitled to appraisal rights. Such notice may, and, if given on
or after the effective date of the merger or consolidation, shall, also
notify such stockholders of the effective date of the merger or
consolidation. Any stockholder entitled to appraisal rights may, within
twenty days after the date of mailing of such notice, demand in writing
from the surviving or resulting corporation the appraisal of such
holder's shares. Such demand will be sufficient if it reasonably informs
the corporation of the identity of the stockholder and that the
stockholder intends thereby to demand the appraisal of such holder's
shares. If such notice did not notify stockholders of the effective date
of the merger or consolidation, either (i) each such constituent
corporation shall send a second notice before the effective date of the
merger or consolidation notifying each of the holders of any class or
series of stock of such constituent corporation that are entitled to
appraisal rights of the effective date of the merger or consolidation or
(ii) the surviving or resulting corporation shall send such a second
notice to all such holders on or within 10 days after such effective
date, provided, however, that if such second notice is sent more than 20
days following the sending of the first notice, such second notice need
only be sent to each stockholder who is entitled to appraisal rights and
who has demanded appraisal of such holder's shares in accordance with
this subsection. An affidavit of the secretary or assistant secretary or
of the transfer agent of the corporation that is required to give either
notice that such notice has been given shall, in the absence of fraud,
be prima facie evidence of the facts stated therein. For purposes of
determining the stockholders entitled to receive either notice, each
constituent corporation may fix, in advance, a record date that shall be
not more than 10 days prior to the date the notice is given; provided
that, if the notice is given on or after the effective
C-2
<PAGE> 209
date of the merger or consolidation, the record date shall be, such
effective date. If no record date is fixed and the notice is given prior
to the effective date, the record date shall be the close of business on
the day next preceding the day, on which the notice is given.
(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any stockholder
who has complied with subsections (a) and (d) hereof and who is otherwise
entitled to appraisal rights, may file a petition in the Court of Chancery
demanding a determination of the value of the stock of all such
stockholders. Notwithstanding the foregoing, at any time within 60 days
after the effective date of the merger or consolidation, any stockholder
shall have the right to withdraw his demand for appraisal and to accept the
terms offered upon the merger or consolidation. Within 120 days after the
effective date of the merger or consolidation, any stockholder who has
complied with the requirements of subsections (a) and (d) hereof, upon
written request, shall be entitled to receive from the corporation
surviving the merger or resulting from the consolidation a statement
setting forth the aggregate number of shares not voted in favor of the
merger or consolidation and with respect to which demands for appraisal
have been received and the aggregate number of holders of such shares. Such
written statement shall be mailed to the stockholder within 10 days after
his written request for such a statement is received by the surviving, or
resulting corporation or within 10 days after expiration of the period for
delivery of demands for appraisal under subsection (d) hereof, whichever is
later.
(f) Upon the filing of any such petition by a stockholder, service of
a copy thereof shall be made upon the surviving or resulting corporation,
which shall within 20 days after such service file in the office of the
Register in Chancery in which the petition was filed a duly verified list
containing the names and addresses of all stockholders who have demanded
payment for their shares and with whom agreements as to the value of their
shares have not been reached by the surviving or resulting corporation. If
the petition shall be filed by the surviving or resulting corporation, the
petition shall be accompanied by such a duly verified list. The Register in
Chancery, if so ordered by the Court, shall give notice of the time and
place fixed for the hearing of such petition by registered or certified
mail to the surviving or resulting corporation and to the stockholders
shown on the list at the addresses therein stated. Such notice shall also
be given by 1 or more publications at least 1 week before the day of the
hearing, in a newspaper of general circulation published in the City of
Wilmington, Delaware or such publication as the Court deems advisable. The
forms of the notices by mail and by publication shall be approved by the
Court, and the costs thereof shall be borne by the surviving or resulting
corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become
entitled to appraisal rights. The Court may require the stockholders who
have demanded an appraisal for their shares and who hold stock represented
by certificates to submit their certificates of stock to the Register in
Chancery for notation thereon of the pendency of the appraisal proceedings;
and if any stockholder fails to comply with such direction, the Court may
dismiss the proceedings as to such stockholder.
(h) After determining the stockholders entitled to an appraisal, the
Court shall appraise the shares, determining their fair value exclusive of
any element of value arising from the accomplishment or expectation of the
merger or consolidation, together with a fair rate of interest, if any, to
be paid upon the amount determined to be the fair value. In determining
such fair value, the Court shall take into account all relevant factors. In
determining the fair rate of interest, the Court may consider all relevant
factors, including the rate of interest which the surviving or resulting
corporation would have had to pay to borrow money during the pendency of
the proceeding. Upon application by the surviving or resulting corporation
or by any stockholder entitled to participate in the appraisal proceeding,
the Court may, in its discretion, permit discovery or other pretrial
proceedings and may proceed to trial upon the appraisal prior to the final
determination of the stockholder entitled to an appraisal. Any stockholder
whose name appears on the list filed by the surviving or resulting
corporation pursuant to subsection (f) of this section and who has
submitted his certificates of stock to the Register in Chancery, if such is
required, may participate fully in all proceedings until it is finally
determined that he is not entitled to appraisal rights under this section.
C-3
<PAGE> 210
(i) The Court shall direct the payment of the fair value of the
shares, together with interest, if any, by the surviving or resulting
corporation to the stockholders entitled thereto. Interest may be simple or
compound, as the Court may direct. Payment shall be so made to each such
stockholder, in the case of holders of uncertificated stock forthwith, and
the case of holders of shares represented by certificates upon the
surrender to the corporation of the certificates representing such stock.
The Court's decree may be enforced as other decrees in the Court of
Chancery may be enforced, whether such surviving or resulting corporation
be a corporation of this State or of any state.
(j) The costs of the proceeding may be determined by the Court and
taxed upon the parties as the Court deems equitable in the circumstances.
Upon application of a stockholder, the Court may order all or a portion of
the expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and
the fees and expenses of experts, to be charged pro rata against the value
of all the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation,
no stockholder who as has demanded his appraisal rights as provided in
subsection (d) of this section shall be entitled to vote such stock for any
purpose or to receive payment of dividends or other distributions on the
stock (except dividends or other distributions payable to stockholders of
record at a date which is prior to the effective date of the merger or
consolidation); provided, however, that if no petition for an appraisal
shall be filed within the time provided in subsection (e) of this section,
or if such stockholder shall deliver to the surviving or resulting
corporation a written withdrawal of his demand for an appraisal and an
acceptance of the merger or consolidation, either within 60 days after the
effective date of the merger or consolidation as provided in subsection (e)
of this section or thereafter with the written approval of the corporation,
then the right of such stockholder to an appraisal shall cease.
Notwithstanding the foregoing, no appraisal proceeding in the Court of
Chancery shall be dismissed as to any stockholder without the approval of
the Court, and such approval may be conditioned upon such terms as the
Court deems just.
(1) The shares of the surviving or resulting corporation to which the
shares of such objecting stockholders would have been converted had they
assented to the merger or consolidation shall have the status of authorized
and unissued shares of the surviving or resulting corporation.
C-4
<PAGE> 211
======================================================
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN
THIS CONSENT SOLICITATION STATEMENT/PROSPECTUS AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY SAT OR GOOD IDEAS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY THE SECURITIES OFFERED HEREBY TO ANY PERSON IN
ANY STATE OR OTHER JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION WOULD BE
UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION
CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
------------------------
- ------------------------------------------------------
- ------------------------------------------------------
======================================================
SUBSTANCE ABUSE
TECHNOLOGIES, INC.
CONSENT SOLICITATION
STATEMENT/PROSPECTUS
TO
MINORITY STOCKHOLDERS
OF
GOOD IDEAS ENTERPRISES, INC.
, 1997
======================================================
<PAGE> 212
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Board of Directors of U.S. Alcohol Testing of America, Inc. (the
"Registrant" or "SAT") has authorized indemnification of directors and officers
of the Registrant to the fullest extent permitted by Delaware law.
Section 145(a) of the General Corporation Law of Delaware (the "GCL")
permits a corporation to indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of the corporation), by reason of the
fact that he or she is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably incurred
in connection with such action, suit or proceeding if he or she acted in good
faith and in a manner he or she reasonably believed to be in, or not opposed to,
the best interests of the corporation, and, with respect to any criminal action
or proceeding, had no reasonable cause to believe his or her conduct was
unlawful.
Under Section 145(b) of the GCL, a corporation also may indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that he or
she is or was a director, officer, employee or agent of the corporation, or is
or was serving at the request of the corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise against expenses (including attorneys' fees) actually and
reasonably incurred by him or her in connection with the defense or settlement
of such action or suit if he or she acted in good faith and in a manner he or
she reasonably believed to be in, or not opposed to, the best interests of the
corporation. However, in such an action by or on behalf of a corporation, no
indemnification may be in respect of any claim, issue or matter as to which the
person is adjudged liable to the corporation unless and only to the extent that
the court determines that, despite the adjudication of liability but in view of
all the circumstances, the person is fairly and reasonably entitled to indemnity
for such expenses which the court shall deem proper.
In addition, under Section 145(f) of the GCL, the indemnification provided
by Section 145 shall not be deemed exclusive of any other rights to which those
seeking indemnification may be entitled under any by-law, agreement, vote of
stockholders or disinterested directors or otherwise, both as to action in his
official capacity and as to action in another capacity while holding such
office.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
All of the following exhibits designated with a footnote reference are
incorporated herein by reference to a prior registration statement filed under
the Securities Act of 1933, as amended (the "Securities Act"), or a periodic
report filed by SAT, Good Ideas Enterprises Inc. ("Good Ideas") or U.S. Drug
Testing, Inc. ("U.S. Drug") pursuant to Section 13 of the Securities Exchange
Act of 1934, as amended. An exhibit marked with an asterisk is filed with this
Amendment No. 2 to this Registration Statement. If no footnote reference or
marking with an asterisk is made, the exhibit was previously filed with this
Registration Statement.
<TABLE>
<CAPTION>
NUMBER EXHIBITS
- ------------- ----------------------------------------------------------------------------
<S> <C>
2(a) Copy of Exchange of Stock Agreement and Plan of Reorganization dated May 7,
1992 between Good Ideas Enterprises, Inc., a Texas corporation ("Good Ideas
Texas"), U.S. Alcohol & Drug Testing International N.V. and David Brooks.(1)
2(b) Copy of Agreement and Plan of Merger dated as of April 12, 1996 by and among
SAT, Good Ideas Acquisition Corp. and Good Ideas.
</TABLE>
II-1
<PAGE> 213
<TABLE>
<CAPTION>
NUMBER EXHIBITS
- ------------- ----------------------------------------------------------------------------
<S> <C>
2(b)(1)* Copy of Agreement and Plan of Merger dated as of February 17, 1997 by and
among SAT, Good Ideas Acquisition Corp. and Good Ideas. (Reference is made
to Appendix A to Part I of this Registration Statement.)
2(c) Copy of Agreement and Plan of Merger dated as of April 23, 1996 by and among
SAT, U.S. Drug Acquisition Corp. and U.S. Drug.(2)
2(c)(1)* Copy of Agreement and Plan of Merger dated as of February 17, 1997 by and
among SAT, U.S. Drug Acquisition Corp. and U.S. Drug.
2(d) Copy of the Certificate of Merger of Good Ideas Texas with and into Good
Ideas as filed on December 17, 1992.(1)
3(a) Copy of Certificate of Incorporation of SAT as filed in Delaware on April
15, 1987.(3)
3(a)(1) Copy of Amendment to the Certificate of Incorporation as filed in Delaware
on July 10, 1989.(3)
3(a)(2) Copy of Amendment to the Certificate of Incorporation as filed in Delaware
on September 25, 1989.(3)
3(a)(3) Copy of Amendment to the Certificate of Incorporation as filed in Delaware
on October 5, 1990.(3)
3(a)(4) Copy of Amendment to the Certificate of Incorporation as filed in Delaware
on December 26, 1990.(4)
3(a)(5) Copy of Amendment to the Certificate of Incorporation as filed in Delaware
on November 1, 1991.(4)
3(a)(6) Copy of Amendment to the Certificate of Incorporation as filed in Delaware
on May 20, 1992.(5)
3(a)(7)* Copy of Amendment to the Certificate of Incorporation as filed in Delaware
on October 28, 1996.
3(b) Copy of By-Laws of SAT.(3)
4(a) Specimen of Common Stock certificate of U.S. Alcohol Testing of America,
Inc.(3)
4(a)(1)* Specimen of Common Stock certificate of SAT.
4(b) Specimen of Class "A" Cumulative and Convertible Preferred Stock certificate
of U.S. Alcohol Testing of America, Inc.(3)
4(b)(1)* Specimen of Class "A" Cumulative and Convertible Preferred Stock certificate
of SAT.
4(c) Specimen of Class "B" Non-Voting Preferred Stock certificate of U.S. Alcohol
Testing of America, Inc.(6)
4(d) Form of Common Stock purchase warrant expiring February 16, 1999 of SAT to
be issued in lieu of the Common Stock purchase warrant of Good Ideas filed
as Exhibit 10(aa)(1) hereto.
4(e) Copy of Convertible Loan and Warrant Agreement dated November 8, 1996 by and
between SAT, S.A.C. Capital Associates, LLC and Steven A. Cohen(15).
4(e)(1) Form of Registration Rights Agreement is Exhibit A to Exhibit 4(e)
hereto.(15)
4(e)(2) Form of Convertible Senior Promissory Note due November 8, 1999 is Exhibit B
to Exhibit 4(e) hereto.(15)
4(e)(3) Form of Common Stock Purchase Warrant expiring June 30, 2000 is Exhibit C to
Exhibit 4(e) hereto.(15)
5(a) Opinion of Gold & Wachtel, LLP.
8 Opinion of Rosenman & Colin LLP.
10(a) Form of the Company's Indemnification Agreement with Officers and
Directors.(3)
</TABLE>
II-2
<PAGE> 214
<TABLE>
<CAPTION>
NUMBER EXHIBITS
- ------------- ----------------------------------------------------------------------------
<S> <C>
10(b) Copy of Employment Agreement dated December 13, 1993 between SAT and James
C. Witham.(6)
10(c) Copy of Employment Agreement dated December 13, 1993 between SAT and Karen
B. Laustsen.(6)
10(d) Copy of Employment Agreement dated December 13, 1993 between SAT and Gary S.
Wolff.(6)
10(e) Copy of Employment Agreement dated December 13, 1993 between SAT and Michael
J. Witham.(6)
10(f) Copy of Employment Agreement dated March 1, 1993 between Douglas G. Allen,
SAT and U.S. Drug.(2)
10(g) Copy of Employment Agreement dated as of December 15, 1993 between William
D. Robbins and Good Ideas.(1)
10(h) Copy of License Agreement dated January 24, 1992 by and between the United
States Department of the Navy and SAT. (Confidential Treatment Requested for
Exhibit.)(7)
10(h)(1) Copy of Amendment dated March 15, 1994 to License Agreement filed as Exhibit
10(h) hereto.(2)
10(h)(2) Copy of Amendment dated June 16, 1995 to License Agreement filed as Exhibit
10(h) hereto.(2)
10(h)(3) Copy of Letter dated May 15, 1995 from the USN to SAT.(2)
10(i) Copy of Assignment dated as of January 1, 1993 between SAT and U.S. Drug of
the Licensing Agreement filed as Exhibit 10(h) hereto.(7)
10(i)(1) Copy of Amended Sublicense Agreement dated September 23, 1993 superseding
the Assignment filed as Exhibit 10(i) hereto.(2)
10(i)(2) Copy of Approval dated September 24, 1993 by the USN of Amended Sublicense
Agreement filed as Exhibit 10(i) hereto.(2)
10(j) Copy of Cooperative Research Agreement (the "CRDA Agreement") dated April
16, 1992 by and between Naval Research Laboratory Section, United States
Department of the Navy, and SAT.(7)
10(j)(1) Copy of Assignment of CRDA Agreement dated as of January 1, 1993 by and
between U.S. Drug and SAT.(7)
10(k) Copy of Management Agreement dated April 1, 1993 by and between U.S. Drug
and SAT.(7)
10(k)(1) Copy of Amendment dated July 20, 1993 to Management Services Agreement filed
as Exhibit 10(k) hereto.(7)
10(l) Copy of Management Services Agreement dated December 29, 1993 by and between
Good Ideas and SAT.(1)
10(m) Copy of Equipment, Licensing, Servicing and Maintenance Agreement dated as
of December 13, 1994 by and between SAT and METPATH, Inc.(6)
10(n) Copy of Equipment, Licensing, Servicing and Maintenance Agreement dated as
of December 22, 1994 by and between SAT and National Health Laboratories
Incorporated.(6)
10(o) Copy of Lease dated March 18, 1991 by and between Rancho Cucamonga Business
Park (now The Realty Trust) as landlord and SAT as tenant.(6)
10(o)(1) Copy of Lease Modification Agreement to Lease filed as Exhibit 10(o)
hereto.(6)
10(o)(2) Copy of Sub-Lease Agreement dated as of January 1, 1993 by and between SAT
as sublandlord and U.S. Drug as subtenant.(7)
</TABLE>
II-3
<PAGE> 215
<TABLE>
<CAPTION>
NUMBER EXHIBITS
- ------------- ----------------------------------------------------------------------------
<S> <C>
10(o)(3)* Copy of Third Amendment dated January 2, 1997 to Lease filed as Exhibit
10(o) hereto.
