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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED MARCH 31, 1997
COMMISSION FILE NUMBER 0-18938
SUBSTANCE ABUSE TECHNOLOGIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<C> <C>
DELAWARE 22-2806310
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
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4517 N.W. 31ST AVE.
FT. LAUDERDALE, FLORIDA
954-739-9600
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
COMMON STOCK, PAR VALUE $.01, AND PREFERRED "A" STOCK, PAR VALUE $.01
(REGISTERED ON THE AMERICAN STOCK EXCHANGE);
PREFERRED "B" STOCK, PAR VALUE $.01
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days: YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
As of July 11, 1997, there were 34,496,036 shares of Common Stock
outstanding.
THE REGISTRANT HAS ONLY ONE CLASS OF VOTING STOCK OUTSTANDING, THE COMMON
STOCK, AND, AS OF JULY 11, 1997, THE AGGREGATE MARKET VALUE OF THE COMMON STOCK
HELD BY NON-AFFILIATES WAS $34,496,036 BASED ON THE CLOSING SALE PRICE OF SUCH
STOCK ON THAT DATE.
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PART I
ITEM 1. BUSINESS OF THE COMPANY
GENERAL
Substance Abuse Technologies, Inc. ("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. SAT,
its divisions and its subsidiaries are hereinafter collectively referred to the
"Company." Through acquisition and internal development, SAT's management
expanded the Company's operations so that, as of March 31, 1997, the Company was
conducting the following operations:
1. alcohol testing products through its Alcohol Products Division;
2. human resource provider through its Employer Services Division (the
"ESD");
3. designing policies and programs on substance abuse prevention through
its Robert Stutman & Associates Consulting Division (the "RSA
Division");
4. developing drug testing products through its subsidiary U.S. Drug
Testing, Inc. ("U.S. Drug");
5. serving as a clinical laboratory through its Biochemical Toxicology
Laboratories ("BioTox") Division.
For reasons hereinafter described in the section "Alcohol Products
Division" under this caption "Business of the Company," SAT's management made a
strategic decision in the fourth quarter of the fiscal year ended March 31, 1997
("fiscal 1997") to abandon a substantial portion of its alcohol testing products
and to concentrate more on the operations of the Employer Services Division.
Subsequently, during the quarter ended June 30, 1997, SAT's Board of Directors
began to re-evaluate the methods of financing the research and development
program of U.S. Drug for the reasons described in the section "U.S. Drug Testing
Inc." under this caption "Business of the Company."
Percentage of Revenue Derived During Each of the Fiscal Year 1995, 1996 and
1997 from SAT's Products and Services
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1995 1996 1997
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Alcohol Products........................................ 63% 64% 35%
BioTox.................................................. 37% 34% 15%
Employer Services....................................... --% 2% 33%
Consulting.............................................. --% --% 17%
---- ---- ----
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U.S. Drug is a development stage enterprise that has had no sales.
EMPLOYMENT SERVICES DIVISION
In September 1995, ProActive Synergies, Inc. ("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. On December 31,
1996, ProActive was merged into SAT and its operations are now operated as the
Employer Services Division (the "ESD") of SAT. The ESD is a single source
service provider, meaning that it is a provider of both substance abuse testing
services and background screening services.
The ESD's substance abuse testing services include specimen collections,
laboratory testing and medical review officer ("MRO") 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 ESD'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. Its total
program management services include establishing a substance abuse policy with
corporations and conducting program audits to ensure regulatory compliance with
such policy.
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Depending on the size of the customers, it may take three to six months for
the execution of a contract for the ESD to implement the procedures at the
customer's site or sites so as to begin to charge fees for its services.
Accordingly, despite the execution of agreements which should result in
multi-million dollar revenues (on an annualized basis) from certain customers,
revenues from the ESD were not at their full potential in fiscal 1997.
SAT management has, accordingly, instituted a new program of seeking
acquisitions of third party administrator ("TPA") companies which would bring
immediate revenues to the Company. In July 1997, SAT entered into a letter of
agreement dated July 3, 1997, a copy of which is filed as an exhibit to this
Report and incorporated herein by this reference, with National Medical Review
Offices, Inc. ("NMRO") to acquire, for $1,600,000, the TPA operations of the
DataMed International Division ("DataMed") of Global Med Technologies, Inc.
("Global Med"). If Global Med's shareholders consent (the shareholders' meeting
is scheduled for August 1997), the Company will obtain approximately $8,000,000
in annualized revenues. SAT is managing the DataMed operations from July 1, 1997
under a management agreement. SAT is also entering into an agreement with NMRO
for MRO services at reduced charges. There can be no assurance that the
acquisition will be consummated or that SAT will effect other acquisitions for
the ESD.
CONSULTING DIVISION
In May 1996, SAT acquired Robert Stutman & Associates, Inc. ("RSA"), a
provider of substance abuse testing/background screening policy manuals and a
consultant on programs relating to alcohol and drug abuse. 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 by the Robert Stutman & Associates
Consulting Division of SAT (the "RSA Division"). The RSA Division's services are
often packaged with the substance abuse testing and background screening
services provided by the ESD.
On December 14, 1995, SAT entered into an agreement with RSA and Robert M.
Stutman, personally, pursuant to which (1) SAT engaged Mr. Stutman to be their
expert spokesman and a consultant with respect to their drug and alcohol testing
businesses; (2) SAT 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 SAT. Prior to forming RSA, Mr. Stutman was Special Agent in charge
of the New York office of the United States Drug Enforcement Administration (the
"DEA"). 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 each Mr. Stutman and RSA three-year Common Stock purchase
warrants to purchase 200,000 shares of SAT's Common Stock, $.01 par value (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
fees to SAT based on referrals to RSA and an initial $100,000 payment by SAT and
varying monthly fees thereafter to RSA. A copy of the Consulting Agreement dated
as of December 14, 1995 by and between SAT and RSA and Mr. Stutman is filed (by
incorporation by reference) as an exhibit to this Report and is incorporated
herein by this reference.
On April 18, 1996, Mr. Stutman was elected as the Chairman of the Board and
a director of SAT and designated as its Chief Executive Officer. SAT also agreed
in principle to acquire RSA. On May 21, 1996, the Company completed its
acquisition of RSA and RSA became a 100% owned subsidiary of SAT. SAT paid
$2,100,000 to the RSA stockholders for all of the outstanding 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 of
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 SAT's
Registration Statement on Form S-1, File No. 33-43337 (the "January 1992
Registration Statement"), and Common Stock purchase warrants expiring May 20,
1999 to purchase an aggregate of
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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). SAT also issued two promissory notes aggregating $400,000 in
principal amount (the "RSA Notes"), one to Mr. Stutman who received an RSA Note
for $239,760 and the other to Brian Stutman for the balance. The RSA Notes bore
interest at the rate of 7.5% per annum and were to become due May 21, 1997. 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 with the United States Navy. Copies
of the Stock Purchase Agreement dated as of May 21, 1996, the Secured Promissory
Note dated May 21, 1996, the Security Agreement dated May 21, 1996, the Common
Stock purchase warrant expiring May 20, 1999 and Registration Rights Agreement
dated as of May 21, 1996, all related to the acquisition of RSA, are filed (by
incorporation by reference) as exhibits to this Report and, by this reference,
are incorporated herein. As a result of the acquisition of RSA, the Consulting
Agreement described in the preceding paragraph terminated; however, the Common
Stock purchase warrants described therein remain outstanding, except that the
RSA warrant was distributed to its shareholders, including Mr. Stutman who
received a warrant to purchase 105,500 shares and Brian Stutman who received a
warrant to purchase 70,500 shares. In December 1996, the Board of Directors
authorized, in consideration of their having to surrender rights with respect to
their secured promissory notes in the aggregate 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 shall be reduced from $3.125 to $2.125 per share on Robert M.
Stutman's Common Stock purchase warrant expiring May 20, 1999 to purchasing
474,750 shares of 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. 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. See "Certain Relationships and Related Transactions" in this Report.
TOXICOLOGY LABORATORIES
The Biochemical Toxicology Laboratories ("BioTox") Division provides
services to SAT and also provides services to U.S. Drug. The BioTox Division is
certified as a Clinical Laboratory by the State of California and possesses a
federal license pursuant to the Clinical Laboratory Improvements Act of 1988
("CLIA 88") promulgated by the United States Department of Health and Human
Services. The BioTox Division is engaged in alcohol and drug testing for many
area police departments, detoxification centers, coroners departments and
corporations and functions within SAT's facilities maintaining state of the art
lab testing instrumentation.
ALCOHOL PRODUCTS DIVISION
SAT through its Alcohol 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. Sales were made directly by SAT's sales representatives.
The Alcohol Products Division markets its products at trade shows, conventions
and through print advertisements.
In February 1994, the United States Department of Transportation (the
"DOT") published its final rule implementing the federal act which mandates
alcohol testing within the transportation industry. The rule at that time
required alcohol testing solely through the use of breath samples. SAT had
designed the Alco-Analyzer 2100 to specifically meet these needs. Its marketing
strategy had included sales, leases and placements of the instrument with a cost
per test charge. Subsequently, the DOT changed the standard resulting in the
Model 2100 competing with less specific and less expensive equipment.
Additionally the DOT regulations initially were to require pre-employment
alcohol and drug testing. The requirement for pre-employment alcohol testing was
suspended May 8, 1995 and later eliminated and, largely because of that, the
anticipated marketing opportunity for this business failed to materialize.
Therefore, management of SAT made a strategic decision to abandon a substantial
portion of its alcohol testing equipment manufacturing, sales and service. SAT
refurbished the equipment and attempted to market it in the fourth quarter of
fiscal
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1997, but to no avail. SAT will continue to package and sell an alcohol breath
sampling device (the AlcoProof System).
In December 1994, SAT entered into two agreements with major testing
laboratories, Quest Diagnostics Inc. ("Quest"), formerly Corning Clinical
Laboratories Inc. and Metpath Inc., and Laboratory Corporation of America ("Lab
Corp."), formerly National Healthcare Laboratories Incorporated, for placement
of approximately 700 units of its Model 2100 at the respective laboratory's
collection sites with remuneration to SAT on a per test basis. These two
agreements, copies of which agreements are filed (by incorporation by reference)
as exhibits to this Report and are incorporated herein by this reference, as
well as others with smaller customers, had terms which ranging from three to
five years. Subsequently, SAT terminated the agreements. As indicated in the
preceding paragraph SAT has discontinued this product and the customers have
returned the units to SAT. See Item 7 to this Report for information as to the
write-off relating to this product.
SAT manufactured in fiscal 1997 a Mobile Alcohol Collection System ("MACS")
device used to collect a breath sample for future analysis, the manufacture of
which device will now be outsourced. The MACS device contains 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 chromatography to determine the exact blood
alcohol content. Management is currently pursuing DOT approval of the MACS
device 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.
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 AlcoProof
Screen through a recently signed distribution agreement, a copy of which is
filed as an exhibit to this Report and is incorporated herein by this reference.
The test is a manual, visual read, enzyme based device that is designed for on
site use and provides 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 silica gel compounded in a glass vial. The glass vial is sent
to a certified laboratory where the sample is extracted from the silica and test
by a gas chromatography method. SAT is currently pursuing DOT approval of
AlcoProof confirm as a collection and transport device.
SAT intends to pursue the non-regulated market for alcohol testing where
approximately 93% of the American work force is employed. Management is of the
opinion that the MACS device 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 MACS device must be
reformatted and DOT approval be obtained. Although management believes that the
non-regulated market is a market with great potential, there can be no assurance
that SAT will derive significant revenues from this market.
Revenues for the following products were included in prior fiscal years,
but the products were discontinued in fiscal 1997 as a result of the events
described in this section.
1. SAT designed and developed a product called an Alco-Analyzer. This
product is a gas chromatography 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 had been approved by the DOT as evidential breath
alcohol testing instruments.