10(p) Copy of Lease dated December 9, 1992 by and between Melvin E. Evans as
landlord and Good Ideas as tenant.(1)
10(q) Copy of Lease expiring June 30, 1999 by and between Rancho Cucamonga
Business Park as landlord and U.S. Rubber Recycling, Inc. ("USRR") as
tenant.(6)
10(r) Copy of Asset Purchase Agreement dated June 20, 1988 between Luckey
Laboratories, Inc. and SAT.(3)
10(r)(1) Copy of Consulting and Royalty Agreement dated June 20, 1988 between Manley
Luckey and SAT.(3)
10(r)(2) Copy of Amendment dated August 1990 to Consulting and Royalty Agreement
filed as Exhibit 10(r)(1) hereto.(3)
10(s) Copy of Investment Banking Agreement dated July 1, 1991, as revised October
1, 1991, between Jeffrey Brooks Securities, Inc. and SAT.(3)
10(t) Copy of Asset Purchase Agreement dated November 2, 1992 by and between Adflo
International, Inc. and SAT.(8)
10(u) Copy of Stock Purchase Agreement dated March 30, 1995 between Alconet, Inc.,
Dakotanet, L.L.C. and SAT.(9)
10(v) Form of Warrant Agreement dated December 17, 1990 between J. Gregory &
Company Inc. and SAT.(3)
10(v)(1) Form of Underwriter's Warrant expiring December 17, 1997 of SAT.(3)
10(w) Form of Common Stock purchase warrant expiring October 31, 1996 of SAT.(5)
10(x) Form of Common Stock purchase warrant.(4) SAT's Common Stock purchase
warrants expiring August 28, 1996, September 1, 1996, September 16, 1996,
September 30, 1996, October 31, 1996, May 17, 1997, September 16, 1997,
November 1, 1997, December 17, 1997, December 31, 1997, February 28, 1998,
April 15, 1998, July 17, 1998, August 27, 1998, September 1, 1998, November
1, 1998, November 15, 1998, December 13, 1998, December 20, 1998, December
27, 1998, January 2, 1999, January 31, 1999, February 26, 1999, February 28,
1999, March 31, 1999, April 14, 1999, April 17, 1999, May 12, 1999, July 17,
1999, July 19, 1999, August 11, 1999, December 31, 1999, January 29, 2000,
October 19, 2000, December 31, 2000 and December 31, 2001 are substantially
identical to the form of Common Stock purchase warrant filed (by
incorporation by reference) as Exhibit 10(x) hereto except as to the name of
the holder, the expiration date and the exercise price and, accordingly,
pursuant to Instruction 2 to Item 601 of Regulation S-K under the Securities
Act are not individually filed.
10(y) Restricted Stock, Non-Qualified Option and Incentive Stock Option Plan of
SAT.(3)
10(y)(1) Form of Stock Option expiring August 1, 2004 issued pursuant to Exhibit
10(y) hereto.(6)
10(z) Form of Common Stock purchase warrant expiring December 17, 1999.(10)
10(aa) Form of Warrant Agreement by and between Good Ideas and Baraban Securities,
Incorporated.(1)
10(aa)(1) Form of Common Stock purchase warrant expiring February 16, 1999 of Good
Ideas.(1)
10(bb) Good Ideas 1993 Stock Option Plan.(1)
10(bb)(1) Form of Stock Option expiring December 17, 2003 of Good Ideas.(1)
</TABLE>
II-4
<PAGE> 216
<TABLE>
<S> <C>
10(cc) Copy of Agreement made as of December 14, 1995 by and between SAT, ProActive
Synergies, Inc., Robert Stutman & Associates, Inc. and Robert Stutman.(10)
10(dd) Copy of Asset Purchase Agreement dated April 30, 1996 by and among USRR, SAT
and Reclamation Resources Inc.(11)
10(ee) Copy of Stock Purchase Agreement dated as of May 21, 1996 by and among SAT,
Robert Stutman, Brian Stutman, Sandra DeBow, Michael Rochelle and Kimberly
Rochelle.(11)
10(ee)(1) Form of Secured Promissory Note dated May 21, 1996 is Exhibit A to Exhibit
10(ee) hereto.
10(ee)(2) Form of Security Agreement dated May 21, 1996 by and among SAT, Robert
Stutman and Brian Stutman is Exhibit C to Exhibit 10(ee) hereto.
10(ee)(3) Form of SAT Warrant expiring May 20, 1999 is Exhibit B to Exhibit 10(ee)
hereto.
10(ee)(4) Form of Registration Rights Agreement dated as of May 21, 1996 by and
between SAT, Robert Stutman, Brian Stutman, Michael Rochelle, Kimberly
Rochelle and Sandra DeBow is Exhibit D to Exhibit 10(ee) hereto.
10(ff) Copy of Severance Agreement dated May 21, 1996 by and between SAT and Robert
Stutman.(11)
10(gg) Copy of Severance Agreement dated May 21, 1996 by and between SAT and Brian
Stutman.(11)
10(hh) Copy of Severance Agreement dated June 27, 1996 by and between SAT and Linda
H. Masterson.
10(ii) Copy of Sublease dated as of June 20, 1996 by and between Lifecare
Investments, Inc. ("Lifecare"), Sublessor, and SAT, Sublessee.
10(ii)(2) Copy of Wingate Commons Business Park Net Lease dated September 27, 1991 by
and between Reynolds Metals Development Company, Landlord, and Lifecare,
Tenant.
10(ii)(3) Copy of First Addendum to the Lease filed as Exhibit 10(ii)(2) hereto.
10(ii)(4) Copy of Second Addendum to the Lease filed as Exhibit 10(ii)(2) hereto.
10(jj) Copy of the Certificate of Incorporation of Good Ideas as filed in Delaware
on June 5, 1992. (1)
10(jj)(1) Copy of Restated Certificate of Incorporation of Good Ideas as filed in
Delaware on February 3, 1994.(1)
10(jj)(2) Copy of By-Laws of Good Ideas.(1)
10(kk) Copy of Employment Agreement dated as of June 1, 1995 between Richard Snyder
and Good Ideas.(12)
10(ll) Copy of Employment Agreement dated as of December 15, 1993 between William
Rodish and Good Ideas.(1)
10(mm) Copy of Employment Agreement dated April 1, 1994 between Jody Harding and
Good Ideas.(13)
10(nn) Copy of Demand Promissory Note dated March 31, 1995 executed by SAT in favor
of Good Ideas.(12)
10(nn)(1) Copy of Demand Promissory Note dated March 31, 1995 executed by USRR in
favor of Good Ideas.(12)
10(oo) Copy of Certificate of Incorporation of U.S. Drug as filed in Delaware on
October 8, 1999.(7)
10(oo)(1) Copy of Amendment to the Certificate of Incorporation of U.S. Drug as filed
in Delaware on October 13, 1992.(7)
10(oo)(2) Copy of By-Laws of U.S. Drug.(7)
</TABLE>
II-5
<PAGE> 217
<TABLE>
<S> <C>
10(pp)* Form of Common Stock purchase warrant expiring November 15, 1999. SAT's
Common Stock purchase warrants expiring November 15, 1999, December 2, 1999
and three years from the effective date of a registration statement under
the Securities Act are substantially identical to the form of Common Stock
purchase warrant filed as Exhibit 10(pp) 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(qq)* Form of Common Stock purchase warrant with deferred exercise. SAT's Common
Stock purchase warrants expiring three years from the effective date of a
registration statement under the Securities Act and those issued or to be
issued to employees, of which the currently outstanding warrants expire
between September 11, 2000 and January 1, 2001, are substantially identical
to the form of Common Stock purchase warrant filed as Exhibit 10(qq) 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.
16(a) Letter dated November 16, 1995 from Wolinetz, Gottlieb & Lafazan, P.C. to
the Securities and Exchange Commission.(14)
21* Subsidiaries of SAT.
23(a)* Consent of Wolinetz, Gottlieb & Lafazan, P.C.
23(b) Consent of Gold & Wachtel, LLP is included on their opinion filed as Exhibit
5 hereto.
23(c) Consent of Rosenman & Colin LLP is included in their opinion filed as
Exhibit 8 hereto.
23(d)* Consent of Ernst & Young LLP.
</TABLE>
- ---------------
(1) Filed as an exhibit to Good Ideas' Registration Statement on Form S-1, File
No. 33-73494, and incorporated herein by this reference.
(2) Filed as an exhibit to U.S. Drug's Annual Report on Form 10-K for the
fiscal year ended March 31, 1996 and incorporated herein by this reference.
(3) Filed as an exhibit to SAT's Registration Statement on Form S-18, File No.
33-29718, and incorporated herein by this reference.
(4) Filed as an exhibit to SAT's Registration Statement on Form S-1, File No.
33-43337, and incorporated herein by this reference.
(5) Filed as an exhibit to SAT's Registration Statement on Form S-1, File No.
33-47855, and incorporated herein by this reference.
(6) Filed as an exhibit to SAT's Annual Report on Form 10-K for the fiscal year
ended March 31, 1995 and incorporated herein by this reference.
(7) Filed as an exhibit to U.S. Drug's Registration Statement on Form SB-2,
File No. 33-61786, and incorporated herein by this reference.
(8) Filed as an exhibit to SAT's Current Report on Form 8-K filed on November
2, 1992 and incorporated herein by this reference.
(9) Filed as an exhibit to SAT's Current Report on Form 8-K dated April 12,
1995 and incorporated herein by this reference.
(10) Filed as an exhibit to SAT's Registration Statement on Form S-8 filed on
March 5, 1996 and incorporated herein by this reference.
(11) Filed as an exhibit to SAT's Current Report on Form 8-K filed on June 5,
1996 and incorporated herein by this reference.
(12) Filed as an exhibit to Good Ideas' Annual Report on Form 10-K for the
fiscal year ended March 31, 1995 and incorporated herein by this reference.
II-6
<PAGE> 218
(13) Filed as an exhibit to Good Ideas' Annual Report on Form 10-K for the
fiscal year ended March 31, 1996 and incorporated herein by this reference.
(14) Filed as an exhibit to SAT's Current Report on Form 8-K/A filed on November
22, 1995 and incorporated herein by this reference.
(15) Filed as an exhibit to Amendment 2 to Schedule 13D filed by Steven A. Cohen
on November 12, 1996 and incorporated herein by this reference.
(b) Financial Statement Schedules
Financial Statement Schedules are omitted as they are not required, are
inapplicable, or the information is included in the financial statements or the
notes thereto.
(c) Item 4(b) Information
The opinion of Whale Securities, Inc. is furnished as Appendix B to the
Consent Solicitation Statement-Prospectus which is Part I of this Registration
Statement.
ITEM 22. UNDERTAKINGS.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement;
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the Registration Statement;
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the Registration Statement
or any material change to such information in the Registration
Statement.
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendments shall be deemed to be a
new Registration Statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of this offering.
The undersigned Registrant hereby undertakes as follows: that prior to any
public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this Registration Statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
issuer undertakes that such reoffering prospectus will contain the information
called for by the applicable registration form with respect to reofferings by
persons who may be deemed underwriters, in addition to the information called
for by the other items of the applicable form.
The Registrant undertakes that every prospectus: (i) that is filed pursuant
to the paragraph immediately preceding, or (ii) that purports to meet the
requirements of Section 10(a)(3) of the Securities Act and is used in connection
with an offering of securities subject to Rule 415, will be filed as a part of
an amendment to the Registration Statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act, each such post-effective amendment shall be deemed to
be a new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
II-7
<PAGE> 219
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned Registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Item 4, 10(b), 11, or 13 of this form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
The undersigned Registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the Registration Statement when it became effective.
II-8
<PAGE> 220
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this amendment to a registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of New York,
State of New York, on April 21, 1997.
SUBSTANCE ABUSE TECHNOLOGIES, INC.
(Registrant)
By: /s/ ROBERT M. STUTMAN
------------------------------------
Robert M. Stutman, Chairman and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this amendment
to a registration statement has been signed by the following persons in the
capacities indicated on April 21, 1997.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- -------------------------------------------- --------------------------------------------
<C> <S>
/s/ ROBERT M. STUTMAN Principal Executive Officer and Director
- --------------------------------------------
Robert M. Stutman
/s/ ROBERT MUCCINI Principal Chief Financial and Accounting
- -------------------------------------------- Officer
Robert Muccini
/s/ ALAN I. GOLDMAN Director
- --------------------------------------------
Alan I. Goldman
/s/ JOHN C. LAWN Director
- --------------------------------------------
John C. Lawn
/s/ PETER M. MARK Director
- --------------------------------------------
Peter M. Mark
/s/ LINDA H. MASTERSON Director
- --------------------------------------------
Linda H. Masterson
/s/ MICHAEL S. MCCORD Director
- --------------------------------------------
Michael S. McCord
/s/ LEE S. ROSEN Director
- --------------------------------------------
Lee S. Rosen
</TABLE>
II-9
<PAGE> 221
EXHIBIT INDEX
SUBSTANCE ABUSE TECHNOLOGIES, INC.
EXHIBITS FILED WITH AMENDMENT NO. 2 TO
REGISTRATION STATEMENT ON FORM S-4
<TABLE>
<CAPTION>
PAGE
NUMBER EXHIBITS NUMBER
- -------- ------------------------------------------------------------------------ ------
<S> <C> <C>
2(b)(1) Copy of Agreement and Plan of Merger dated as of February 17, 1997 by
and among SAT, Good Ideas Acquisition Corp. and Good Ideas. (Reference
is made to Appendix A to Part I of this Registration Statement.)
2(c)(1) Copy of Agreement and Plan of Merger dated as of February 17, 1997 by E-2
and among SAT, U.S. Drug Acquisition Corp. and U.S. Drug................
3(a)(7) Copy of Amendment to the Certificate of Incorporation as filed in E-29
Delaware on October 28, 1996............................................
4(a)(1) Specimen of Common Stock certificate of SAT............................. E-30
4(b)(1) Specimen of Class "A" Cumulative and Convertible Preferred Stock E-32
certificate of SAT......................................................
10(o)(3) Copy of Third Amendment dated January 2, 1997 to Lease filed as Exhibit E-34
10(o)...................................................................
10(pp) Form of Common Stock purchase warrant expiring November 15, 1999........ E-35
10(qq) Form of Common Stock purchase warrant with deferred exercise............ E-43
21 Subsidiaries of SAT..................................................... E-51
23(a) Consent of Wolinetz, Gottlieb & Lafazan, P.C............................ E-52
23(d) Consent of Ernst & Young LLP............................................ E-53
</TABLE>
E-1
<PAGE> 1
EXHIBIT 2(c)(1)
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER dated as of February 17, 1997 by and among
Substance Abuse Technologies, Inc., a Delaware corporation ("SAT"), U.S. Drug
Acquisition Corp., a Delaware corporation ("Acquisition Corp."), and U.S. Drug
Testing, Inc., a Delaware corporation ("U.S. Drug").
WITNESSETH:
WHEREAS, of the 5,221,900 shares of the common stock, $.001 par value
(the "U.S. Drug Common Stock"), of U.S. Drug outstanding as of the date hereof,
SAT is the owner of 3,500,000 shares and 1,721,900 shares (the "Minority U.S.
Drug Common Stock") are owned by persons other than SAT (the "U.S. Drug Minority
Stockholders");
WHEREAS, the Board of Directors of each of SAT and Acquisition Corp.
have each adopted, approved and authorized the execution and delivery of this
Agreement and Plan of Merger (the "Agreement") so as to implement the subject
merger in compliance with the provisions of Section 251 of the General
Corporation Law of the State of Delaware (the "GCL") and Section 368(a) of the
Internal Revenue Code of 1986, as amended (the "Code");
WHEREAS, because of the relationships of all three of the directors of
U.S. Drug to SAT as current directors and/or officers thereof and as
securityholders thereof, the Board of Directors of U.S. Drug has only authorized
execution and delivery of the Agreement on the condition that approval of the
subject merger by U.S. Drug shall only be effected as a result of the obtaining
of consents thereto from the holders of more than 50% of the Minority U.S. Drug
Common Stock;
WHEREAS, the Board of Directors of U.S. Drug intends to, and shall,
submit this Agreement and the subject merger to the stockholders of U.S. Drug
for approval to the extent required by the applicable provisions of the GCL; and
WHEREAS, in connection with the subject merger and the solicitation of
stockholder consents thereto, SAT has filed a Registration Statement on Form
S-4, File No. 333-4790 (the "Registration Statement"), with the Securities and
Exchange Commission (the "SEC") pursuant to the Securities Act of 1933, as
amended (the "Securities Act"), the Registration Statement to include as Part I
thereof the prospectus and consent solicitation statement to be transmitted to
the U.S. Drug Minority Stockholders (such prospectus and consent solicitation
statement, as from time to time amended and/or supplemented, hereinafter
referred to as the "Consent Solicitation Statement/Prospectus") (a) with respect
to the solicitation of consents from the U.S. Drug Minority Stockholders to the
subject merger pursuant to Section 228 of the GCL and Section 14(a) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and (b) with
E-2
<PAGE> 2
respect to the distribution of the shares of the SAT common stock, $.01 par
value (the "SAT Common Stock"), to the U.S. Drug Minority Stockholders in
exchange for their shares of the U.S. Drug Common Stock pursuant to the terms of
the Agreement, the subject merger, the Securities Act and the rules and
regulations promulgated thereunder;
NOW THEREFORE, in consideration of the premises and the mutual
representations, warranties, covenants and agreements herein contained, the
parties hereto do hereby agree as follows:
1. THE MERGER. Subject to the terms and conditions hereinbelow set
forth, on the Effective Date (as hereinafter defined in Section 11 hereof) U.S.