2. 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. SAT manufactured two variations of the Alco-Breath Tubes
specifically designed for various
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applications of alcohol breath testing. SAT has sold the assets to a
distributor who will now manufacture the product, but will not market
or promote the product.
3. The Alcohol Products Division manufactured three devices, the
Alco-Simulator, Alco-Simulator 2000 and the Alco-Equilibrator which
were used to calibrate and check alcohol testing instruments made by
both SAT and its competitors for continued accuracy. The devices were
designed to simulate the breath of a person who has been drinking
alcohol. The standard alcohol solutions used in these calibration
devices were produced by SAT in its own certified laboratory.
The Alcohol Products Division purchased the raw materials and parts for its
products from various suppliers which delivered them to SAT for assembly,
packaging and distribution. These raw materials were primarily glass, plastic
containers and certain mechanical parts, all of which were readily available
from many suppliers. SAT has decided to out source the manufacture of the MACS
device to a single source supplier of these products and discontinue the
manufacture of Alco-Breath Tubes.
U.S. DRUG TESTING
U.S. Drug, of which SAT owned 75.4 % as of May 31, 1997, is a development
stage company attempting to develop a saliva based drug and alcohol testing
product. 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, $.001
par value (the "U.S. Drug Common Stock"), which security traded on the Pacific
Exchange, Inc. (the "Pacific Exchange") through May 12, 1997, at which time
trading was suspended because the subsidiary did not comply with the Exchange's
net worth maintenance requirement. U.S. Drug has filed an appeal as to such
suspension. 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. At a May 1997
meeting of the Board of Directors, the SAT Board agreed that SAT should purchase
1,768,202 shares of U.S. Drug Common Stock in forgiveness of an inter-company
loan in the amount of $2,210,254 (including interest at the rate of 8% per
annum) as of April 30, 1997. The additional shares purchased increased SAT
ownership to 75.4% of the outstanding shares. The Board of Directors also
authorized the purchase of 2,000,000 shares of the U.S. Drug Common Stock for
$2,500,000; however such potential investment has been delayed pending
additional financing by SAT. At present the SAT Board has agreed to continue to
fund U.S. Drug as needed. It is anticipated that these equity purchases will
assist U.S. Drug's appeal by demonstrating compliance with the net worth
requirement; however, there can be no assurance that the Pacific Exchange will
act favorably and, in such event, the U.S. Drug Common Stock will continue to be
traded in the over-the-counter market.
On January 24, 1992, SAT and the United States Navy ("USN") entered into a
ten-year non-assignable agreement (the term of which license was subsequently
extended by the USN) 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. However, because
the USN refused to grant a novation of the license agreement, the USN looks only
to SAT for performance thereunder.
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 of
1933, as amended (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 U.S. Drug Acquisition Corp.,
a wholly-owned subsidiary of SAT. The SAT Board of Directors had concluded then
that the value of the SAT Common Stock could best be maximized if the Company
concentrated its operations on the SAT alcohol testing business, U.S. Drug's
drug testing business and the related human resource provider business of the
ESD and operated the three as if one corporation. The U.S. Drug Registration
Statement is not yet effective and, accordingly, no offer has been made to the
minority stockholders of U.S. Drug. As indicated below, in May and June, 1997,
the SAT Board began to re-evaluate the means of financing U.S. Drug because of
the estimated increased costs and longer period to bring the product to market.
In addition, taking into account the Company's limited resources, the SAT Board
recognized that the Company would realize a more
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immediate return on the ESD and RSA Division's operations. SAT still intends to
take U.S. Drug private, which, as indicated below, will facilitate the
possibility of obtaining venture capital investments. There can be no assurance
that any or all of these objectives will be achieved and, if achieved, during
what time frame.
The Company has not received any revenues from U.S. Drug because its
products are still in the developmental stage. U.S. Drug is developing
proprietary systems that test for alcohol and 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 work with the USN developed technology. U.S. Drug has received six
FDA marketing approvals covering its Model 9000 Flow Immunoassay System and the
attendant assays for each of the five Drugs of Abuse listed above, using urine
as the test medium. However, additional development work would be required
before the urine based testing product can be marketed. U.S. Drug, based on its
review of these market conditions, decided to complete the assays for a saliva
medium testing product first and, as a result, has produced no revenues through
March 31, 1997. U.S. Drug has commenced research using saliva as a testing
medium in connection with flow immunosensor technology and, assuming success in
the remainder of the development program, currently expects to submit its
five-panel screening assay to the Food and Drug Administration ("the FDA") in
February 1999 at the earliest (compared with the prior estimate of December
1998). U.S. Drug will be able to market it in the United States for non-medical
purposes, such as employment screening and screening by correctional and
criminal justice agencies, and in Europe where no FDA approval is required,
although U.S. Drug will not be able to commence marketing of the product in
medical markets until FDA approval is obtained, which marketing should occur
approximately five months to a year after that approval. 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, if at all, or as to when marketing in either
medical or non medical markets will commence. Management recognizes that,
although FDA approval is not required for use of drug testing for non-medical
purposes, such as described above, FDA approval of the product will assist U.S.
Drug's marketing in the United States to such customers. Management anticipates
that, assuming successful development of the product and submission to the FDA
when currently anticipated product revenues will not be realized until the
second quarter of 1999 at the earliest.
An independent consulting firm engaged by SAT estimated that it would cost
$18,400,000 from April 1, 1997 to complete the development of the saliva based
drug testing product. SAT had previously reported the estimated (by U.S. Drug
management) additional costs as between $10,000,000 and $12,000,000. Such
estimates reflected both product development and manufacturing buildout costs,
as well as general and administrative expenses. U.S. Drug will attempt to reduce
such estimated costs 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. The consulting firm also estimated that the launching of the program may
not occur until August 1999 at the earliest. However, the consultant's report
confirmed U.S. Drug's managements' opinion that the product was developable and
had market potential, especially with an added feature of the device also
testing for alcohol. During the last six months of fiscal 1997, management
sought financing from several investment banking firms or potential investors or
a standby commitment from the firms with respect to a rights offering to the
U.S. Drug stockholders, but has not received any favorable response, as opposed
to an expression of interest by certain of these firms in financing SAT.