Drug shall be merged with and into Acquisition Corp. (the "Merger") and, in
connection therewith:
(a) except to the extent provided or permitted by applicable
law, the separate existence of U.S. Drug shall cease and terminate;
(b) Acquisition Corp. as the surviving corporation, shall
continue its corporate existence under the laws of the State of Delaware and
shall possess all of the rights, privileges, immunities, powers, franchises and
authority (both public and private) of, and be subject to all of the
restrictions, disabilities and duties of, U.S. Drug;
(c) all of the assets and property of U.S. Drug of every kind,
nature and description (real, personal and mixed and both tangible and
intangible) and every interest therein, wheresoever located, including, without
limitation, all debts or other obligations belonging or due to U.S. Drug, all
stock subscriptions, claims and choses in action shall be, and be deemed to be,
vested, absolutely and unconditionally, in Acquisition Corp. (to the same
extent, degree and manner as previously vested in U.S. Drug); and
(d) all debts and obligations of U.S. Drug, all rights of
creditors of U.S. Drug and all liens or security interests encumbering any of
the property of U.S. Drug shall be vested in Acquisition Corp. and shall remain
in full force and effect without modification or impairment and shall be, and be
deemed to be, enforceable against Acquisition Corp. and its assets and
properties with the same full force and effect as if such debts, obligations,
liens or security interests had been originally incurred or created by
Acquisition Corp. in its own name and for its own behalf. Without limiting the
generality of the foregoing, Acquisition Corp. specifically assumes all
continuing obligations which U.S. Drug would otherwise have to indemnify its
officers and directors, to the fullest extent currently provided in Acquisition
Corp.'s By-Laws and pursuant to the GCL, with respect to any and all claims
arising out of actions taken or omitted by such officers and directors prior to
the Effective Date.
2. INSTRUMENTS OF CONVEYANCE. Without limiting the generality of the
provisions of Section 1 hereof and/or the succession provisions of applicable
law, the officers and directors of U.S. Drug last in office shall (to the extent
they, or any of them, possess and/or may exercise the power to do so) execute,
deliver and/or record such deeds and/or other instruments of transfer and/or
conveyance, and take or cause to be taken, such other and further actions, as
the case may
E-3
<PAGE> 3
be, as shall be reasonably requested by Acquisition Corp. or SAT, or their legal
counsel, to vest, perfect, confirm, implement the transfer of, or establish in
the name, on behalf or for the account or the benefit of Acquisition Corp.,
title and/or possession of any or all of the assets, property, property
interests, rights, privileges, immunities, powers and franchises owned and/or
exercisable by U.S. Drug (or in which U.S. Drug had an interest and/or the power
to exercise immediately prior to the Effective Date) and which was vested, or
intended to be vested, in Acquisition Corp. pursuant to the provisions of this
Agreement and the Merger.
3. CONSTITUTIONAL DOCUMENTS, DIRECTORS AND OFFICERS. On and as of the
Effective Date:
(a) The Certificate of Incorporation of Acquisition Corp. on
such date in full force and effect shall be the Certificate of Incorporation of
Acquisition Corp., as the surviving corporation, until the same shall be
altered, amended, modified, terminated or rescinded in the manner provided by
the GCL, which rights of alteration, amendment, modification, termination and/or
rescission are hereby expressly reserved by Acquisition Corp.;
(b) The By-Laws of Acquisition Corp. on such date in full
force and effect shall be the By-Laws of Acquisition Corp., as the surviving
corporation, until the same shall be altered, amended, modified, terminated or
rescinded in the manner provided in the Certificate of Incorporation of
Acquisition Corp. and/or the GCL, which rights of alteration, amendment,
modification, termination and/or rescission are hereby expressly reserved by
Acquisition Corp.
(c) The members of the Board of Directors and the officers of
Acquisition Corp., the surviving corporation, shall consist of the persons
described on Exhibit "A" annexed hereto and made a part hereof, each of such
persons to hold such membership and/or officership as provided in the By-Laws
and/or the GCL.
(d) The Certificate of Incorporation of SAT on such date in
full force and effect shall be the Certificate of Incorporation of SAT until the
same shall be altered, amended, modified, terminated or rescinded in the manner
provided by the GCL, which rights of alteration, amendment, modification,
termination and/or rescission are hereby expressly reserved by SAT.
(e) The By-Laws of SAT on such date in full force and effect
shall be the By-Laws of SAT until the same shall be altered, amended, modified,
terminated or rescinded in the manner provided in the Certificate of
Incorporation of SAT and/or the GCL, which rights of alteration, amendment,
modification, termination and/or rescission are hereby expressly reserved by
SAT.
4. CONVERSION RATES. On the Effective Date the shares of the U.S. Drug
Common Stock shall be converted and exchanged into shares of the SAT Common
Stock (and warrants exercisable with respect to shares of the U.S. Drug Common
Stock shall become exercisable with respect to shares of the SAT Common Stock)
in the following manner:
E-4
<PAGE> 4
(a) Each issued and outstanding share of the U.S. Drug Common
Stock shall, by virtue of the Merger and without any action on the part of the
holder thereof, be converted and exchanged into 1.62 shares of the SAT Common
Stock, provided however, that to the extent any holder of the U.S. Drug Common
Stock shall be entitled, as a result of the foregoing conversion and exchange,
to receive less than a whole share of the SAT Common Stock, then and in any such
event:
(i) no fractional share and/or fractional interest in
a whole share shall be issued and
(ii) the fractional interest of such holder shall be
liquidated for cash equivalent calculated on the basis of the closing sales
price of the SAT Common Stock on the Effective Date or on the first day
thereafter that such price is available.
The number of shares of the SAT Common Stock to be exchanged for each share of
U.S. Drug Common Stock was determined by dividing $2.625 (which is the value of
the shares of the SAT Common Stock to be exchanged for a share of the U.S. Drug
Common Stock) by an assumed market price of $1.625 (which was the closing sale
price reported by the American Stock Exchange on February 14, 1997, the last
trading date before the date of this Agreement).
(b) Each warrant expiring October 13, 1998 (the "Warrant")
shall, by virtue of the Merger and without any action on the part of the holder
thereof, be converted and exchanged into a warrant (the "Merger Warrant") to
purchase shares of SAT Common Stock equal to the number of shares that the
holder would have received under Section 4(a) hereof had the Warrant been
exercised immediately prior to the Effective Date. The exercise price shall be
adjusted to the product of $7.50 and a fraction, the numerator of which shall be
the number of shares of the U.S. Drug Common Stock issuable upon exercise of the
Warrant prior to the Merger and the denominator will be the number of shares of
the SAT Common Stock issuable upon the exercise of the Merger Warrant. The
expiration date shall not be changed.
(c) Anything in this Section 4 to the contrary
notwithstanding:
(i) Any and all issued shares of the U.S. Drug Common
Stock owned by U.S. Drug and held as treasury stock shall be cancelled and
retired and no shares of the SAT Common Stock shall be issued with respect
thereto;
(ii) Any and all issued shares of the U.S. Drug
Common Stock owned by SAT shall be cancelled and retired and no shares of the
SAT Common Stock shall be issued to SAT with respect thereto; and
(iii) Upon the issuance of shares of the SAT Common
Stock to the U.S. Drug Minority Stockholders in exchange for their shares of the
U.S. Drug Common Stock, there shall be credited to the capital account of SAT an
amount equal to $1.625 and, of the amount so credited, the portion thereof in
excess of the aggregate par value thereof shall be credited to the capital
surplus account.
E-5
<PAGE> 5
5. APPOINTMENT OF EXCHANGE AGENT. Prior to the Effective Date SAT
shall, subject to the provisions of Paragraph 8 hereof:
(a) Designate U.S. Stock Transfer Corporation (the "Exchange
Agent") to implement the exchange (subsequent to the Effective Date) of
certificates representing shares of the U.S. Drug Common Stock (the "Old
Certificates") for certificates representing shares of the SAT Common Stock (the
"New Certificates");
(b) engage the Exchange Agent for a period of the lesser of
(i) 12 consecutive months following the Effective Date and (ii) the date on
which all of the Old Certificates held by the U.S. Drug Minority Stockholders
have been surrendered for the New Certificates; and
(c) provide to the Exchange Agent sufficient supplies of New
Certificates so as to enable a holder of an Old Certificate(s) to surrender such
Certificate(s) and receive New Certificate(s).
6. CERTIFICATE EXCHANGE. Subsequent to the Effective Date the issuance
and distribution of New Certificates in exchange for Old Certificates shall be
implemented as follows:
(a) As promptly after the Effective Date as shall be
reasonably possible, the Exchange Agent shall be directed to, and shall, notify
(the "Notification") each holder of an Old Certificate of the consummation of
the Merger, the availability of New Certificates and a description of the
procedure to be followed (and documents to be executed and submitted) in
connection with the surrender of the Old Certificate and the issuance of the New
Certificate. Upon compliance by a holder thereof with the requirements for the
certificate surrender and issuance specified in the Notification, the Exchange
Agent shall be directed to, and shall, issue and transmit to such holder New
Certificates (representing that number of shares of the SAT Common Stock to
which such holder shall be entitled as herein provided). Until surrendered and
replaced as aforesaid:
(i) each Old Certificate shall, and be deemed to,
represent and evidence (for all corporate purposes other than the payment of
dividends and other distributions) that number of shares of the SAT Common Stock
into which the shares of the U.S. Drug Common Stock therein referred to are
convertible and exchangeable as herein provided and
(ii) each Old Certificate shall not be transferable
on the books and records of U.S. Drug and/or SAT.
(b) From and after the Effective Date any and all dividends
and/or distributions of every kind, nature or description declared and payable
by SAT on, or with respect to, the SAT Common Stock to any holder of an Old
Certificate (collectively "Distributions") shall be paid, retained, invested and
paid over as follows:
E-6
<PAGE> 6
(i) Until such time as the Old Certificate is
surrendered for replacement by a New Certificate(s) as herein provided, no
Distribution shall be paid over by SAT and/or the Exchange Agent to such holder
on, or with respect to, the shares of the SAT Common Stock evidenced by such Old
Certificate;
(ii) All Distributions payable on, or with respect
to, shares of the SAT Common Stock represented by Old Certificates shall be paid
over by SAT to the Exchange Agent and dealt in and with by the Exchange Agent as
follows:
(A) All Distributions in cash shall be deposited by
the Exchange Agent in an interest bearing account (the "Distribution Account")
and retained and disposed of as hereinbelow provided;
(B) Upon surrender by, or on behalf of, a holder of
an Old Certificate for surrender and replacement as hereinabove provided (or
satisfactory proof of loss and an indemnity in favor of, and acceptable to, SAT
and the Exchange Agent), the Exchange Agent shall pay over and/or deliver to
such holder (in addition to the New Certificate(s) to which such holder shall be
entitled) (y) the principal amount of any cash dividends and any property (other
than shares of the SAT Common Stock) previously received by the Exchange Agent
with respect to the shares of the SAT Common Stock evidenced by such Old
Certificate and (z) a certificate representing any shares of the SAT Common
Stock forming part of any Distribution made prior to the date of any such
surrender;
(C) Any and all interest earned and/or credited on,
or with respect to, Distributions shall be applied by the Exchange Agent to the
payment of its fees and disbursements and the remainder, if any, paid over to
SAT upon the termination of the engagement of the Exchange Agent.
(c) From and after the Effective Date the sole rights of the
holders of Old Certificates (except as otherwise provided by law or Section 4(a)
hereof) shall be those to which they are entitled as owners of the SAT Common
Stock into which the shares of the U.S. Drug Common Stock evidenced by such Old
Certificates shall have been converted as herein provided.
(d) A holder of a Warrant shall, after the Effective Date,
have no obligation to exchange the holder's certificate evidencing the Warrant
for a new certificate evidencing the Merger Warrant. Whenever thereafter a
holder wishes to exercise his, her or its Warrant, the holder shall present the
Warrant, with the exercise form duly executed and with payment of the new
exercise price per share determined in accordance with Section 4(b) hereof, to
SAT and not to U.S. Drug or Acquisition Corp. SAT shall then cause the Exchange
Agent as the transfer agent for the SAT Common Stock to issue the shares of the
SAT Common Stock as to which the Warrant is exercised. To the extent that the
Warrant is not exercised for all of the shares of the SAT Common Stock subject
thereto, SAT will issue a new certificate evidencing a Merger Warrant for the
balance.
E-7
<PAGE> 7
7. TRANSFERS. If the holder of any Old Certificate desires that the New
Certificate to be issued in replacement therefor (as hereinabove provided) is to
be issued in a name other than that on the Old Certificate which it replaces,
any such issuance shall be subject to and conditioned upon:
(a) Delivery to the Exchange Agent of the Old Certificate duly
endorsed in blank or accompanied by a duly executed stock assignment power and
otherwise in form for transfer acceptable to the Exchange Agent; and
(b) Payment to SAT or the Exchange Agent of any and all
transfer and/or other taxes payable, in the opinion of the Exchange Agent, by
reason of the issuance and/or transfer of such New Certificate and/or the shares
of the SAT Common Stock evidenced thereby.
8. TERMINATION OF EXCHANGE AGENT. Upon the termination of the Exchange
Agent's engagement as hereinabove provided, the Exchange Agent shall deliver to
SAT the then balance of the Distribution Account and, upon such delivery, the
Exchange Agent shall have no further duties or obligations as exchange agent to
SAT, Acquisition, U.S. Drug or their respective stockholders. Thereafter, the
duties to be performed by the Exchange Agent as described in Sections 6 and 7
hereof shall be performed by SAT in lieu of, and instead of, the Exchange Agent.
All blank stock certificates evidencing the SAT Common Stock shall be retained
by the Exchange Agent for utilization by it in the performance of its duties as
transfer agent for, and with respect to, the SAT Common Stock.
9. SPECIAL PAYMENT. If U.S. Drug or, subsequent to the Effective Date,
Acquisition Corp. executes a definitive agreement (the "Marketing Agreement")
with an unaffiliated corporation to act as a marketing partner (the "Partner")
with respect to its drug testing products and if the Partner makes a cash
payment or payments to U.S. Drug, Acquisition Corp. or SAT upon the execution of
the Marketing Agreement (the "Special Payment"), then:
(a) SAT will calculate the percentage (to the nearest tenth)
that the outstanding shares of the Minority U.S. Drug Common Stock on the
Effective Date constitute of the outstanding shares of the U.S. Drug Common
Stock on the Effective Date (the "Percentage") and (i) if the Marketing
Agreement is entered into on or prior to the 180th day following the Effective
Date, SAT or, if U.S. Drug or Acquisition Corp. is the recipient of the Special
Payment, Acquisition Corp. shall pay to each of the former U.S. Drug Minority
Stockholders his, her or its pro rata share of one third of the Percentage of
the Special Payment; (ii) if the Marketing Agreement is entered into during the
period after the 180th day following the Effective Date and on or prior to the
first anniversary of the Effective Date, SAT or, if Acquisition Corp. is the
recipient of the Special Payment, Acquisition Corp. shall pay to each of the
former U.S. Drug Minority Stockholders his, her or its pro rata share of one
sixth of the Percentage of the Special Payment; and (iii) if the Marketing
Agreement is entered into after the first anniversary of the Effective Date, the
former U.S. Drug Minority Stockholders shall receive none of the Special
Payment.
E-8
<PAGE> 8
(b) If a cash payment is received from the Partner after
execution, but on or prior to the first anniversary of the Effective Date, and
if such payment is not based on sales effected by the Partner or some similar
criteria, SAT or Acquisition Corp. will treat any such payment or payments as a
Special Payment as if received on the execution of the Marketing Agreement.
(c) A loan or an equity investment made by the Partner shall
not be deemed to be part of the Special Payment.
(d) On computing the Special Payment, there shall be deducted
from the payment received from the Partner the amount of any finder's fee paid
to secure the Partner or other costs related to obtaining such payment.
(e) A transferee of the shares of the SAT Common Stock
received as a result of the Merger shall not be eligible to receive a
proportionate share of the Special Payment and SAT or Acquisition Corp. shall
make such payments only to the U.S. Drug Minority Stockholders as reflected on
the stock books of U.S. Drug on the Effective Date or, in the event of the death
of the U.S. Drug Minority Stockholder, his or her heirs or legal
representatives, in the case of the dissolution of a partnership, to its
partners or, in the case of a corporation, to its successor by merger or other
operation of law.
(f) Because SAT intends to merge Acquisition Corp. with and
into SAT if the Merger is consummated and thereafter conduct the former
operations of U.S. Drug as a division of SAT, all references to Acquisition
Corp. in this Section 4 shall be deemed to refer to SAT after such merger.
10. THE CLOSING. The closing of the transactions contemplated by this
Agreement shall take place on such date, at such place and at such time within
five business days after the satisfaction or waiver of the last of the
conditions set forth in Sections 18 and 19 hereof as shall be designated by SAT.
The closing of such transactions shall be referred to herein as the "Closing;"
the date of the Closing shall be referred to herein as the "Closing Date"; and
the Closing Date may be the same as the Effective Date.
11. THE EFFECTIVE DATE. Subject to the satisfaction and/or waiver of
the conditions herein described, the Merger shall become effective as at the
close of business on the date specified in the Certificate of Merger to be filed
in the manner required by the GCL or, if none, on the date of filing (the
"Effective Date"). Upon the receipt by U.S. Drug of consents from the holders of
more than 50% of the outstanding shares of the Minority U.S. Drug Common Stock
and of a consent from SAT to the Merger, U.S. Drug and Acquisition Corp. shall
cause to be filed the Certificate of Merger in the manner required by the GCL.