SAT's management until now believed that the best "partner" for U.S. Drug
was SAT, not only because it owned 67.0% (now 75.4%), but because of its related
synergistic operations which also would allow the Company to operate while the
development program proceeded and because SAT appeared to be the best source for
funding. The increase in estimated costs and the further delay in the probable
launch date has required SAT's management to re-evaluate the methods of
financing and request the U.S. Drug management to seek financing in which SAT's
securities are not offered. A probable source of such funding for a development
stage company is investments by venture capital investors which would result in
a substantial dilution of SAT's ownership percentage in U.S. Drug and, if the
U.S. Drug Merger is not consummated, that
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of the U.S. Drug Minority Stockholders' interest. In addition, the SAT's
management believes that a venture capital investor would prefer to invest in a
privately-owned company with an initial public offering as the investor's exit
strategy. Consummation of the U.S. Drug Merger would facilitate that
possibility.
Current SAT and U.S. Drug management have been of the opinion that use of
one of the major pharmaceutical or medical diagnostic companies to assist in the
product development as the stage of development risked giving confidential data
to potential competitors that would not be fully protected by confidentiality
and also could result in marketing rights demands that would later reduce the
revenues to the Company assuming successful consummation of the development
program. Current management also believed that a potential marketing partner
could not be obtained on acceptable terms until there was a working prototype
for the instrument and the disposable and certain preliminary clinical data is
obtained. Current management does not believe that the prototype will be
produced until April 1998 at the earliest and that, at that stage of
development, the greater part of the expenses in development and manufacturing
build-out expenses would already have been incurred, making it less beneficial
to obtain a development partner at that time. Despite these reservations
continuing, Management believes that the consulting firm's report may resolve
the concerns of these major companies as to there being no prototype currently
available and U.S. Drug may have to assume the risks of disclosing confidential
data as the lesser evil than not to secure adequate financing. U.S. Drug's
management will pursue this potential avenue of funding, but does not currently
rate U.S. Drug's chances of succeeding as high as those with venture capital
investors or some other equity investor. There can be no assurance that the
attempts to obtain venture capital investments or a strategic partner for U.S.
Drug will be successfully consummated, in which event a decision would have to
be made as to whether SAT would seek the additional funds through sales of its
own securities or U.S. Drug will have to suspend its development program until
funds become available, as to which there can be no assurance. SAT's new
investment bankers, L.H. Friend, Weinress, Frankson & Presson, Inc. and Sutro &
Co., Inc., have advised SAT management that it would be difficult to finance
both the proposed acquisitions for the ESD and the research and development
program of U.S. Drug.
To facilitate the possibility of U.S. Drug obtaining financing, SAT's Board
has requested that U.S. Drug study the feasibility of terminating certain of the
interlocking relationships between SAT and U.S. Drug such as (1) U.S. Drug
building up a separate management team (Linda H. Masterson resigned as the
President of SAT to become the Chief Executive Officer of U.S. Drug (she was
already its President) and (2) seeking independent directors. There can be no
assurance that these objectives will be achieved or, if achieved, that they will
facilitate financing.
U.S. Drug spent approximately $8,998,000 on operating expenses including
research and development during the period from Inception, October 1992, through
March 31, 1997.
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 to be paid to the USN of $375,000 for 1995, $600,000 for
1996 and $1,000,000 for 1997 and thereafter. In June 1995, the license
agreement with the USN was re-negotiated and amended to provide for minimum
annual royalties to be paid to the USN of $100,000 per year commencing
October 1, 1995 and terminating September 30, 2005. Additional royalties
will be paid pursuant to a schedule based upon sales of products. By an
amendment dated June 16, 1995, the term of the exclusive right under the
License Agreement was extended to terminate ten years from June 27, 1995
and 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. By letter dated May 15, 1995, the USN
notified SAT that, because the expiration date of the USN patent
7
<PAGE> 9
had been extended to February 23, 2010 under the GATT/WTO treaty, the
expiration date of the License Agreement was extended to February 23, 2010.
(b) On April 16, 1992, SAT entered into a 12-month cooperative
development research agreement ("CRDA") with the Naval Research Laboratory
section of the USN to further develop the licensing technology of the "Flow
Immunosensor".
(c) Effective January 1993, 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 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 $300,000 annually 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. 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. In March of 1997, the Management Agreement was again amended to a
percentage of time and services agreement whereby certain SAT employees and
facilities are allocated to U.S. Drug based on a percentage of usage. The
allocation is estimated to be approximately $1,300,000. As the activity of
U.S. Drug is increasing there has been a tremendous increase in time
required by SAT employees and expanded use of leased space to satisfy U.S.
Drug's needs. This new arrangement in the opinion of management more
accurately reflects the current cost to U. S. Drug.
Copies of the License Agreement (including all amendments), the cooperative
research agreement with CRDA (and the assignment thereof to U. S. Drug), the
sublicense (and the USN's consent thereto) and the U.S. Drug Management
Agreement (including the amendment thereto) are filed (almost all by
incorporation by reference) as exhibits to this Report and are incorporated
herein by this reference.
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:
1. 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.
2. U.S. Patent No. 5,354,654, "Lyophilized Ligand-Receptor Complexes
for Assay and Sensors" issued on October 11, 1994. Unless extended, the
Company's license under this patent expires on July 16, 2013. This patented
process allows for the freeze-drying of ready-to-use immunoassay chemistry
or reagents which is then indefinitely preserved.
GOOD IDEAS ENTERPRISES, INC.
In June 1988, the predecessor of Good Ideas Enterprises, Inc. ("Good
Ideas") began the manufacture and shipment of toys and in December 1992 was
merged into Good Ideas. In February and April 1994, Good Ideas completed an
initial public offering of Good Ideas Common Stock, which security trades in the
over-the-counter market after being delisted from the Pacific Exchange effective
January 1, 1997. As of May 31, 1997, SAT owned 2,400,000 of the 3,948,680
outstanding shares of the Good Ideas Common Stock or 60.8%
8
<PAGE> 10
thereof. On February 26, 1996, the SAT Board of Directors concluded that,
because of the history of losses in Good Ideas and what they perceive to be the
problems generally in the toy industry it would be difficult to make Good Ideas'
operations profitable. The Board also concluded that the Company's best
opportunity for maximizing revenue and securing profitable operations was to
focus its resources on its operations which were synergistic with each other.
For those reasons, the SAT Board authorized management to seek offers from
prospective purchasers of Good Ideas. Subsequently, all operations were
discontinued and Good Ideas is being held for sale or liquidation. Good Ideas
has been retroactively reported in the Company's financial statements as a
discontinued operation since March 31, 1995. At March 31, 1997, Good Ideas has
written off all remaining inventory since no offer to purchase the inventory is
outstanding and its liquidation value is questionable.
Since July 1992, SAT had provided certain management and administrative
services to Good Ideas. These services included management and financial advice;
maintenance of financial books and records and preparation of financial
statements, budgets, forecasts and cash flow projections; services relating to
banking relationships; payment of accounts payable and payroll; collection of
accounts receivable and credit analysis; order processing; import processing;
cash management; and other miscellaneous services and advice. In view of the SAT
Board's decision on February 26, 1996 to sell or liquidate Good Ideas (see the
preceding paragraph), the Board suspended management fees to SAT retroactive to
January 1, 1996. Accordingly, Good Ideas recorded no management fee expense in
the last quarter of fiscal 1996 and all of fiscal 1997 and SAT recorded no
income from management fees in the same period.
SAT filed in April 1996, a Registration Statement on Form S-4, File No.
333-3734 (the "Good Ideas Registration Statement"), under the Securities Act to
register shares of the SAT Common Stock to be issued to the minority
stockholders of Good Ideas upon the consummation of a merger of Good Ideas with
and into Good Ideas Acquisition Corp., a wholly-owned subsidiary of SAT. The
Good Ideas Registration Statement is not yet effective and, accordingly, no
offer has been made to the minority stockholders of Good Ideas.
ALCONET, INC.
In March 1995, SAT acquired 100% of the issued and outstanding common stock
of Alconet, Inc. ("Alconet") and all the membership interests of Dakotanet,
L.L.C. As consideration, SAT issued 782,321 shares of the SAT Common Stock
registered under the Securities Act as Acquisition Shares in the January 1992
Registration Statement and valued at $1,564,642. The acquisitions have been
accounted for as a purchase in the financial statements of the Company. A copy
of the Stock Purchase Agreement relating to the Alconet acquisition is filed (by
incorporation by reference) as an exhibit to this Report and is incorporated
herein by this reference. In March 1996, 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. SAT has closed the Alconet
operation as of March 31, 1997.
U.S. RUBBER RECYCLING, INC.
In November 1992, SAT purchased all the assets of Adflo International, Inc.
for its then newly formed wholly-owned subsidiary, U.S. Rubber Recycling, Inc.
("USRR"), which then began to manufacture floor covering products for office and
industrial use from used truck and bus tires. These tires were delivered to
USRR's then Rancho Cucamonga plant and to an off-site storage facility, where
they were recycled by splitting and cutting the tires and reassembling the
recycled parts into finished products. Sales were made nationwide through
manufacturer's representatives and distributors. All manufacturing was performed
in the Rancho Cucamonga facility.
On April 30, 1996, USRR sold substantially all of its assets to an
unaffiliated buyer for $450,000, $150,000 of which was paid at the closing and
the balance by the delivery of a $300,000 promissory note. The purchaser also
paid approximately $80,000 in accounts payable of USRR and assumed certain other
liabilities, including USRR's lease. The sale resulted in a loss of
approximately $132,000. 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
9
<PAGE> 11
security interest in all of the buyer's assets. USRR required to agree, however,
to subordinate its security interest to up to $1,000,000 of institutional
financing for the buyer. USRR has been presented under the caption of
"Discontinued Operations" in the accompanying financial statements. See Item 8
to this Report.
Copies of the Asset Acquisition Agreement relating to the acquisition of
assets by USSR and of the Asset Purchase Agreement relating to the sale of USRR
assets are filed (by incorporation by reference) as exhibits to this Report and
are incorporated herein by this reference.
OTHER SUBSIDIARIES
As of May 31, 1997, the only other subsidiaries of SAT were Good Ideas
Acquisition Corp. and U.S. Drug Acquisition Corp., both of which are inactive
and which were incorporated solely for the purpose of the taking private
transactions relating to Good Ideas and U.S. Drug, respectively.
COMPETITION
(1) Employment Services Division
The competition from single source providers which the ESD 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 ESD hopes to achieve. The ESD has entered into
two national contracts as of June 30, 1997 and is actively pursuing others.
However, Lab Corp., through Med-Express, is currently offering background
screening services to corporations on a limited basis. Although, the ESD has
experienced personnel in both the drug testing and investigative arena, there
can be no assurance that the ESD will become successful in marketing its
services as a single source provider on a national level. In addition, the ESD
will face competition from other companies which provide each of these services
separately such as the companies mentioned in the succeeding 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 ESD), and local or regional investigative firms or private
investigators (including vendors to the ESD) as it relates to background
investigative services. Assuming that the combined RSA Division/ESD operations
achieve national status as a single source provider, there can be no assurance
that existing or new companies will not enter the national marketplace to
compete with the combined RSA Division/ESD operations.
(2) 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 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, offer an on-site screening saliva based alcohol
test. Hoffman-LaRoche, Inc. ("Roche") has, and several of these 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.
(3) Drug Testing
The Company has not received any revenues from U.S. Drug because its
products are still in the developmental stage. U.S. Drug had previously been
developing two products which screen for the presence of drugs of abuse, one
which utilizes flow immunosensor technology with urine samples as a medium of
testing and another which utilizes flow immunosensor technology with saliva
samples as a medium of testing. Only the saliva sampling system is currently
being developed. The technology in development will specifically test
10
<PAGE> 12
for alcohol and five commonly used drugs of abuse: cocaine, opiates (heroin,
morphine and codeine), phencyclidine (PCP), amphetamines (including
methamphetamine) and tetrahydrocannabinol (THC, marijuana). When the drug
testing product is developed, as to which there can be no assurance, U.S. Drug
will compete with many of the companies of varying size that already exist or
may be founded in the future which utilize urine samples as a medium of testing.