Subject to the provisions of Section 20 hereof, such filing shall be made on, or
as soon as practicable after, the Closing Date; and the parties hereto shall
thereafter execute, acknowledge, deliver and/or record such other and further
instruments, documents or certificates and/or take and perform such other and
further actions as may be required to effect and/or implement the Merger. If the
Merger is consummated, SAT will take such actions as are necessary to deregister
the U.S. Drug Common Stock pursuant to Section 12(b) of the Exchange Act and to
delist the U.S. Drug Common Stock
E-9
<PAGE> 9
from the Pacific Stock Exchange. The Certificate of Merger shall provide for the
change of name of Acquisition Corp. to "U.S. Drug Testing, Inc."
12. THE REGISTRATION STATEMENT AND CONSENT SOLICITATION STATEMENT. In
connection with the preparation, utilization and/or distribution of the Consent
Solicitation Statement-Prospectus to be issued and distributed to the U.S. Drug
Minority Stockholders in connection with the Merger and the preparation and
utilization of the Registration Statement of which the Consent Solicitation
Statement/Prospectus constitutes Part I thereof, the parties shall follow the
procedures as provided in this Section 12.
(a) The parties hereto shall cooperate in the preparation
thereof consistent with the applicable requirements of the GCL, the Securities
Act and the Exchange Act and the rules and regulations promulgated under the
Securities Act and the Exchange Act by the SEC; and, without limiting the
generality of the foregoing, each of SAT and U.S. Drug shall promptly supply to
the other any and all information and material (relating to itself and/or the
subject transaction) as may be requested or required in connection with the
preparation and filing of the Registration Statement, including, without
limitation, all information concerning their respective officers, directors and
principal stockholders that is reasonably requested for inclusion in the Consent
Solicitation Statement/Prospectus; and each shall take and perform such other
and further acts and actions as shall be necessary or appropriate to cause the
prompt preparation, completion, filing, review, finalization and clearance of
the Registration Statement.
(b) Subject to the Registration Statement being declared
effective by the SEC, the Consent Solicitation Statement/Prospectus and any
other communication required by the Exchange Act or the rules and regulations
promulgated thereunder or reasonably requested by SAT shall be mailed by U.S.
Drug or its transfer agent to the U.S. Drug Minority Stockholders as soon after
such effective date as is reasonably possible. Subsequent thereto U.S. Drug
shall transmit to the U.S. Drug Minority Stockholders such amended and/or
supplemental consent solicitation materials as may be necessary, in light of
subsequent developments or otherwise, to render the Consent Solicitation
Statement/Prospectus, as so amended or supplemented, not false or misleading
with respect to any material fact and so as not to omit to state any information
necessary to make the statements made, within the context made, not misleading.
Prior to the Effective Date (or earlier termination of this Agreement) neither
party hereto shall distribute any material (other than the Consent Solicitation
Statement/Prospectus as herein provided) which might constitute, or be deemed to
constitute, a "prospectus" relating to the Merger within the meaning of the
Securities Act without the prior written consent of all of the parties hereto in
each instance.
(c) U.S. Drug hereby authorizes the utilization by SAT in the
Registration Statement or in any filing with a state securities administrator of
all information concerning U.S. Drug either provided to SAT by U.S. Drug in
connection with or contained in the Consent Solicitation Statement/Prospectus
and/or contained in any filings heretofore made by U.S. Drug pursuant to the
Securities Act and/or the Exchange Act. U.S. Drug shall promptly advise SAT if
at any time any of such information or material is or becomes incorrect,
inaccurate or incomplete in any material respect and, in connection therewith,
U.S. Drug shall provide SAT with such
E-10
<PAGE> 10
information and material as shall be needed to correct any such inaccuracy or
omission. SAT shall promptly advise U.S. Drug if at any time any of the
information or material contained in the Registration Statement and supplied by
SAT is or becomes incorrect, inaccurate or incomplete in any material respect.
SAT shall cause the preparation, review, clearance, approval and distribution of
such amended or supplemented material as shall be necessary to correct or
eliminate any such inaccuracies and/or omissions as provided in this Section
12(c).
(d) Each of SAT and U.S. Drug covenants and warrants to the
other that any and all information and/or material supplied by it to the other
and/or in connection with the Registration Statement and/or the within
transactions (i) will, at the time made and at each Relevant Date (as
hereinafter defined), be true and correct in all material respects; (ii) will
comply in all material respects with the requirements of the Securities Act and
the Exchange Act and the rules and regulations promulgated thereunder by the
SEC; and (iii) will not contain any statement which, at the time, and at each
Relevant Date and in light of the circumstances under which it is made, is false
or misleading with respect to any material fact, or which omits to state any
material fact necessary in order to make the statements therein made not false
or misleading. For the purposes of this Agreement, the term "Relevant Date"
shall be and mean each of (x) the effective date of the Registration Statement,
(y) the mailing date of the Consent Solicitation Statement/Prospectus and (z)
the Effective Date. Each of SAT and U.S. Drug specifically agrees to indemnify
and hold harmless the other (and their respective officers, directors,
employees, agents and representatives) from and against any and all costs,
expenses, losses, demands, claims and liabilities of every kind, nature and
description (including reasonable attorneys' fees) arising out of, or relating
to any breach or anticipatory breach by it of its duties and obligations
pursuant to this Section 12(d) hereof.
(e) SAT does hereby agree to indemnify and hold harmless U.S.
Drug and each of its directors and officers, and each person, if any, other than
SAT who controls U.S. Drug within the meaning of Section 15 of the Securities
Act, from and against any and all losses, claims, damages, expenses or
liabilities, joint or several (including, without limitation, reasonable
attorneys' fees as herein provided), to which they or any of them may become
subject under the Securities Act, any other statute, common law or otherwise
and, except as provided below, shall reimburse U.S. Drug and each such director,
officer or controlling person for any legal or other expenses reasonably
incurred by them or any of them in connection with investigating or defending
any actions and/or claims, whether or not resulting in any liability, insofar as
such losses, claims, damages, expenses, liabilities or actions result from a
breach or alleged breach of the representations and warranties contained in
Sections 14 or 15 hereof or are based upon any untrue statement or alleged
untrue statement of a material fact contained in the Registration Statement or
the Consent Solicitation Statement/Prospectus or arise out of, or are based
upon, the omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not misleading,
but only insofar as any such untrue statement or omission or alleged untrue
statement or omission is with respect to the description of SAT or as to the
terms of its offer. Promptly after receipt by a party to be indemnified pursuant
to this Section 12(e) (the "Indemnitee") of notice of the commencement of any
action in respect of which indemnity may be sought against SAT hereunder, the
Indemnitee will promptly notify SAT in writing of the commencement thereof and
SAT shall, subject to the
E-11
<PAGE> 11
provisions stated below, assume the defense of the action (including the
employment of counsel, who shall be counsel reasonable satisfactory to U.S.
Drug), and shall make payment of expenses (including attorneys' fees as herein
provided) insofar as such action shall relate to any alleged liability in
respect of which indemnity may be sought against SAT. The Indemnitee or
Indemnitees shall have the right to employ separate counsel in any such action
and to participate in the defense thereof, but the fees and expenses of such
separate counsel shall not be at the expense of SAT unless the employment of
such separate counsel has been specifically authorized by SAT or there is a
conflict of interest which under the canon of ethics requires the employment of
separate counsel. SAT shall not be liable to any Indemnitee for any settlement
of any action effected without SAT's consent. Notwithstanding any provision of
this Agreement to the contrary, the obligations of SAT hereunder shall survive
the consummation of the transactions contemplated by this Agreement.
13. U.S. DRUG REPRESENTATIONS AND WARRANTIES. In order to induce SAT
and Acquisition to execute and perform this Agreement, U.S. Drug does hereby
represent, warrant, covenant and agree (which representations, warranties,
covenants and agreements shall be, and be deemed to be, continuing and survive
the execution and delivery of this Agreement, the Closing and the Effective
Date) as follows:
(a) U.S. Drug is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware, with full
power and authority, corporate and otherwise, and with all licenses, permits,
certifications, registrations, approvals, consents and franchises necessary to
own or lease and operate its properties and to conduct its business as presently
being conducted.
(b) Subject only to the consent of its stockholders as
required by the GCL: (i) U.S. Drug has the full power and authority, corporate
and otherwise, to execute, deliver and perform this Agreement and to consummate
the transactions contemplated hereby; (ii) the execution, delivery and
performance of this Agreement, the consummation by U.S. Drug of the transactions
herein contemplated and the compliance by U.S. Drug with the terms of this
Agreement have been duly authorized by U.S. Drug; (iii) this Agreement is the
valid and binding obligation of U.S. Drug, enforceable in accordance with its
terms, subject, as to enforcement of remedies, to applicable bankruptcy,
insolvency, reorganization, moratorium and other laws affecting the rights of
creditors generally and the discretion of courts in granting equitable remedies;
(iv) the execution, delivery and performance of this Agreement by U.S. Drug and
the consummation by U.S. Drug of the transactions herein contemplated do not,
and will not, with or without the giving of notice or the lapse of time, or
both, (A) result in any violation of the Certificate of Incorporation or By-Laws
of U.S. Drug or (B) result in a breach of, or a conflict with, any of the terms
or provisions of, or constitute a default under, or result in the modification
or termination of, or result in the creation or imposition of any lien, security
interest, charge or encumbrance upon any of the properties or assets of U.S.
Drug pursuant to, any indenture, mortgage, note, contract, commitment or other
agreement or instrument to which U.S. Drug is a party or by which it is, or any
of its respective properties or assets are, or may be, bound or affected.
E-12
<PAGE> 12
14. SAT REPRESENTATIONS AND WARRANTIES. In order to induce U.S. Drug to
execute and perform this Agreement, SAT does hereby represent, warrant, covenant
and agree (which representations, warranties, covenants and agreements shall be,
and be deemed to be, continuing and survive the execution and delivery of this
Agreement, the Closing and the Effective Date) as follows:
(a) SAT is a corporation duly organized, validly existing and
in standing under the laws of the State of Delaware, with full power and
authority, corporate and otherwise, and with all licenses, permits,
certifications, registrations, approvals, consents and franchises necessary to
own or lease and operate its properties and to conduct its business as presently
being conducted. SAT is duly qualified to do business as a foreign corporation,
and is in good standing, in all jurisdictions, if any, wherein such
qualification is necessary and where failure so to qualify would have a material
adverse effect on the business, properties or financial conditions of SAT. SAT
has no subsidiaries other than as set forth on Exhibit "B" annexed hereto and
made a part hereof (the "Subsidiaries"). SAT owns and has and marketable title
in and to 100% of the issued and outstanding capital stock (of all classes) of
each of the Subsidiaries, free and clear of all liens, security interests,
claims and encumbrances and rights and options of others, except as set forth on
Exhibit "B".
(b) Each of the Subsidiaries (other than U.S. Drug as to which
SAT makes no representation) is a corporation duly organized, validly existing
and in good standing under the laws of the state of its incorporation, with full
power and authority, corporate and otherwise, and with all licenses, permits,
certifications, registrations, approvals, consents and franchises necessary to
own or lease and operate its properties and to conduct its business as presently
being conducted. Each such Subsidiary is duly qualified to do business as a
foreign corporation, and is in good standing, in all jurisdictions, if any,
wherein such qualification is necessary and where failure so to qualify would
have a material adverse effect on the business, properties or finances of such
Subsidiary.
(c) (i) SAT has the full power and authority, corporate and
otherwise, to execute, deliver and perform this Agreement and to consummate the
transactions contemplated hereby; (ii) the execution, delivery and performance
of this Agreement, the consummation by SAT of the transactions herein
contemplated and the compliance by SAT with the terms of this Agreement have
been duly authorized by SAT; (iii) this Agreement is the valid and binding
obligation of SAT, enforceable in accordance with its terms, subject, as to
enforcement of remedies, to applicable bankruptcy, insolvency, reorganization,
moratorium and other laws affecting the rights of creditors generally and the
discretion of courts in granting equitable remedies; (iv) the execution,
delivery and performance of this Agreement by SAT and the consummation by SAT of
the transactions herein contemplated do not, and will not, with or without the
giving of notice or the lapse of time, or both, (A) result in any violation of
the Certificate of Incorporation (except possibly as indicated in Section 17(g)
hereof) or By-Laws of SAT, (B) result in a breach of, or a conflict with, any of
the terms or provisions of, or constitute a default under, or result in the
modification or termination of, or result in the creation or imposition of any
lien, security interest, charge or encumbrance upon any of the properties or
assets of SAT pursuant to, any indenture, mortgage, note, contract, commitment
or other
E-13
<PAGE> 13
agreement or instrument to which SAT is a party or by which it is, or any of its
respective properties or assets are, or may be, bound or affected; (C) to the
best knowledge of SAT, after due investigation, violate any existing applicable
law, rule, regulation, judgment, order or decree of any governmental agency or
court, domestic or foreign, having jurisdiction over SAT and/or any of the
Subsidiaries (other than U.S. Drug as to which SAT makes no representation), or
any of their respective properties or businesses; or (D) have any effect on any
license, permit, certification, registration, approval, consent or other
authorization necessary for SAT and/or any of the Subsidiaries (other than U.S.
Drug as to which SAT makes no representation) to own or lease and operate any of
its respective properties and to conduct its businesses or the ability of SAT
and/or any of the Subsidiaries (other than U.S. Drug as to which SAT makes no
representation) to make use thereof. No consent, approval, authorization or
order of any court, governmental agency, authority or body (other than as
required pursuant to the Securities Act, the Exchange Act and/or state
securities or "take over" statutes and the rules and regulations promulgated
under any of the foregoing and/or any party to an agreement to which SAT is a
party and/or by which it is bound) is required in connection with the execution,
delivery and performance of this Agreement and/or the consummation by SAT of the
transactions contemplated by this Agreement.
(d) Neither SAT nor any of the Subsidiaries (other than U.S.
Drug as to which SAT makes no representation) is in violation of, or in default
under, (i) any term or provision of its Certificate of Incorporation or By-Laws;
(ii) any material term or provision of any financial covenant of any indenture,
mortgage, contract, commitment or other agreement or instrument to which it is a
party or by which it or any or its properties or business is, or may be, bound
or affected; or (iii) any existing applicable law, rule, regulation, judgment,
order or decree of any governmental agency or court, domestic or foreign, having
jurisdiction over it or any of its properties or business, including, without
limitation, all reporting obligations pursuant to the Exchange Act and the rules
and regulations promulgated thereunder. SAT and each Subsidiary (other than U.S.
Drug as to which SAT makes no representation) owns, possesses or has obtained
all governmental and other licenses, permits, certifications, registrations,
approvals or consents and other authorizations necessary to own or lease, as the
case may be, and to operate its properties and to conduct its business or
operations as presently conducted and all such governmental and other licenses,
permits, certifications, registrations, approvals, consents and other
authorizations are outstanding and in good standing and there are no proceedings
pending or, to the best of its knowledge, threatened or any basis therefor
existing, seeking to cancel, terminate or limit such licenses, permits,
certifications, registrations, approvals or consents or authorizations.
(e) Prior to the date hereof SAT has delivered to U.S. Drug
copies of the audited consolidated financial statements (the "SAT Audited
Financial Statements") and the unaudited interim financial statements (the "SAT
Interim Financial Statements") described on Exhibit "C" annexed hereto and made
a part hereof (collectively the "SAT Financial Statements). The SAT Audited
Financial Statements fairly present the financial position of SAT and the
Subsidiaries as of the respective dates thereof and the results of operations,
and the changes in financial position of SAT and the Subsidiaries, for each of
the periods covered thereby. The SAT Audited Financial Statements have been
prepared in conformity with generally accepted
E-14
<PAGE> 14
accounting principles, applied on a consistent basis throughout the entire
periods involved. The SAT Unaudited Financial Statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and the instructions to Form 10-Q and Item 310 of Regulation S-K of
the SEC. Accordingly, the interim financial statements may not include all of
the information and footnotes required by generally accepted accounting
principles. In the opinion of SAT's management, all adjustments (consisting of
normal recurring adjustments) considered necessary for a fair presentation have
been included. As of the date of any balance sheet forming a part of the SAT
Financial Statements and, except as and to the extent reflected or reserved
against therein, neither SAT nor any of the Subsidiaries (other than U.S. Drug
as to which SAT makes no representation) had any material liabilities, debts,
obligations or claims (absolute or contingent) asserted against it or them
and/or which should have been reflected in a balance sheet or the notes thereto;
and all assets reflected thereon are properly reported and present fairly the
value of the assets therein stated in accordance with generally accepted
accounting principles.
(f) The financial and other books and records of SAT and each
of the Subsidiaries (other than U.S. Drug as to which SAT makes no
representation) are in all material respects true, complete and correct and
have, at all times, been maintained in accordance with good business and
accounting practices.
(g) SAT and the Subsidiaries (other than U.S. Drug as to which
SAT makes no representation) own and have good and marketable title in and to
all of their respective assets, properties and interests in properties (both
real and personal) which are reflected in the latest balance sheet included in
the SAT Financial Statements and/or are utilized in connection with the
operation of the business of SAT and such Subsidiaries as presently constituted
and/or acquired after that date (except to the extent any of the same were
disposed of since such date in the ordinary course of business), in all cases
free and clear of all liens, security interests, claims and encumbrances of
every kind, nature and description and rights and options of others except as
expressly set forth in such balance sheet.