U.S. Drug will face competition from at least eight major companies providing
substance abuse screening methods: (1) enzyme-multiplied immunoassay technique
(EMIT) manufactured and distributed by Syva, a division of Behring Diagnostics;
(2) radioimmunoassay (RIA) manufactured and distributed by Roche and others; (3)
thin layer chromatography (TLC) manufactured and distributed by Marion
Laboratories, Inc.("Marion"); (4) a fluorescence polarization immunoassay (FPIA)
manufactured by Abbott Laboratories, Inc.("Abbott"), and other immunoassay tests
provided by (5) Editek, Inc. ("Editek"); (6) Hycor Biomedical, Inc. ("Hycor");
(7) Princeton Biotech, Inc. ("Princeton"), and (8) BioSite, Inc. ("BioSite").
Almost all of these companies (i.e., Syva, Roche, Marion, Abbott, Editek, Hycor,
Princeton and BioSite) have substantially greater financial resources available
to them than does the Company to develop and to market their products.
Management believes that saliva sample testing is unique in that, to
management's knowledge, no company is currently offering a drug of abuse
detection method using saliva samples as a medium on an "on-site" basis.
However, U.S. Drug has been advised that such a product is under development by
two or 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.
RESEARCH AND DEVELOPMENT
During fiscal 1997 the Company spent approximately $1,787,000 on research
and development, including approximately $1,735,000 expended on development of
the drug testing technology of U.S. Drug. During the fiscal year ended March 31,
1996 ("fiscal 1996"), the Company spent approximately $1,006,000 on research and
development, including $949,000 expended on development of the drug testing
technology of U.S. Drug. In the fiscal year ended March 31, 1995 ("fiscal
1995"), the Company spent approximately $1,249,000 on research and development,
including $886,000 expended on development of the technology of U.S. Drug.
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 (including its operating
divisions) 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
"U.S. Drug Testing, Inc." under this caption "Business of the Company" and the
terms of the U.S. Drug patents are 17 years from the date of issuance as set
forth in that section, subject to renewal. Termination of the Licensing
Agreement for the USN patent, which would occur only on a default by 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 the
development and marketing thereof.
The Company has obtained tradenames for its major products. The following
are the registered trademarks of the Company and have been published by the U.S.
Patent and Trademark Office (the "PTO"): Alco-Equilibrator(TM), Sobriety
Checkpoint(TM), ABT(TM), Alco-Analyzer(TM), Final Call(TM), Alco-Equilbrator(TM)
and Drug Won't Work Here(TM). On April 12, 1995, the Company abandoned the
following trademarks: Mobile Alcohol Collection, MACS, Alco-Report; Alco-Breath
Tubes, Alco-Link and Alco-Simulator. The Company also has trademark applications
pending with the PTO for AlcoProof(TM) and Substance Abuse Technologies(TM).
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<PAGE> 13
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.
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.
EMPLOYEES
As of March 31, 1997, the Company had 74 full time employees other than its
officers, 17 engaged in, research development of the 10 in sales, and 47 in
clerical administrative jobs. The Company has no collective bargaining agreement
with its employees.
ITEM 2. 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 used for the RSA Division and the ESD. ProActive
occupied approximately 1,640 square feet of office space in Savannah, Georgia
under a lease expiring January 2, 1999. ProActive has subleased such office
space and remains liable in the event of a default by the sublease. SAT has
assumed such liability as a result of the merger of ProActive into SAT.
SAT occupies approximately 19,500 square feet of office and factory
facilities in Rancho Cucamonga, California under a lease expiring January 31,
2002 (as a result of a renewal). The premises are shared with its subsidiary
U.S. Drug. This lease includes an option of extending its terms for another
consecutive five-year term. The former Alconet subsidiary occupied approximately
1,200 square feet of office space in Bismarck, North Dakota under a lease which,
would have expired March 31, 1997 and has been canceled.
Copies of the leases for the Fort Lauderdale and Rancho Cucamonga premises
are filed (by incorporation by reference) as exhibits to this Report and are
incorporated herein by this reference.
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
five fiscal years, see Note 12 to the Company's Financial Statements elsewhere
in this Report.
Management is of the opinion that the leased facilities in Fort Lauderdale
are not adequate for the Company for its planned expansion of the ESD and
acquisition strategy. SAT is, therefore negotiating to sublease approximately
4,000 additional square feet in an adjacent building to its current Fort
Lauderdale office. The space in California is adequate for its current use;
however, if U.S. Drug successfully completes development of its product, U.S.
Drug will require an additional 20,000 square feet of space for manufacturing.
ITEM 3. LEGAL MATTERS
The Company is not a party to any material litigation and is not aware of
any pending litigation that could have a material adverse effect on the
Company's business, results of operations or financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS
Not Applicable.
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<PAGE> 14
PART II
ITEM 5. MARKET DATA FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
MARKET DATA
Between January 2, 1992 and October 23, 1996, the SAT Common Stock traded
on the American Stock Exchange under the symbol "AAA." Effective October 26,
1996, the SAT Common Stock traded 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:
<TABLE>
<CAPTION>
HIGH LOW
------- -------
<S> <C> <C>
Fiscal 1996
Quarter Ended
June 30, 1995............................................. $2.1875 $1.625
September 30, 1995........................................ $2.9375 $1.875
December 31, 1995......................................... $2.25 $1.875
March 31, 1996............................................ $3.375 $1.8125
Fiscal 1997
Quarter Ended
June 30, 1996............................................. $3.625 $2.3125
September 30, 1996........................................ $3.00 $1.75
December 31, 1996......................................... $2.3125 $1.375
March 31, 1997............................................ $1.4375 $1.375
</TABLE>
On July 11, 1997, the closing sales price of the SAT Common Stock was $1.00
per share.
HOLDERS
The holders of record of the SAT Common Stock on June 30, 1997 were 982 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.
EXCHANGE LISTING
SAT's stockholders' equity as of March 31, 1997 was a negative $596,484 and
it has sustained losses since its incorporation, accordingly not meeting the
American Stock Exchange requirements that a listed company have stockholders'
equity of not less than $4,000,000 if it has sustained losses from continuing
operations in three of its four most recent fiscal years. This is a financial
condition that would normally cause the American Stock Exchange to consider
delisting a listed company's securities. SAT is seeking equity financing to meet
the stockholders' equity requirement and will file a Current Report on Form 8-K
with a pro forma balance sheet showing compliance upon consummation of same.
However, there can be no assurance that SAT will obtain such equity financing or
that it will prevent delisting.
If the SAT Common Stock is delisted, it will become 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 SAT 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 SAT Common
Stock.
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<PAGE> 15
DIVIDENDS
No dividends on the SAT Common Stock have been declared by SAT's Board of
Directors through March 31, 1997 and, in view of the Company's cash
requirements, its history of operational losses and restrictions in its
outstanding Convertible Notes, Convertible Debentures and shares of Preferred
Stock, 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. Dividends on the Class B Preferred
Stock are also payable semi-annually, but they first began to accrue on 62,500
shares on May 8, 1997.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data are derived from the consolidated
financial statements of the Company. The selected financial data should be read
in conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Company's Consolidated Financial Statements,
related notes and other financial information included herein.
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<PAGE> 16
SELECTED CONSOLIDATED STATEMENT OF OPERATIONS DATA:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED MARCH 31,
----------------------------------------------------------------------
1997 1996 1995 1994 1993
------------ ------------ ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Continuing Operations:
Net Sales............................ $ 2,723,805 $ 1,165,661 $ 1,695,215 $ 442,728 $ 611,739
Costs and Expenses:
Cost of Sales (Exclusive of
Depreciation Shown Below).......... 1,993,535 1,208,726 1,397,034 389,830 464,103
Selling, General and Administrative
Expenses (Exclusive of Depreciation
(Shown below)...................... 9,085,331 5,720,592 5,284,405 3,759,858 4,647,943
Research and Development............. 1,787,213 1,005,832 1,248,962 947,811 1,067,381
Depreciation and Amortization........ 1,166,698 1,017,534 695,367 380,676 191,414
Write off of cost in excess of net
assets acquired.................... 714,377 -- -- --
Write off of assets associated with
abandonment of breath alcohol and
cost per test services............. 1,850,209 -- -- --
Present value of future royalties.... 1,100,000
Loss From Settlement of Class Action
Litigation......................... -- -- -- 4,600,000 652,625
Loss From Settlement of Litigation... 416,421 1,137,914 -- 50,000 --
------------ ------------ ----------- ------------ -----------
Total Costs and Expenses...... 18,113,784 10,090,598 8,625,768 10,128,175 7,023,466
------------ ------------ ----------- ------------ -----------
Loss From Operations................... (15,389,979) (8,924,937) (6,930,553) (9,685,447) (6,411,727)
------------ ------------ ----------- ------------ -----------
Other (Expense) Income: net............ (306,415) 327,426 (545,206) (474,775) (1,211,888)
Loss Before Minority Interest in Net
Loss (Income) of Subsidiaries........ (15,696,394) (8,597,511) (7,475,759) (10,160,222) (7,623,615)
Minority Interest in Net Loss (Income)
of Subsidiaries, Net of Subsidiary
Preferred Stock Dividends Paid....... 567,469 541,466 769,632 464,083 (360,477)
------------ ------------ ----------- ------------ -----------
Loss from Continuing Operations........ (15,128,925) (8,056,045) (6,706,127) (9,696,139) (7,623,615)
Discontinued Operations:
Loss from Operations before Minority
Interest........................... (1,545,457) (857,575) (242,451) (173,118)
Minority Interest in Net Loss...... 467,183 327,306 (127,445) (200,520)
Loss on Disposal, net of Minority
Interest of $58,591 in 1997 and
143,671 in 1996.................. (314,889) (1,326,267) -- -- --
------------ ------------ ----------- ------------ -----------
Loss from Discontinued Operations...... (314,889) (2,404,541) (530,269) (369,896) (373,638)
------------ ------------ ----------- ------------ -----------
Net Loss............................... $(15,443,814) $(10,460,586) $(7,236,396) $(10,066,036) $(7,997,235)
============ ============ =========== ============ ===========
Weighted Average Common Shares
Outstanding.......................... 35,327,631 29,834,502 25,691,674 22,027,068 12,317,743
Loss Applicable to Common Stock:
Net Loss............................. $(15,443,814) $(10,460,586) $(7,236,396) $(10,066,035) $(7,997,253)
Preferred Stock Dividend -- Class
"A"................................ (28,810) (28,810) (39,179) (26,358) (39,992)
Preferred Stock Dividend -- Class
"B"................................ -- -- (2,425) (13,826) (331,767)
------------ ------------ ----------- ------------ -----------
Loss Applicable to Common Stock........ $(15,472,624) $(10,489,396) $(7,278,000) $(10,106,219) $(8,369,012)
============ ============ =========== ============ ===========
Loss Per Common Share:
Loss from Continuing Operations...... $ (.43) $ (.27) $ (.26) $ (.44) $ (.65)
Loss from Discontinued Operations.... (.01) (.08) (.02) (.02) (.03)
------------ ------------ ----------- ------------ -----------
Net Loss............................... $ (.44) $ (.35) $ (.28) $ (.46) $ (.68)
============ ============ =========== ============ ===========
</TABLE>
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<PAGE> 17
SELECTED CONSOLIDATED BALANCE SHEET DATA:
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
----------- ---------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Working Capital (Deficiency)................ $(1,381,892) $1,685,583 $ 4,634,665 $ 7,459,655 $3,172,817
=========== ========== =========== =========== ==========
Total Assets................................ $ 8,153,720 $6,535,840 $14,097,548 $16,848,733 $6,300,602
=========== ========== =========== =========== ==========
Long-Term Debt
Less Current Portion...................... $ 4,144,110 $ 32,935 $ 79,008 $ 81,521 $ 2,886
=========== ========== =========== =========== ==========
Minority Interest........................... $ 845,349 $1,478,508 $ 2,723,502 $ 3,705,120 $3,676,068
=========== ========== =========== =========== ==========
Stockholders (Deficit) Equity............... $ (596,484) $4,032,330 $ 7,693,942 $ 6,844,375 $1,482,943
=========== ========== =========== =========== ==========
</TABLE>
PART III
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
NECESSITY FOR OPERATIONAL CHANGES