(h) Except as is set forth on Exhibit "D" hereto, SAT and the
Subsidiaries (other than U.S. Drug as to which SAT makes no representation) own
all trademarks, service marks, tradenames, copyrights, similar rights and their
registrations, trade secrets, methods, practices, systems, ideas, know how and
confidential materials used or proposed to be used in the conduct of their
respective businesses as conducted as of the date hereof (collectively the
"Intangibles") free and clear of all liens, security interests, claims and
encumbrances and rights and options of third parties (including, without
limitation, former or current officers, directors, stockholders, employees and
agents); neither SAT nor any such Subsidiary has licensed or leased any of the
Intangibles and/or any interest therein to any person and/or entity except a
Subsidiary; neither SAT nor any such Subsidiary has infringed, nor is
infringing, upon the rights of others with respect to the Intangibles; neither
SAT nor any such Subsidiary has received any notice of conflict with the
asserted rights of others with respect to the Intangibles which could, singly or
in the aggregate, materially adversely affect its business as currently
conducted or prospects, financial condition or results of operations and SAT
knows of no basis therefor; and, to the best of the knowledge of SAT, no others
have infringed upon the Intangibles.
E-15
<PAGE> 15
(i) Except as and to the extent reflected or reserved against
in the SAT Financial Statements and/or as set forth on Exhibit "E" annexed
hereto and made a part hereof, neither SAT nor any of the Subsidiaries (other
than U.S. Drug as to which SAT makes no representation) had, as at the
respective date of such SAT Financial Statements, any material liabilities,
debts, obligations or claims asserted against it, whether accrued, absolute,
contingent or otherwise, and whether due or to become due, including, but not
limited to, liabilities on account of due and unpaid taxes, other governmental
charges or lawsuits.
(j) Since the date of the most recent balance sheet included
in the SAT Financial Statements, neither SAT nor any Subsidiary (other than U.S.
Drug as to which SAT makes no representation) has, except as set forth on
Exhibit "F" annexed hereto and made a part hereof, (i) incurred any obligation
or liability (absolute or contingent, secured or unsecured) except obligations
and liabilities incurred in the ordinary course of the operation of its business
as carried on at and prior to such date; (ii) cancelled, without payment in
full, any notes, loans or other obligations receivable or other debts or claims
held by it other than in the ordinary course of business; (iii) sold, assigned,
transferred, abandoned, mortgaged, pledged or subjected to lien or security
interest any of its material properties, tangible or intangible, or rights under
any contract, permit, license, franchise or other agreement other than sales or
other dispositions of goods or services in the ordinary course of business at
customary prices; (iv) entered into any line of business other than that
conducted by it on such date or entered into any transaction not in the ordinary
course of its business; (v) conducted any line of business in any manner except
by transactions customary in the operation of its material business as conducted
on such date; or (vi) declared, made or paid, or set aside for payment, any cash
or non-cash dividends or other distribution on any shares of its capital stock.
(k) Except as set forth on Exhibit "G" annexed hereto and made
a part hereof, neither SAT nor any of the Subsidiaries (other than U.S. Drug as
to which SAT makes no representation) is in default, in any material respect,
under the terms of any outstanding agreement which is material to the business,
operations, properties, assets or condition of SAT and/or the Subsidiaries
(other than U.S. Drug as to which SAT makes no representation); and there exists
no event of default or event which, with notice and/or the passage of time, or
both, would constitute any such default.
(l) Except as reported in the SAT Financial Statements and/or
as set forth on Exhibit "H" hereto and made a part hereof, there are no claims,
actions, suits, proceedings, arbitrations, investigations or inquiries before
any court or governmental agency, court or tribunal, domestic, or foreign, or
before any private arbitration tribunal, pending or, to the best of the
knowledge of SAT, threatened against SAT and/or any Subsidiary (other than U.S.
Drug as to which SAT makes no representation) or involving their respective
properties or businesses which, if determined adversely to SAT or such
Subsidiary, would, individually or in the aggregate, result in a material
adverse change in the financial position, stockholders' equity, results of
operations, properties, business, management or affairs of SAT or such
Subsidiary, or which question the validity of this Agreement or of any action
taken, or to be taken, by SAT pursuant to, or in connection with, this
Agreement; nor, to the best of the knowledge of SAT, is
E-16
<PAGE> 16
there any basis for any such claim, action, suit, proceeding, arbitration,
investigation or inquiry to be made by any person and/or entity, including,
without limitation, any customer, supplier, lender, stockholder, former or
current employee, agent or landlord. There are no outstanding orders, judgments
or decrees of any court, governmental agency or other tribunal specifically
naming SAT and/or any Subsidiary (other than U.S. Drug as to which SAT makes no
representation) and/or enjoining SAT and/or any such Subsidiary from taking, or
requiring SAT and/or any such Subsidiary to take, any action and/or by which SAT
and/or any such Subsidiary is, and/or their respective properties or businesses
are, bound or subject.
(m) SAT and each of the Subsidiaries (other than U.S. Drug as
to which SAT makes no representation) has filed all federal, state, municipal
and local tax returns (whether relating to income, sales, franchise,
withholding, real or personal property or otherwise) required to be filed under
the laws of the United States and all applicable states and has paid in full all
taxes which are due pursuant to such returns or claimed to be due by any taxing
authority or otherwise due and owing. No penalties or other charges are, or will
become, due with respect to the late filing of any such return. To the best of
the knowledge of SAT, after due investigation, each such tax return heretofore
filed by SAT and each of such Subsidiaries correctly and accurately reflects the
amount of its tax liability thereunder. SAT has withheld, collected and paid all
other levies, assessments, license fees and taxes to the extent required and,
with respect to payments, to the extent that the same have become due and
payable.
(n) The authorized and outstanding capitalization of SAT is as
set forth on Exhibit "I" annexed hereto and made a part hereof; as of the date
hereof and the Closing Date, there shall not be authorized and/or issued and
outstanding any shares of capital stock of SAT and/or rights to purchase shares
of capital stock of SAT except as set forth on Exhibit "I" or upon the exercise
of outstanding warrants or the conversion of outstanding shares of preferred
stock or convertible notes. The issued and outstanding shares of the SAT Common
Stock and outstanding warrants and other similar rights to purchase or convert
into the SAT Common Stock have been duly authorized and validly issued. All such
outstanding shares of the SAT Common Stock are fully paid and nonassessable. All
such outstanding warrants and similar rights to purchase or convert into the SAT
Common Stock constitute the valid and binding obligations of SAT, enforceable in
accordance with their respective terms, subject, as to enforcement of remedies,
to applicable bankruptcy, insolvency, reorganization, moratorium and other laws
affecting the rights of creditors generally and the discretion of courts in
granting equitable remedies. There are no preemptive rights. SAT has no reason
to believe that any holder of such outstanding shares of the SAT Common Stock is
subject to personal liability solely by reason of being such a holder. The
offers and sales of such outstanding shares of the SAT Common Stock and
outstanding warrants and similar rights to purchase or convert into the SAT
Common Stock were, at all relevant times, either registered under the applicable
provisions of the Securities Act and the applicable state securities laws or
exempt from such registration or prospectus filing requirements pursuant to an
exemption for which SAT and/or such offering or sale fully qualified, or any
claim arising out of, or relating to, any such offering and/or sale are barred
by the statute of limitations. The authorized shares of the SAT Common Stock and
outstanding warrants and similar rights to purchase or convert into the SAT
Common Stock conform to the description thereof contained in the current filings
by SAT pursuant to the Exchange Act. No
E-17
<PAGE> 17
dividends or other distributions of the assets of SAT have or will be declared
and/or paid prior to the Closing Date on or with respect to the SAT Common
Stock.
(o) Except as is set forth on Exhibit "J" hereto, since the
date of the most recent balance sheet included in the SAT Financial Statements,
there has not been, with respect to SAT and/or the Subsidiaries (other than U.S.
Drug as to which SAT makes no representation), except as set forth in or
permitted by this Agreement, or, in the ordinary course of business:
(i) Any change in their respective material business,
operations or financial condition, or the manner of managing or conducting their
respective business and operations; none of which changes, if any, has had a
material adverse effect on such business, operations or financial condition,
taken as a whole;
(ii) Any change in their respective accounting
methods or practices (including, without limitation, any change in depreciation,
amortization and/or good will policies or rates);
(iii) Any damage, destruction or loss (whether or not
covered by insurance) materially and adversely affecting their respective
assets, business, operations or financial condition;
(iv) Any declaration, setting, or payment of a
dividend or other distribution with respect to the SAT Common Stock or any
direct or indirect redemption, purchase or other acquisition by SAT of any of
the shares of the SAT Common Stock;
(v) Any issuance or sale of any shares of their
respective capital stock of any class or any other securities except for the
exercise of warrants to purchase shares of the SAT Common Stock outstanding
prior to the date hereof;
(vi) Any loan by any of them to any person or entity
and/or the issuance of any guaranty by any of them for or with respect to their
own or another's obligations;
(vii) Any waiver or release of any material right or
claim;
(viii) Any sale, lease, abandonment, assignment,
transfer, license or other disposition (including any agreement and/or option
for, or with respect to, any of the foregoing) by any of them of any material
real property or tangible or intangible assets, property or rights (and/or
interest therein);
(ix) Any incurrence of any material obligation or
liability, absolute or contingent;
(x) Any payment of any material obligation or
liability, absolute or contingent, except for current liabilities reflected in,
or shown on, the SAT Financial Statements
E-18
<PAGE> 18
and/or incurred subsequent to the date thereof in the ordinary course of
business and/or in connection with the transactions contemplated by this
Agreement;
(xi) Any labor problems and/or other events or
conditions of any character materially and/or adversely affecting, or which
might materially and/or adversely affect, the financial condition, business,
assets or prospects of any of them;
(xii) Any amendment, termination or modification of
any material agreement or license to which any of them is a party which has or
may have a material affect on the financial condition, business, assets or
prospects of any of them; and
(xiii) Any agreement by any of them to do or perform
any of the things described in this Section 14(o).
(p) At the Closing, all of the shares of the SAT Common Stock
to be issued by SAT pursuant to this Agreement shall be, and be deemed to be,
duly and validly authorized and, when issued to the U.S. Drug Minority
Stockholders in exchange for their shares of the U.S. Drug Common Stock, duly
and validly issued, fully paid and nonassessable and free and clear of all
federal and state issuance, stock and/or company taxes, liens, security
interests, claims, encumbrances and charges.
15. ACQUISITION CORP. REPRESENTATIONS AND WARRANTIES. In order to
induce U.S. Drug to execute and perform this Agreement, Acquisition Corp. does
hereby represent, warrant, covenant and agree (which representations,
warranties, covenants and agreements shall be, and be deemed to be, continuing
and survive the execution and delivery of this Agreement, the Closing and the
Effective Date) as follows:
(a) Acquisition Corp. is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware, with full
power and authority, corporate and otherwise, and with all licenses, permits,
certifications, registrations, approvals, consents and franchises necessary to
own or lease and operate its properties and to conduct its business as presently
being conducted. Neither prior to the date hereof has Acquisition Corp. engaged,
nor prior to the Closing Date will Acquisition Corp. engage, in any business
activity of any kind nature or description except in connection with the
implementation of the transactions herein described. Acquisition Corp. has no
subsidiaries, nor, at the present time is it, or at the Closing will it be, a
partner or joint venturer with any other person or entity.
(b) (i) Acquisition Corp. has the full power and authority,
corporate and otherwise, to execute, deliver and perform this Agreement and to
consummate the transactions contemplated hereby; (ii) the execution, delivery
and performance of this Agreement, the consummation by Acquisition Corp. of the
transactions herein contemplated and the compliance by Acquisition Corp. with
the terms of this Agreement have been duly authorized by Acquisition Corp.;
(iii) this Agreement is the valid and binding obligation of Acquisition Corp.,
enforceable in accordance with its terms, subject, as to enforcement of
remedies, to applicable bankruptcy, insolvency, reorganization, moratorium and
other laws affecting the rights of creditors generally
E-19
<PAGE> 19
and the discretion of courts in granting equitable remedies; (iv) the execution,
delivery and performance of this Agreement by Acquisition Corp. and the
consummation by Acquisition Corp. of the transactions herein contemplated do
not, and will not, with or without the giving of notice or the lapse of time, or
both, (A) result in any violation of the Certificate of Incorporation or By-Laws
of Acquisition Corp., (B) result in a breach of, or a conflict with, any of the
terms or provisions of, or constitute a default under, or result in the
modification or termination of, or result in the creation or imposition of any
lien, security interest, charge or encumbrance upon any of the properties or
assets of Acquisition Corp. pursuant to, any indenture, mortgage, note,
contract, commitment or other agreement or instrument to which Acquisition Corp.
is a party or by which it is, or any of its respective properties or assets are,
or may be, bound or affected; or (C) to the best knowledge of Acquisition Corp.,
after due investigation, violate any existing applicable law, rule, regulation,
judgment, order or decree of any governmental agency or court, domestic or
foreign, having jurisdiction over Acquisition Corp. or its assets. No consent,
approval, authorization or order of any court, governmental agency, authority or
body (other than as required pursuant to the Securities Act, the Exchange Act
and/or state securities or "take over" statutes and/or any party to an agreement
to which Acquisition Corp. is a party and/or by which it is bound, is required
in connection with the execution, delivery and performance of this Agreement,
and/or the consummation by Acquisition Corp. of the transactions contemplated by
this Agreement.
(c) Acquisition Corp. is not in violation of, or in default
under, (i) any term or provision of its Certificate of Incorporation or By-Laws;
(ii) any material term or provision of any financial covenant of any indenture,
mortgage, contract, commitment or other agreement or instrument to which it is a
party or by which it or any or its properties is, or may be, bound or affected;
or (iii) any existing applicable law, rule, regulation, judgment, order or
decree of any governmental agency or court, domestic or foreign, having
jurisdiction over it or any of its assets.
(d) Acquisition Corp. was incorporated on December 18, 1995
and its sole asset is the $1,000 which SAT paid in subscription for 100 shares
of its authorized 1,500 shares of common stock, without par value, and it has
incurred no liabilities other than its incorporation costs. Prior to the date
hereof, Acquisition Corp. has conducted no business operations and, prior to the
Effective Date, its sole activities will be in connection with the transactions
contemplated by this Agreement.
(e) The financial and other books and records of Acquisition
Corp. are in all material respects true, complete and correct and have, at all
times, been maintained in accordance with good business and accounting
practices.
(f) Except as set forth on Exhibit "K" hereto and made a part
hereof, there are no claims, actions, suits, proceedings, arbitrations,
investigations or inquiries before any court or governmental agency, court or
tribunal, domestic, or foreign, or before any private arbitration tribunal,
pending or, to the best of the knowledge of Acquisition Corp., threatened
against Acquisition Corp. or involving its assets which, if determined adversely
to Acquisition Corp., would, individually or in the aggregate, result in a
material adverse change in the financial position, stockholders' equity, results
of operations, properties, business, management or affairs
E-20
<PAGE> 20
of Acquisition Corp., or which question the validity of this Agreement or of any
action taken or to be taken by Acquisition Corp. pursuant to, or in connection
with, this Agreement; nor, to the best of the knowledge of Acquisition Corp., is
there any basis for any such claim, action, suit, proceeding, arbitration,
investigation or inquiry to be made by any person and/or entity. There are no
outstanding orders, judgments or decrees of any court, governmental agency or
other tribunal specifically naming Acquisition Corp. and/or enjoining
Acquisition Corp. from taking, or requiring Acquisition Corp. to take, any
action, and/or by which Acquisition Corp. is, and/or its assets are, bound or
subject.
16. U.S. DRUG COVENANTS, U.S. Drug shall, during the period commencing
on the date hereof and terminating immediately following the close of business
on the Effective Date (or earlier, upon the failure or refusal of the U.S. Drug
Minority Stockholders to approve this Agreement and/or the termination of this
Agreement as herein provided):
(a) Take and perform any and all actions necessary to render
accurate, and/or maintain the accuracy of, all of the representations and
warranties of U.S. Drug herein contained and/or satisfy each covenant or
condition required to be performed or satisfied by U.S. Drug at or prior to the
Closing and/or to cause or permit the implementation of the Merger;
(b) Not take or perform any action which would or might cause
any representation or warranty made by U.S. Drug herein to be rendered
inaccurate, in whole or in part, and/or which would prevent, inhibit or preclude
the satisfaction, in whole or in part, of any covenant required to be performed
or satisfied by U.S. Drug at or prior to the Closing and/or the implementation
of the Merger;
(c) Carry on and maintain its business in substantially the
same form, style and manner as heretofore operated by it; perform, in all
material respects, all of its respective obligations under all material
agreements, leases and documents relating to or affecting its respective assets,
properties and businesses; and use its best efforts to preserve intact its
business organization and the good will and relationships with its suppliers,
customers and others having business relations with it.
(d) Not make, or permit to be made on its behalf, any
announcement to the public in general and/or within its industry and/or
otherwise with respect to this Agreement, the Merger and the current or future
business or operations of any party hereto without the prior written consent of
SAT or, in the case of an announcement required by applicable securities laws,
prior consultation with SAT; and
(e) Immediately advise SAT of any event, condition or
occurrence which constitutes, or may, with the passage of time and/or giving of
notice, constitute, a breach of any representation or warranty of U.S. Drug
herein contained and/or which prevents, inhibits or limits or may prevent,
inhibit or limit U.S. Drug from satisfying, in full and on a timely basis, any
covenant, term or condition herein contained and/or implementing this Agreement.
E-21
<PAGE> 21
17. SAT COVENANTS. SAT shall, during the period commencing on the date
hereof and terminating immediately following the close of business on the
Effective Date (or earlier, upon the failure or refusal of the U.S. Drug
Minority Stockholders to approve this Agreement and/or the termination of this
Agreement as herein provided):
(a) Take and perform any and all actions necessary to render
accurate, and/or maintain the accuracy of, all of the representations and
warranties of SAT herein contained and/or satisfy each covenant or condition
required to be performed or satisfied by SAT at or prior to the Closing and/or
to cause or permit the implementation of the Merger;
(b) Not take or perform any action which would or might cause
any representation or warranty made by SAT herein to be rendered inaccurate, in
whole or in part, and/or which would prevent, inhibit or preclude the
satisfaction, in whole or in part, of any covenant required to be performed or
satisfied by SAT at or prior to the Closing and/or the implementation of the
Merger;
(c) Carry on and maintain its business in substantially the
same form, style and manner as heretofore operated by it; perform, in all
material respects, all of its obligations under all material agreements, leases
and documents relating to or affecting its assets, properties and business; and
use its best efforts to preserve intact its business organization and the good
will and relationships with its suppliers, customers and others having business
relations with it;
(d) Not make any announcement to the public in general and/or
within its industry and/or otherwise with respect to this Agreement, the Merger
and the current or future business or operations of any party hereto without the
prior written consent of U.S. Drug or, in the case of an announcement required
by applicable securities laws, prior consultation with U.S. Drug;
(e) Immediately advise U.S. Drug of any event, condition or
occurrence which constitutes, or may, with the passage of time and/or giving of
notice, constitute, a breach of any representation or warranty of SAT herein
contained and/or which prevents, inhibits or limits or may prevent, inhibit or
limit SAT from satisfying, in full and on a timely basis, any covenant, term or
condition herein contained and/or implementing this Agreement;
(f) Subject to U.S. Drug's compliance with its obligations
under Section 12 hereof, use its best efforts to have the Registration Statement
declared effective under the Securities Act;
(g) Call a Special Meeting of Stockholders to approve an
amendment to SAT's Certificate of Incorporation to increase the authorized
shares of the SAT Common Stock in an amount sufficient to permit the Merger, the
merger of Good Ideas Acquisition Corp. with and into Good Ideas Enterprises,
Inc., the conversion of all outstanding convertible notes and shares of the
preferred stock and the exercise of all outstanding warrants; and
E-22
<PAGE> 22
(h) Extend the terms of the notes due to SAT from U.S. Drug,
if and only if the consent solicitation for the Merger is still in progress on
April 30, 1997, to the earlier of (i) five business days after the results of
the solicitation are known and the results are that the Merger has not been
approved or (ii) the Effective Date.
18. SAT AND ACQUISITION CORP. CONDITIONS PRECEDENT. The obligations of
SAT and Acquisition Corp. to implement this Agreement and consummate the Merger
are, at their respective elections, subject to, and conditioned upon, the
satisfaction (and/or waiver except as to Sections 18(a), (b), (f) and (h)) of
each of the following conditions:
(a) Prior to the Closing Date the holders of more than 50% of
the shares of the Minority U.S. Drug Common Stock shall have adopted this
Agreement by consenting to the adoption of this Agreement pursuant to the
Consent Solicitation Statement/Prospectus.
(b) The Registration Statement shall have been declared
effective by the SEC and all appropriate state securities administrators and no
"stop orders" shall have been issued and/or be in effect or a proceeding for
such purpose shall have been instituted and be pending.
(c) The representations and warranties of U.S. Drug contained
in this Agreement shall be true and correct in all material respects as of the
Effective Date with the same effect as if made on and as of the Effective Date
and U.S. Drug shall have performed in all material respects all of its covenants
and obligations contemplated hereunder to be performed on or prior to the
Effective Date. At the Closing, SAT shall have received a certificate, executed
by the President and the Secretary of U.S. Drug (effective as of the Closing and
the Effective Date) and in form reasonably acceptable to SAT, certifying as of
both the date of this Agreement and the Closing Date, the truth and accuracy of
(and the remaking of) the representations and warranties of U.S. Drug herein
contained, including, without limitation, those set forth in Section 13 hereof.
(d) Prior to the Closing, there shall not have occurred any
material adverse change in the financial condition, business or operations of
U.S. Drug, nor shall any event have occurred or condition exist which, with the
passage of time or the giving of notice, may cause or create any such adverse
material change.
(e) Prior to the Closing, all corporate and other proceedings
in connection with the transactions contemplated by this Agreement and all
documents and instruments incident to such transactions shall be in form and
content reasonably satisfactory to SAT and its counsel and SAT and its counsel
shall have received all counterpart originals or certified or other copies of
such documents and instruments as they may reasonably request.
(f) No action or proceeding shall have been instituted and be
pending by any private party and/or governmental agency or authority challenging
the legality of this Agreement or the Merger and/or seeking to prevent or delay
consummation of the transactions herein contemplated, which action or proceeding
shall have resulted in an order granting preliminary or permanent injunctive
relief prohibiting consummation of this Agreement and/or the Merger and which
order shall not have been vacated as of the Closing.
E-23
<PAGE> 23
(g) All statutory requirements for the valid consummation by
U.S. Drug of the transactions herein described shall have been fully and timely
satisfied; all authorizations, consents and approvals of all Federal, state and
local governmental agencies and authorities required to be obtained in order to
permit consummation by U.S. Drug of the transactions herein described and/or to
permit the businesses currently carried on by U.S. Drug to continue unimpaired
in all material respects immediately following the Effective Date shall have
been obtained and shall be in full force and effect; and no action or proceeding
to suspend, revoke, cancel, terminate, modify or alter any of such
authorizations, consents or approvals shall be pending or threatened.
(h) U.S. Drug shall have received a written opinion from Whale
Securities Co., L.P., satisfactory to SAT in form and content, regarding the
fairness, from a financial point of view, to the U.S. Drug Minority Stockholders
of the exchange ratio offered pursuant to the terms of the Merger.
19. U.S. DRUG CONDITIONS PRECEDENT. The obligation of U.S. Drug to
implement this Agreement and to consummate the Merger is, at its election,
subject to, and conditioned upon, the satisfaction (and/or waiver except as to
Section 19(a), (b), (c), (g) and (i)) of each of the following conditions:
(a) Prior to the Closing Date the holders of more than 50% of
the shares of the Minority U.S. Drug Common Stock shall have adopted this
Agreement by consenting to the adoption of this Agreement pursuant to the
Consent Solicitation Statement/ Prospectus.
(b) Prior to the Closing Date SAT shall have adopted this
Agreement by filing with U.S. Drug a consent to its adoption.
(c) The Registration Statement shall have been declared
effective by the SEC and all appropriate state securities administrators and no
"stop orders" shall have been issued and/or be in effect or a proceeding for
such purpose shall have been instituted and be pending.
(d) The representations and warranties of SAT and Acquisition
Corp. contained in this Agreement shall be true and correct in all material
respects as of the Effective Date with the same effect as if made on and as of
the Effective Date. At the Closing, U.S. Drug shall have received a certificate,
executed by the Chairman of the Board and the Secretary of SAT and Acquisition
Corp. (effective as of the Closing and the Effective Date) and in form and
content reasonably acceptable to U.S. Drug, certifying, as to both the date of
this Agreement and the Closing Date the truth and accuracy of (and the remaking
of) the representations and warranties of SAT and Acquisition Corp. herein
contained, including, without limitation, those set forth in Sections 14 and 15
hereof.
(e) Prior to the Closing, there shall not have occurred any
material adverse change in the financial condition, business or operations of
SAT and the Subsidiaries (excluding U.S. Drug) as a consolidated entity, nor
shall any event have occurred or condition exist which,
E-24
<PAGE> 24
with the passage of time or the giving of notice, may cause or create any such
adverse material change.
(f) Prior to the Closing, all corporate and other proceedings
in connection with the transactions contemplated by this Agreement and all
documents and instruments incident to such transactions shall be in form and
content reasonably satisfactory to U.S. Drug and its counsel and U.S. Drug and
its counsel shall have received all counterpart originals or certified or other
copies of such documents and instruments as they may reasonably request.
(g) No action or proceeding shall have been instituted and be
pending by any private party and/or governmental agency or authority challenging
the legality of this Agreement or the Merger and/or seeking to prevent or delay
consummation of the transactions herein contemplated, which action or proceeding
shall have resulted in an order granting preliminary or permanent injunctive
relief prohibiting consummation of this Agreement and/or the Merger and which
order shall not have been vacated as of the Closing.
(h) All statutory requirements for the valid consummation by
SAT of the transactions herein described shall have been fully and timely
satisfied; all authorizations, consents and approvals of all Federal, state and
local governmental agencies and authorities required to be obtained in order to
permit consummation by SAT of the transactions herein described and/or to permit
the businesses currently carried on by SAT to continue unimpaired in all
material respects immediately following the Effective Date shall have been
obtained and shall be in full force and effect; and no action or proceeding to
suspend, revoke, cancel, terminate, modify or alter any of such authorizations,
consents or approvals shall be pending or threatened.
(i) U.S. Drug shall have received a written opinion from Whale
Securities Co., L.P., satisfactory to U.S. Drug in form and content, regarding
the fairness, from a financial point of view, to the U.S. Drug Minority
Stockholders of the exchange ratio offered pursuant to the terms of the Merger.
20. TERMINATION.
(a) This Agreement may be terminated and the Merger abandoned
at any time prior to the Effective Date, whether before or after submission to,
or approval by, the U.S. Drug Minority Stockholders as herein provided either:
(a) by mutual agreement of the Boards of Directors of U.S. Drug and SAT; or (b)
by the Board of Directors of either U.S. Drug or SAT if either (i) the Closing
shall not have taken place on or prior to September 30, 1997 (other than by
reason of the default hereunder by the terminating party) or (ii) there is any
statute, rule or regulation which makes consummation of the Merger illegal or
otherwise prohibited or any order, decree, injunction or judgment enjoining SAT,
U.S. Drug or Acquisition Corp. from consummating the Merger is issued by a court
of competent jurisdiction and such order, decree, injunction or judgment has
become final and non-appealable; or (c) by the Board of Directors of SAT or U.S.
Drug if, based upon the opinion of its outside counsel, such Board of Directors
determines that making a recommendation to the U.S. Drug Minority Stockholders
to adopt the
E-25
<PAGE> 25
Merger Agreement could reasonably be deemed to cause the members of such Board
of Directors to breach their fiduciary duty under applicable law to its
respective stockholders.
(b) If this Agreement shall be terminated and/or the Merger
abandoned pursuant to the provisions of subsection (a) of this Section 20 hereof
(other than by reason of the default of any party hereunder), then and in that
event SAT shall bear all of the costs and its special expenses except for those
of Whale Securities Co., L.P. and of counsel to U.S. Drug and there shall be no
liability on the part of any party hereto (and/or their respective officers,
directors, agents and employees) to any other party hereto (and/or their
respective officers, directors, agents and employees).
21. COSTS AND EXPENSES. SAT shall pay all costs and expenses relating
to the transactions contemplated by this Agreement, including, without
limitation, the costs and expenses relating to the preparation of this Agreement
and the Registration Statement, such as attorneys' fees, accounting fees,
printing expenses and consent solicitation expenses, except that U.S. Drug will
pay all costs and expenses of Whale Securities Co., L.P. and of its special
counsel.
22. NOTICES. Any and all notices, requests or instructions desired to
be given by any party hereto to any other party hereto shall be in writing and
shall be either be hand delivered, delivered by express courier or mailed to the
recipient first class, postage prepaid, certified, return receipt requested at
the following respective addresses:
To: U.S. Drug
10410 Trademark Street
Rancho Cucamonga, California 91730
Attn: President
With a copy to:
Rosenman & Colin LLP
575 Madison Avenue
New York, New York 10022
Attn: Edward H. Cohen, Esq.
To: SAT or Acquisition Corp.
4517 N.W. 31st Avenue
Ford Lauderdale, Florida 33309
Attn: Chairman of the Board
E-26
<PAGE> 26
With a copy to:
Gold & Wachtel, LLP
110 East 59th Street
New York, New York 10022
Attn: Robert W. Berend, Esq.
or to such other address as any party hereto shall designate in a writing
complying with the provisions of this Section 22.
23. WAIVER. Each of the parties hereto may, by written instrument, (a)
extend the time for the performance of any of the obligations or other acts of
any party hereto; (b) waive any inaccuracies of such other party in the
representations and warranties contained herein or in any document delivered
pursuant to this Agreement; (c) waive compliance with any of the covenants of
such other party contained in this Agreement; (d) waive such other party's
performance of any of such party's obligations set out in this Agreement; and
(e) waive any condition to its obligation to effect the Merger. Anything in this
Section 23 to the contrary notwithstanding, no party hereto may waive the
requirements that the holders of more than 50% of the shares of the Minority
U.S. Drug Common Stock must consent to the adoption of this Agreement and the
Merger, the fairness opinion be delivered as set forth in Section 18(h) or
Section 19(i) or the Registration Statement be effective as set forth in Section
18(b) or Section 19(c).
24. AMENDMENTS. This Agreement may be amended at any time prior to the
Effective Date (whether before or after the consent of stockholders of U.S. Drug
as herein provided) by a writing executed by an authorized officer of SAT, U.S.
Drug and Acquisition (upon due authorization by their respective Boards of
Directors); provided, however, that in no event may the provisions of Sections 4
and 9 hereof be altered, amended, modified, terminated or rescinded without the
approval of the U.S. Drug Minority Stockholders.
25. GOVERNING LAW. This Agreement shall be governed by, and construed
in accordance with, the laws of the State of Delaware applicable to contracts
executed and to be fully performed therein and without regard to principles of
conflicts of laws.
26. EFFECTIVENESS. This Agreement shall inure to the benefit of, and be
binding upon, the parties hereto and any controlling person of any party hereof
as provided in Section 15 of the Securities Act and their respective successors,
transferees, heirs, assigns and beneficiaries.
27. COUNTERPARTS. This Agreement may be executed in multiple copies,
each of which shall constitute an original, but all of which shall constitute
one and the same agreement.
28. PARTIAL INVALIDITY. If any term, covenant or condition in this
Agreement, or the application thereof to any person or circumstance, shall be
invalid or unenforceable, the remainder of this Agreement or the application of
such term, covenant or condition to persons or circumstances, other than those
as to which it is held invalid, shall be unaffected thereby and
E-27
<PAGE> 27
each term, covenant or condition of this Agreement shall be enforced to fullest
extent permitted by law.
29. INTEGRATION. This Agreement (including the Exhibits hereto, the
documents and instruments delivered by the parties hereto and any other
documents executed and delivered and/or to be executed and delivered pursuant to
the provisions of this Agreement as herein provided) sets forth the entire
agreement among the parties hereto with respect to the subject matter herein
contained. There are no covenants, promises, agreements, conditions or
understandings, either oral or written, between or among the parties hereto with
respect to the subject matter hereof except as herein and in such ancillary
documents provided. This Agreement can only be altered, amended, modified,
terminated or rescinded by a writing executed by the party to be charged.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement and
Plan of Merger as of the date first above written.
ATTEST: SUBSTANCE ABUSE TECHNOLOGIES, INC.
______________________________ By:_____________________________________
Secretary Chairman of the Board
U.S. DRUG ACQUISITION CORP.
______________________________ By:_____________________________________
Secretary Chairman of the Board
U.S. DRUG TESTING, INC.
______________________________ By:_____________________________________
Secretary President
E-28
<PAGE> 1
EXHIBIT 3(a)(7)
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
U.S. ALCOHOL TESTING OF AMERICA, INC.
-----------------------------------------
Adopted in accordance with the provisions
of Section 242 of the General Corporation
Law of the State of Delaware
-----------------------------------------
It is hereby certified that:
FIRST: The name of the Corporation is U.S. ALCOHOL TESTING OF AMERICA,
INC..
SECOND: The Certificate of Incorporation of the Corporation is hereby
amended by striking out the whole of Article FIRST thereof as it now exists and
inserting in lieu and instead thereof a new Article FIRST, reading in its
entirety as follows:
"FIRST: The name of the Corporation is SUBSTANCE ABUSE TECHNOLOGIES,
INC. (hereinafter called the "corporation")."
THIRD: The amendment to the Certificate of Incorporation of the
Corporation has been duly adopted in accordance with the provisions of Section
242 of the General Corporation law of the State of Delaware.
Signed and attested to this 22nd day of October, 1996.
U.S. ALCOHOL TESTING OF AMERICA, INC.
By: /s/ Robert M. Stutman
------------------------------------
Robert M. Stutman
Chairman of the Board
Attest:
/s/ Robert W. Berend
- ------------------------------------
Robert W. Berend
Secretary
E-29
<PAGE> 1
COMMON STOCK
SUBSTANCE ABUSE TECHNOLOGIES, INC.
SEE REVERSE FOR
CERTAIN DEFINITIONS
CUSIP 864325 10 5
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
THIS CERTIFICATE IS TRANSFERABLE IN THE CITIES OF LOS ANGELES, CA
OR NEW YORK, NY
THIS CERTIFIES THAT
SPECIMEN
IS THE RECORD HOLDER OF
FULLY PAID AND NONASSESSABLE SHARES OF COMMON STOCK, $.01 PAR VALUE, OF
SUBSTANCE ABUSE TECHNOLOGIES, INC.
transferable on the books of the Corporation in person or by duly authorized
attorney upon surrender of this Certificate properly endorsed. This Certificate
is not valid unless countersigned and registered by the Transfer Agent and
Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile
signatures of its duly authorized officers.
Dated:
/s/ Robert W. Berend SEAL /s/ Robert M. Stutman
SECRETARY CHAIRMAN
COUNTERSIGNED AND REGISTERED
REGISTRAR AND TRANSFER COMPANY
CO-TRANSFER AGENT AND REGISTRAR
BY
AUTHORIZED OFFICER
COUNTERSIGNED AND REGISTERED:
U.S. STOCK TRANSFER CORPORATION
TRANSFER AGENT AND REGISTRAR
BY
ISSUED IN NEW YORK CITY
AUTHORIZED SIGNATURE
E-30
<PAGE> 2
c The Corporation will furnish without charge to each stockholder who so
requests a statement of the powers, designations, preferences and relative,
participating, optional or other special rights of each class of stock of the
Corporation or series thereof and the qualifications, limitations or
restrictions of such preferences and/or rights. Such requests shall be made to
the Corporation's Secretary at the principal office of the Corporation.
The following abbreviations, when used in the description on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM -- as tenants in common
TEN ENT -- as tenants by the entireties
JT TEN -- as joint tenants with right of
survivorship and not as tenants
in common
UNIF GIFT MIN ACT -- ................ Custodian ......................
(Cust) (Minor)
under Uniform Gifts to Minors
Act .............................................
(State)
UNIF TRF MIN ACT -- ............ Custodian (until age ..............)
(Cust)
......................... under Uniform Transfers
(Minor)
to Minors Act ...................................
(State)
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED, hereby sell, assign and transfer unto
--------------------
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- --------------------------------------
- --------------------------------------
- -------------------------------------------------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OR ASSIGNEE)
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Shares
- ------------------------------------------------------------------------
of the capital stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
Attorney
- ----------------------------------------------------------------------
to transfer the said stock on the books of the within named Corporation with
full power of substitution in the premises.
Dated
------------------------------------
X
-----------------------------------------------
X
-----------------------------------------------
NOTICE: THE SIGNATURE(S) TO THIS ASSIGNMENT MUST
CORRESPOND WITH THE NAME(S) AS WRITTEN UPON THE
FACE OF THE CERTIFICATE IN EVERY PARTICULAR
WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE
WHATEVER.
Signature(s) Guaranteed
By
-----------------------------------------------------
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE
GUARANTOR INSTITUTION (BANKS, STOCKBROKERS, SAVINGS
AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH
MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION
PROGRAM). PURSUANT TO S.E.C. RULE 17Ad-15.
E-31
<PAGE> 1
PREFERRED STOCK
SUBSTANCE ABUSE TECHNOLOGIES, INC.
LU SHARES
SEE REVERSE FOR
CERTAIN DEFINITIONS
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
CUSIP 864325 20 4
THIS CERTIFICATE IS TRANSFERABLE IN THE CITIES OF
LOS ANGELES, CA OR NEW YORK, NY
THIS CERTIFIES THAT
SPECIMEN
IS THE RECORD HOLDER OF
FULLY PAID AND NONASSESSABLE SHARES OF THE CUMULATIVE
CONVERTIBLE PREFERRED STOCK, $.01 PAR VALUE, OF
SUBSTANCE ABUSE TECHNOLOGIES, INC.
transferable on the books of the Corporation in person or by duly authorized
attorney upon surrender of this Certificate properly endorsed. This Certificate
is not valid unless countersigned and registered by the Transfer Agent and
Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile signatures
of its duly authorized officers.
Dated:
[SUBSTANCE ABUSE TECHNOLOGIES, INC. CORPORATE SEAL/DELAWARE 1957]
/s/ Robert W. Berency /s/ Robert M. Stutman
- ------------------------------ ------------------------------
SECRETARY CHAIRMAN
COUNTERSIGNED AND REGISTERED:
REGISTRAR AND TRANSFER COMPANY
CO-TRANSFER AGENT AND REGISTRAR
BY
ISSUED IN LOS ANGELES
AUTHORIZED OFFICER
COUNTERSIGNED AND REGISTERED
U.S. STOCK TRANSFER CORPORATION
TRANSFER AGENT AND REGISTRAR
BY
AUTHORIZED SIGNATURE
E-32
<PAGE> 2
The Corporation will furnish without charge to each stockholder who so
requests a statement of the powers, designations, preferences and relative,
participating, optional or other special rights of each class of stock of the
Corporation or series thereof and the qualifications, limitations or
restrictions of such preferences and/or rights. Such requests shall be made to
the Corporation's Secretary at the principal office of the Corporation.
The following abbreviations, when used in the inscription on the face
of this certificate, shall be construed as through they were written out in
full according to applicable laws or regulations:
TEN COM - as tenants in common
TEN ENT - as tenants by the entireties
JT TEN - as joint tenants with rights of
survivorship and not as tenants
in common
UNIF GIFT MIN ACT - ________________________ Custodian ____________________
(Cust) (Minor)
under Uniform Gifts to Minors
Act_____________________________________________________
(State)
UNIF TRP MIN ACT - _________________________Custodian (until age __________)
(Cust)
_____________________________ under Uniform Transfers
(Minor)
to Minors Act _____________________________________
(State)
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED, ______________________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- --------------------------------------
- --------------------------------------
______________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________ shares
of the capital stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
_____________________________________________________________________ Attorney
to transfer the said stock on the books of the within named Corporation with
full power of substitution in the premises.
Dated________________________
X________________________________
X________________________________
NOTICE: THE SIGNATURE(S) TO THIS
ASSIGNMENT MUST CORRESPOND WITH THE
NAME(S) AS WRITTEN UPON THE FACE OF
THE CERTIFICATE IN EVERY PARTICULAR,
WITHOUT ALTERATION OR ENLARGEMENT OR
ANY CHANGE WHATEVER.
Signature(s) Guaranteed
By____________________________________________
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION
(BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH
MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT TO
S.E.C. RULE 17Ad-15.
E-33
<PAGE> 1
EXHIBIT 10(o)(3)
THIRD AMENDMENT TO INDUSTRIAL LEASE
10400 AND 10410 TRADEMARK STREET, RANCHO CUCAMONGA, CA 91730
1. The terms of the industrial lease dated March 18, 1991 originally
between Rancho Cucamonga Business Park as Lessor and U.S. Alcohol Testing of
America as Lessee and currently by and between Substance Abuse Technologies,
Inc. (formerly U.S. Alcohol Testing of America) as Lessee and the Realty Trust
as Lessor is amended as follows:
2. The monthly rentals for the first option period exercised by Lessee
shall be amended as follows:
<TABLE>
<S> <C>
February 1, 1997 to January 31, 1998 $10,750.00
February 1, 1998 to January 31, 1999 $11,072.50
February 1, 1999 to January 31, 2000 $11,404.68
February 1, 2001 to January 21, 2002 $12,099.11
</TABLE>
3. All other terms and conditions of the original lease dated March 18,
1991 and its addendum and amendments shall remain in full force and effect.
4. This Third Amendment is executed in two (2) originals. One original
shall be held by the Lessor, the Realty Trust, and one original shall be held by
the Lessee, Substance Abuse Technologies, Inc.
Dated: January 2, 1997
SUBSTANCE ABUSE TECHNOLOGIES, INC.
By: /s/ Linda H. Masterson
----------------------------------------
Linda H. Masterson, President
Dated: December 30, 1996
THE REALTY TRUST
By: /s/ Simi Dabah
----------------------------------------
Simi Dabah, Trustee
E-34
<PAGE> 1
EXHIBIT 10(pp)
NEITHER THIS WARRANT NOR THE SECURITIES ISSUABLE
UPON EXERCISE HEREOF HAVE BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR UNDER ANY
STATE SECURITIES LAWS AND MAY NOT BE TRANSFERRED IN
VIOLATION OF SUCH ACT OR LAWS, THE RULES OF THIS WARRANT.
WARRANT TO PURCHASE ____________ SHARES
OF COMMON STOCK OF
SUBSTANCE ABUSE TECHNOLOGIES, INC.
ISSUED TO
_____________________
DATED: ______________
WARRANT NO. ____
(INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE)
THIS CERTIFIES THAT _______________ (the "Warrant Holder") is the owner
of a Warrant, subject to adjustment as provided in Section 3 hereof, which
entitles the owner thereof to purchase, in whole or in part at any time, and
from time to time, during the period commencing on ______________ (the
"Commencement Date") and terminating at 5:00 P.M., New York Time, on
______________ (the "Expiration Date"), _____________ fully paid and
nonassessable shares of the Common Stock, no par value (the "Common Stock"), of
Substance Abuse Technologies, Inc., a Delaware corporation (hereinafter called
the "Company"), at the purchase price per share of $________ (the "Purchase
Price"), subject to adjustment as provided in Section 3 hereof, payable in
lawful money of the United States of America upon surrender of this Warrant and
payment of the Purchase Price in lawful money of the United States of America at
the principal office of the Company (currently 4517 NW 31st Avenue, Ft.
Lauderdale, Florida 33309) or at such other place as the Company may designate
by written notice to the Warrant Holder.
1. Exercise
The Warrant evidenced hereby may be exercised from time to time, in
whole or in part, from the Commencement Date until the Expiration Date, provided
that in no event may any fractional share of the Common Stock be issued. In the
event that a fractional share would otherwise be issued as a result of any
adjustment made pursuant to Section 3 hereof or otherwise, payment for such
fractional share shall be made on the basis of the Market Price on the date of
exercise. For the purpose of this Section 1, the term "Market Price" shall mean
(a) if the Common Stock is traded on a national securities exchange or on the
National Association of Securities
E-35
<PAGE> 2
Dealers Automated Quotation ("NASDAQ") System, the closing sales price (or, if
no sales on that day, the high bid price) or (b) if the Common Stock is not
traded as provided in subsection (a), the closing bid price as reported in the
OTC Bulletin Board of the National Association of Securities Dealers, Inc. (the
"NASD") or in the pink sheets by the National Quotation Bureau, Inc.
Upon any exercise of the Warrant evidenced hereby, the form of election
to purchase set forth as Exhibit A hereto shall be properly completed, executed
and delivered to the Company, together with full payment to the Company of the
Purchase Price for the shares as to which the Warrant is exercised by certified
check or bank draft. In the event that there is only a partial exercise of the
Warrant evidenced hereby, there shall be issued to the Warrant Holder a new
Warrant Certificate, in all respects similar to this Warrant Certificate,
evidencing the number of shares of the Common Stock still available for
exercise.
Upon receipt of full payment and properly completed documentation, the
Company shall then cause the Transfer Agent for the Common Stock to issue fully
paid and nonassessable shares of the Common Stock as are represented by the
exercise.
If this Warrant shall be surrendered upon exercise within any period
during which the transfer books for the Common Stock are closed for any purpose,
the Company shall not be required to make delivery of certificates for shares of
the Common Stock until the date of the reopening of said transfer books.
2. Expiration Date
The Warrant evidenced hereby may not be exercised before the
Commencement Date or after the Expiration Date with respect to the shares of the
Common Stock as to which the Warrant may be exercised and, to the extent not
exercised by the Expiration Date, the Warrant evidenced hereby shall become
void.
3. Adjustments
Subject to the provisions of this Section 3, the Purchase Price and the
shares of the Common Stock as to which the Warrant may be exercised shall be
subject to adjustment from time to time as hereinafter set forth:
(a) If at any time, or from time to time, the Company shall,
by subdivision, consolidation, or reclassification of shares, or otherwise,
change as a whole the outstanding shares of the Common Stock into a different
number or class of shares, the number and class of shares so changed shall
replace the shares outstanding immediately prior to such change and the Purchase
Price and the number of shares purchasable under the Warrant immediately prior
to the date on which such change shall become effective shall be proportionately
adjusted.
(b) Irrespective of any adjustments or change in the Purchase
Price or the number of securities actually purchasable under the Warrant, the
Warrant theretofore and thereafter issued may continue to express the exercise
price and the number of securities purchasable
E-36
<PAGE> 3
thereunder as the Purchase Price and the number of securities purchasable were
expressed in the Warrant when initially issued.
(c) If at any time while the Warrant is outstanding, the
Company shall consolidate with, or merge into, another corporation, firm or
entity, or otherwise enter into a form of business combination, the holder of
the Warrant shall thereafter be entitled upon exercise thereof to purchase, with
respect to each security purchasable thereunder immediately prior to the date on
which such consolidation or merger or other form of business combination shall
become effective, the securities or property to which a holder of one such
security would have been entitled upon such consolidation or merger or other
form of business combination, without any change in, or payment in addition to,
the Purchase Price in effect immediately prior to such consolidation or merger
or other form of business combination, and the Company shall take such steps in
connection with such consolidation or merger or other form of business
combination as may be necessary to assure that all the provisions of the Warrant
shall thereafter be applicable, as nearly as reasonably may be, in relation to
any securities or property thereafter deliverable upon the exercise of the
Warrant.
(d) The Board of Directors of the Company, in its discretion,
may, at any time during the exercise period of the Warrant, extend the exercise
period or reduce the Purchase Price for all warrants then outstanding.
(e) Upon the happening of any event requiring the adjustment
of the exercise price hereunder, the Company shall forthwith give written notice
thereof to the registered holder of the Warrant stating the adjusted Purchase
Price and the adjusted number of securities purchasable upon the exercise
thereof resulting from such event and setting forth in reasonable detail the
method of calculation and the facts upon which such calculation is based. The
certificate of the Company's independent public accountants shall be conclusive
evidence of the correctness of any computation made hereunder.
4. Notice to Warrant Holder
Nothing contained herein shall be construed as conferring upon the
Warrant Holder the right to vote or to consent or to receive notice as a
shareholder in respect of the meetings of shareholders for the election of
directors of the Company or any other matter, or any other rights whatsoever as
a shareholder of the Company; provided, however, that in the event that:
(a) the Company shall take action to make any distribution
(other than cash dividends payable out of earnings or earned surplus) on the
Common Stock;
(b) the Company shall take action to offer for subscription
pro rata to the holders of the Common Stock any additional shares of stock of
any class or other rights or securities convertible into the Common Stock;
(c) the Company shall take action to accomplish any capital
reorganization, or reclassification of the capital stock of the Company (other
than a change in par value, or a change
E-37
<PAGE> 4
from par value to no par value, or a change from no par value to par value, or a
subdivision or combination of the Common Stock), or a consolidation or merger of
the Company into, or a sale of all or substantially all of its assets to,
another corporation; or
(d) the Company shall take action looking to a voluntary
dissolution, liquidation or winding up of the Company;
then, in any one or more of such cases, the Company shall, (x) at least 10 days
prior to the date on which the books of the Company shall close or a record date
shall be taken for such distribution or subscription rights or for determining
rights to vote in respect of any such reorganization, reclassification,
consolidation, merger, sale, dissolution, liquidation or winding up, cause
notice thereof to be sent to the Warrant Holder at the address appearing on the
Warrant register of the Company and, (y) in the case of any such reorganization,
reclassification, consolidation, merger, sale, dissolution, liquidation or
winding up, cause at least 10 days' prior written notice of the date when the
same shall take place to be given to the Warrant Holder in the same manner. Such
notice in accordance with the foregoing clause (x) shall also specify, in the
case of any such distribution or subscription rights, the date on which the
holders of the Common Stock shall be entitled thereto, and such notice in
accordance with the foregoing clause (y) shall also specify the date on which
the holders of the Common Stock shall be entitled to exchange their shares of
the Common Stock for securities or other property deliverable upon such
reorganization, reclassification, consolidation, merger, sale, dissolution,
liquidation or winding up, as the case may be. Failure to give such notice or
any defect therein shall not affect the legality or validity of any of the
matters set forth in this Section 5 inclusive.
5. Investment Representation
The Warrant Holder, by his, her or its acceptance of this Warrant,
acknowledges that neither the Warrant nor the shares of the Common Stock
issuable upon exercise thereof have been registered under the Securities Act of
1933, as amended (the "Securities Act"), and, accordingly, represents and
warrants to the Company that he, she or it is acquiring the Warrant for
investment and not with a view to, or in connection with, any distribution
thereof. The holder further represents and warrants that, if a registration
statement under the Securities Act is not effective with respect to the
underlying shares at the time of exercise, the Warrant Holder will acquire the
shares of the Common Stock for investment and not with a view to, or in
connection with, any distribution thereof.
6. Transfers and Exchanges
The Company shall transfer, from time to time, any outstanding Warrant
upon the books to be maintained by the Company for that purpose, upon surrender
thereof for transfer properly endorsed or accompanied by appropriate
instructions for transfer. Upon any such transfer, a new Warrant shall be issued
to the transferee and the surrendered Warrant shall be canceled by the Company.
The Warrant so canceled shall be delivered to the Company from time to time upon
request. Warrants may be exchanged at the option of the holder thereof, when
surrendered at the office of the Company, for another Warrant, or other Warrants
of different denominations, of like
E-38
<PAGE> 5
tenor and representing in the aggregate the rights to purchase a like number of
shares. Anything in this Section 6 to the contrary notwithstanding, no transfer
shall be made if such transfer would violate Section 5 of the Securities Act.
7. Payment of Taxes
The Company will pay any documentary stamp taxes attributable to the
initial issuance of the Common Stock issuable upon the exercise of the Warrant;
provided, however, that the Company shall not be required to pay any tax or
taxes which may be payable in respect of any transfer involved in the issue or
delivery of any certificates for the Common Stock in a name other than that of
the registered holder of the Warrant in respect of which such shares are issued,
and in such case the Company shall not be required to issue or deliver any
certificates for the Common Stock or any Warrant for remaining shares until the
person requesting the same has paid to the Company the amount of such tax or has
established to the Company's satisfaction that such tax has been paid.
8. Mutilated or Missing Warrant
In case the Warrant shall be mutilated, lost, stolen or destroyed, the
Company may in its discretion issue and deliver in exchange and substitution
for, and upon cancellation of, the mutilated Warrant, or in lieu of, and in
substitution for, the Warrant lost, stolen or destroyed, a new Warrant of like
tenor and representing an equivalent right or interest, but only upon receipt of
evidence satisfactory to the Company of such loss, theft or destruction of such
Warrant. Applicants for such substitute Warrant shall also comply with such
other reasonable regulations and pay such reasonable charges as the Company may
prescribe.
9. Reserve
The Company covenants and agrees that, from time to time, there will be
authorized and available for delivery a sufficient number of its shares of the
Common Stock or other securities into which the Warrant is then exercisable to
permit the exercise of the Warrant at the time outstanding as and when the
certificates shall, from time to time, be deliverable in accordance with Section
1 hereof. In the event that there are insufficient shares or other securities
for such purpose, the Company shall use its best efforts to seek shareholder
approval for an Amendment to the Company's Certificate of Incorporation and/or
to take such other action as is necessary or appropriate to cause such shares or
other securities to be authorized.
10. Governing Law
The Warrant evidenced hereby shall be construed and enforced in
accordance with the laws of the State of New York applicable to contracts made
and to be performed in that State, without giving effect to any principles of
conflicts of laws.
E-39
<PAGE> 6
IN WITNESS WHEREOF, Substance Abuse Technologies, Inc. has caused this
Warrant to be signed manually by a duly authorized officer.
Dated: SUBSTANCE ABUSE TECHNOLOGIES, INC.
By_____________________________________
E-40
<PAGE> 7
EXHIBIT A
ELECTION TO PURCHASE
To Substance Technologies, Inc.
c/o
-------------------------------------
-------------------------------------
-------------------------------------
The undersigned hereby irrevocably elects to exercise the Warrant
represented by the within Warrant Certificate to purchase shares of the
Common Stock issuable upon the exercise of the Warrant and requests that
certificates for such shares shall be issued in the name of
- --------------------------------------------------------------------------------
(Name)
- --------------------------------------------------------------------------------
(Address)
- --------------------------------------------------------------------------------
(Taxpayer number)
and be delivered
to
------------------------------------------------------------------------------
(Name)
at
------------------------------------------------------------------------------
(Address)
and, if said number of shares of the Common Stock shall not be all the shares of
the Common Stock evidenced by the within Warrant Certificate, that a new Warrant
Certificate for the balance remaining of such said shares be registered in the
name of
- --------------------------------------------------------------------------------
(Name)
- --------------------------------------------------------------------------------
(Address)
- --------------------------------------------------------------------------------
(Taxpayer number)
and delivered to the undersigned at the address below stated.
Dated: , 19
---------------- --
E-41
<PAGE> 8
Name of holder of Warrant Certificate:
- --------------------------------------------------------------------------------
(please print)
- --------------------------------------------------------------------------------
(Address)
- --------------------------------------------------------------------------------
(Signature)
Note: The above signature must correspond with
the name as written upon the face of
this Warrant Certificate in every
particular, without alteration or
enlargement or any change whatever.
E-42
<PAGE> 1
EXHIBIT 10(qq)
NEITHER THIS WARRANT NOR THE SECURITIES ISSUABLE
UPON EXERCISE HEREOF HAVE BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR UNDER ANY
STATE SECURITIES LAWS AND MAY NOT BE TRANSFERRED IN
VIOLATION OF SUCH ACT OR LAWS, THE RULES AND
REGULATIONS THEREUNDER AND THE PROVISIONS
OF THIS WARRANT.
WARRANT TO PURCHASE ____________ SHARES
OF COMMON STOCK OF
SUBSTANCE ABUSE TECHNOLOGIES, INC.
ISSUED TO
_____________________
DATED: ______________
WARRANT NO. ____
(INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE)
THIS CERTIFIES THAT _______________ (the "Warrant Holder") is the owner
of a Warrant, subject to adjustment as provided in Section 3 hereof, which
entitles the owner thereof to purchase, in whole or in part, and from time to
time, as provided in Section 1 hereof, _____________ fully paid and
nonassessable shares of the Common Stock, no par value (the "Common Stock"), of
Substance Abuse Technologies, Inc., a Delaware corporation (hereinafter called
the "Company"), at the purchase price per share of $________ (the "Purchase
Price"), subject to adjustment as provided in Section 3 hereof, payable in
lawful money of the United States of America upon surrender of this Warrant and
payment of the Purchase Price in lawful money of the United States of America at
the principal office of the Company (currently 4517 NW 31st Avenue, Ft.
Lauderdale, Florida 33309) or at such other place as the Company may designate
by written notice to the Warrant Holder.
1. Exercise
The Warrant evidenced hereby shall become exercisable in installments
as follows: (1) as to ____________ shares of Common Stock on
_______________________and shall terminate at 5:00 P.M., New York Time, on
______________ , and (2) as to an additional ____________ shares of Common Stock
on each ____________ thereafter, and each such additional shares shall terminate
at 5:00 P.M., New York Time, three years from their respective dates of
exercise; provided, that however, in no event may any fractional share of the
Common Stock be issued. In
E-43
<PAGE> 2
the event that a fractional share would otherwise be issued as a result of any
adjustment made pursuant to Section 3 hereof or otherwise, payment for such
fractional share shall be made on the basis of the Market Price on the date of
exercise. For the purpose of this Section 1, the term "Market Price" shall mean
(a) if the Common Stock is traded on a national securities exchange or on the
National Association of Securities Dealers Automated Quotation ("NASDAQ")
System, the closing sales price (or, if no sales on that day, the high bid
price) or (b) if the Common Stock is not traded as provided in subsection (a),
the closing bid price as reported in the OTC Bulletin Board of the National
Association of Securities Dealers, Inc. (the "NASD") or in the pink sheets by
the National Quotation Bureau, Inc.
Upon any exercise of the Warrant evidenced hereby, the form of election
to purchase set forth as Exhibit A hereto shall be properly completed, executed
and delivered to the Company, together with full payment to the Company of the
Purchase Price for the shares as to which the Warrant is exercised by certified
check or bank draft. In the event that there is only a partial exercise of the
Warrant evidenced hereby, there shall be issued to the Warrant Holder a new
Warrant Certificate, in all respects similar to this Warrant Certificate,
evidencing the number of shares of the Common Stock still available for
exercise.
Upon receipt of full payment and properly completed documentation, the
Company shall then cause the Transfer Agent for the Common Stock to issue fully
paid and nonassessable shares of the Common Stock as are represented by the
exercise.
If this Warrant shall be surrendered upon exercise within any period
during which the transfer books for the Common Stock are closed for any purpose,
the Company shall not be required to make delivery of certificates for shares of
the Common Stock until the date of the reopening of said transfer books.
2. Expiration Date
The Warrant evidenced hereby may not be exercised after the expiration
dates set forth in Section 1 hereof, with respect to the shares of the Common
Stock as to which the Warrant may be exercised and, to the extent any such
shares are not exercised by such expiration dates, the Warrant evidenced hereby
shall become void.
3. Adjustments
Subject to the provisions of this Section 3, the Purchase Price and the
shares of the Common Stock as to which the Warrant may be exercised shall be
subject to adjustment from time to time as hereinafter set forth:
(a) If at any time, or from time to time, the Company shall,
by subdivision, consolidation, or reclassification of shares, or otherwise,
change as a whole the outstanding shares of the Common Stock into a different
number or class of shares, the number and class of shares so changed shall
replace the shares outstanding immediately prior to such change and the Purchase
E-44
<PAGE> 3
Price and the number of shares purchasable under the Warrant immediately prior
to the date on which such change shall become effective shall be proportionately
adjusted.
(b) Irrespective of any adjustments or change in the Purchase
Price or the number of securities actually purchasable under the Warrant, the
Warrant theretofore and thereafter issued may continue to express the exercise
price and the number of securities purchasable thereunder as the Purchase Price
and the number of securities purchasable were expressed in the Warrant when
initially issued.
(c) If at any time while the Warrant is outstanding, the
Company shall consolidate with, or merge into, another corporation, firm or
entity, or otherwise enter into a form of business combination, the holder of
the Warrant shall thereafter be entitled upon exercise thereof to purchase, with
respect to each security purchasable thereunder immediately prior to the date on
which such consolidation or merger or other form of business combination shall
become effective, the securities or property to which a holder of one such
security would have been entitled upon such consolidation or merger or other
form of business combination, without any change in, or payment in addition to,
the Purchase Price in effect immediately prior to such consolidation or merger
or other form of business combination, and the Company shall take such steps in
connection with such consolidation or merger or other form of business
combination as may be necessary to assure that all the provisions of the Warrant
shall thereafter be applicable, as nearly as reasonably may be, in relation to
any securities or property thereafter deliverable upon the exercise of the
Warrant.
(d) The Board of Directors of the Company, in its discretion,
may, at any time during the exercise period of the Warrant, extend the exercise
period or reduce the Purchase Price for all warrants then outstanding.
(e) Upon the happening of any event requiring the adjustment
of the exercise price hereunder, the Company shall forthwith give written notice
thereof to the registered holder of the Warrant stating the adjusted Purchase
Price and the adjusted number of securities purchasable upon the exercise
thereof resulting from such event and setting forth in reasonable detail the
method of calculation and the facts upon which such calculation is based. The
certificate of the Company's independent public accountants shall be conclusive
evidence of the correctness of any computation made hereunder.
4. Notice to Warrant Holder
Nothing contained herein shall be construed as conferring upon the
Warrant Holder the right to vote or to consent or to receive notice as a
shareholder in respect of the meetings of shareholders for the election of
directors of the Company or any other matter, or any other rights whatsoever as
a shareholder of the Company; provided, however, that in the event that:
(a) the Company shall take action to make any distribution
(other than cash dividends payable out of earnings or earned surplus) on the
Common Stock;
E-45
<PAGE> 4
(b) the Company shall take action to offer for subscription
pro rata to the holders of the Common Stock any additional shares of stock of
any class or other rights or securities convertible into the Common Stock;
(c) the Company shall take action to accomplish any capital
reorganization, or reclassification of the capital stock of the Company (other
than a change in par value, or a change from par value to no par value, or a
change from no par value to par value, or a subdivision or combination of the
Common Stock), or a consolidation or merger of the Company into, or a sale of
all or substantially all of its assets to, another corporation; or
(d) the Company shall take action looking to a voluntary
dissolution, liquidation or winding up of the Company;
then, in any one or more of such cases, the Company shall, (x) at least 10 days
prior to the date on which the books of the Company shall close or a record date
shall be taken for such distribution or subscription rights or for determining
rights to vote in respect of any such reorganization, reclassification,
consolidation, merger, sale, dissolution, liquidation or winding up, cause
notice thereof to be sent to the Warrant Holder at the address appearing on the
Warrant register of the Company and, (y) in the case of any such reorganization,
reclassification, consolidation, merger, sale, dissolution, liquidation or
winding up, cause at least 10 days' prior written notice of the date when the
same shall take place to be given to the Warrant Holder in the same manner. Such
notice in accordance with the foregoing clause (x) shall also specify, in the
case of any such distribution or subscription rights, the date on which the
holders of the Common Stock shall be entitled thereto, and such notice in
accordance with the foregoing clause (y) shall also specify the date on which
the holders of the Common Stock shall be entitled to exchange their shares of
the Common Stock for securities or other property deliverable upon such
reorganization, reclassification, consolidation, merger, sale, dissolution,
liquidation or winding up, as the case may be. Failure to give such notice or
any defect therein shall not affect the legality or validity of any of the
matters set forth in this Section 5 inclusive.
5. Investment Representation
The Warrant Holder, by his, her or its acceptance of this Warrant,
acknowledges that neither the Warrant nor the shares of the Common Stock
issuable upon exercise thereof have been registered under the Securities Act of
1933, as amended (the "Securities Act"), and, accordingly, represents and
warrants to the Company that he, she or it is acquiring the Warrant for
investment and not with a view to, or in connection with, any distribution
thereof. The holder further represents and warrants that, if a registration
statement under the Securities Act is not effective with respect to the
underlying shares at the time of exercise, the Warrant Holder will acquire the
shares of the Common Stock for investment and not with a view to, or in
connection with, any distribution thereof.
E-46
<PAGE> 5
6. Transfers and Exchanges
The Company shall transfer, from time to time, any outstanding Warrant
upon the books to be maintained by the Company for that purpose, upon surrender
thereof for transfer properly endorsed or accompanied by appropriate
instructions for transfer. Upon any such transfer, a new Warrant shall be issued
to the transferee and the surrendered Warrant shall be canceled by the Company.
The Warrant so canceled shall be delivered to the Company from time to time upon
request. Warrants may be exchanged at the option of the holder thereof, when
surrendered at the office of the Company, for another Warrant, or other Warrants
of different denominations, of like tenor and representing in the aggregate the
rights to purchase a like number of shares. Anything in this Section 6 to the
contrary notwithstanding, no transfer shall be made if such transfer would
violate Section 5 of the Securities Act.
7. Payment of Taxes
The Company will pay any documentary stamp taxes attributable to the
initial issuance of the Common Stock issuable upon the exercise of the Warrant;
provided, however, that the Company shall not be required to pay any tax or
taxes which may be payable in respect of any transfer involved in the issue or
delivery of any certificates for the Common Stock in a name other than that of
the registered holder of the Warrant in respect of which such shares are issued,
and in such case the Company shall not be required to issue or deliver any
certificates for the Common Stock or any Warrant for remaining shares until the
person requesting the same has paid to the Company the amount of such tax or has
established to the Company's satisfaction that such tax has been paid.
8. Mutilated or Missing Warrant
In case the Warrant shall be mutilated, lost, stolen or destroyed, the
Company may in its discretion issue and deliver in exchange and substitution
for, and upon cancellation of, the mutilated Warrant, or in lieu of, and in
substitution for, the Warrant lost, stolen or destroyed, a new Warrant of like
tenor and representing an equivalent right or interest, but only upon receipt of
evidence satisfactory to the Company of such loss, theft or destruction of such
Warrant. Applicants for such substitute Warrant shall also comply with such
other reasonable regulations and pay such reasonable charges as the Company may
prescribe.
9. Reserve
The Company covenants and agrees that, from time to time, there will be
authorized and available for delivery a sufficient number of its shares of the
Common Stock or other securities into which the Warrant is then exercisable to
permit the exercise of the Warrant at the time outstanding as and when the
certificates shall, from time to time, be deliverable in accordance with Section
1 hereof. In the event that there are insufficient shares or other securities
for such purpose, the Company shall use its best efforts to seek shareholder
approval for an Amendment to the Company's Certificate of Incorporation and/or
to take such other action as is necessary or appropriate to cause such shares or
other securities to be authorized.
E-47
<PAGE> 6
10. Governing Law
The Warrant evidenced hereby shall be construed and enforced in
accordance with the laws of the State of New York applicable to contracts made
and to be performed in that State, without giving effect to any principles of
conflicts of laws.
IN WITNESS WHEREOF, Substance Abuse Technologies, Inc. has caused this
Warrant to be signed manually by a duly authorized officer.
Dated: SUBSTANCE ABUSE TECHNOLOGIES, INC.
By:_____________________________________
E-48
<PAGE> 7
EXHIBIT A
ELECTION TO PURCHASE
To Substance Technologies, Inc.
c/o___________________________________
___________________________________
___________________________________
The undersigned hereby irrevocably elects to exercise the Warrant
represented by the within Warrant Certificate to purchase shares of the
Common Stock issuable upon the exercise of the Warrant and requests that
certificates for such shares shall be issued in the name of
________________________________________________________________________________
(Name)
________________________________________________________________________________
(Address)
________________________________________________________________________________
(Taxpayer number)
and be delivered
to______________________________________________________________________________
(Name)
at______________________________________________________________________________
(Address)
and, if said number of shares of the Common Stock shall not be all the shares of
the Common Stock evidenced by the within Warrant Certificate, that a new Warrant
Certificate for the balance remaining of such said shares be registered in the
name of
________________________________________________________________________________
(Name)
________________________________________________________________________________
(Address)
________________________________________________________________________________
(Taxpayer number)
and delivered to the undersigned at the address below stated.
Dated:________________, 19__
E-49
<PAGE> 8
Name of holder of Warrant Certificate:
- --------------------------------------------------------------------------------
(please print)
- --------------------------------------------------------------------------------
(Address)
- --------------------------------------------------------------------------------
(Signature)
Note: The above signature must correspond with the
name as written upon the face of this Warrant
Certificate in every particular, without
alteration or enlargement or any change
whatever.
E-50
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF SAT
<TABLE>
<CAPTION>
Jurisdiction of Percentage of
Name of Subsidiary Incorporation Ownership
- ------------------ ------------- --------
<S> <C> <C>
Good Ideas Enterprises, Inc. Delaware 60.8%
U.S. Drug Testing, Inc. Delaware 67.0%
Good Ideas Acquisition Corp. Delaware 100%
U.S. Drug Acquisition Corp. Delaware 100%
</TABLE>
E-51
<PAGE> 1
EXHIBIT 23(a)
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We hereby consent to the use in this Amendment No. 2 to Registration Statement
on Form S-4 of our report dated May 26, 1995 on the consolidated financial
statements of Substance Abuse Technologies, Inc. and Subsidiaries included
herein and to the reference made to us under the caption "Experts" in the
Prospectus.
WOLINETZ, GOTTLIEB & LAFAZAN, P.C.
/s/ Wolinetz, Gottlieb & Lafazan, P.C.
Rockville Centre, New York
April , 1997
E-52
<PAGE> 1
EXHIBIT 23(d)
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our reports on Substance Abuse Technologies, Inc. (formerly U.S. Alcohol
Testing of America, Inc.) and Good Ideas Testing, Inc. dated May 20, 1996, in
the Registration Statement (Amendment No. 2 to Form S-4 No. 333-3734) and
related Prospectus of Substance Abuse Technologies, Inc. for the Registration of
common stock, warrants to purchase common stock, and the Consent Solicitation
Statement to the Minority Stockholders of Good Ideas Enterprises, Inc.
ERNST & YOUNG LLP
/s/ Ernst & Young LLP
Riverside, California
April 14, 1997
E-53