In February 1996, the SAT Board of Directors reached the conclusion, after
months of debate and study, that, in order to make an effort to eliminate the
Company's history of declining revenues and increasing operational losses, the
Company should concentrate its future operations on three operations which the
Board considered to be synergistic: its existing alcohol testing products, its
drug testing products which were still in the development stage and its human
resource provider business which it had launched in September 1995. To
facilitate this change in business focus, the SAT Board initiated a program to
sell the Company's unrelated business of manufacturing floor covering products
from used bus and truck tires (the assets of USRR were sold in April 1996) and
the toy business of Good Ideas. In making its decision to divest these two
subsidiaries, the SAT Board recognized that the Company would eliminate
operations which had produced 79.9% of the Company's revenues in fiscal 1995 and
67.3% in fiscal 1996, which loss would have to be offset by a growth in the
human resource provider and alcohol testing products operations because revenues
from drug testing products were then considered to be at least 18 to 24 months
off in the future, assuming a successful completion of the product development
program, as to which there could be no assurance. In May 1996, SAT acquired RSA,
thus adding to the Company's synergistic operations RSA's capabilities as a
provider of substance abuse testing/ background screening manuals and a
consultant on programs relating to alcohol and drug abuse.
The SAT Board also caused the filing of the U.S. Drug and Good Ideas
Registration Statements in May 1996 and April 1996, respectively, to take U.S.
Drug and Good Ideas private, the first as part of the program to unify the
synergistic operations into one corporate entity operating through divisions and
the second as part of the program to phase out of non-synergistic operations. In
both areas, the SAT Board believed that the minority stockholders of the two
public subsidiaries would benefit more by being stockholders of SAT. See the
sections "Effect of Merger-U.S. Drug" and "Effect of Merger-Good Ideas" under
this caption "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
In May and June 1997 the SAT Board, delayed in its plans to take the two
subsidiaries private, and after consulting with its new investment bankers as to
the potential sources of financing available to the Company, the SAT Board felt
compelled to review the Company's operational strategy in light of the 15 months
which had elapsed since February 1996. The SAT Board also considered the limited
resources available to the Company absent new significant financing.
First, the human resource provider business of the Employer Services
Division (formerly ProActive) seemed, in the opinion of SAT management, to be
the most promising operation for potential immediate significant revenues and
profitability. This operation had started slowly, but with the changes in
management in the Division over the past 15 months, the installation in July of
a new computer system to manage more effectively the customer data and the
engagement of an effective sales staff and other qualified personnel, this
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Division has begun to produce multi-million dollar (on an annualized basis)
contracts. Because it takes three to six months, depending on the size of the
customer's requirements, to install at the customer the necessary procedures,
there is a gap between contract signing and the customer beginning to pay SAT's
charges. Accordingly, revenues from this source have not as yet been reflected
in any material amount in the Company's financial statements. Nevertheless, the
growth potential of this Division became obvious to SAT's management. Also
during this period SAT had to incur the marketing and other build-up expenses to
launch the program. The SAT management also ascertained that the growth rate
could be accelerated by making acquisitions of appropriate third party
administrator ("TPA") companies, the first of which is expected to be
consummated in late summer of 1997 adding over $7,000,000 in annualized
revenues. See the section "Acquisition Strategy for Human Resource Provider
Business" under this caption "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
In its review of the Robert Stutman & Associates Consulting Division
(formerly RSA), the SAT Board concluded that this Division gave added support to
the Employer Services Division that made it unique in the industry, as well as
being a revenue producer on its own and, now operates on a profitable basis.
Depending on future developments with respect to the Alcohol Testing Products
Division and U.S. Drug's product development program, this Division can be a
potential source of business for these operations.
Second, the alcohol testing products business now conducted by the Alcohol
Testing Products Division of SAT, which was SAT's original business, did not
develop, primarily as a result of a DOT change in alcohol testing requirements,
discussed in Part 1, Item 1 "Business of the Company". The contracts with two
major testing laboratories entered into by former management with charges based
on a per test basis had produced losses as well as collection problems. Although
current management has terminated these agreements and collections have
improved, the Division has revised its marketing program entirely, the Division
abandoned future marketing of the Alcohol-Breath Tubes (the "ABTs") and only the
AlcoProof System -- the rights to which were acquired in 1997 -- and an alcohol
breath testing confirmation device (formerly known as MACS) remain as the viable
products to be marketed in the future. See the section "Results of Operations"
under this caption "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the sections "Alcohol Products Division" under
the caption "Business of the Company." SAT's management will continue to
evaluate the operations of this Division on a periodic basis.
The saliva based drug testing product is still in the development
stage -- a prototype now is not expected until April 1998 at the earliest and
submission to the FDA not expected by U.S. Drug management until, at the
earliest, February 1999 U.S. Drug's management had estimated that it would take
an additional $10,000,000 to $12,000,000 to bring the product to market,
assuming that the development program is successfully completed, as to which
there can be no assurance. An independent consulting firm engaged by SAT
estimated in June 1997 that the product launch date is August 1999 and not
December 1998 as previously announced by SAT and that the cost to produce the
product from April 1, 1997 could be approximately $18,400,000. The added delay
in the launching of the drug testing product and the increased project costs
required the SAT Board to ascertain (1) whether the drug testing
product-development program should be continued and (2), if the answer is in the
affirmative, whether SAT can continue to fund U.S. Drug. The SAT Board
concluded, based on the consultant's review and internal management's
recommendation, that the product could be developed and still has the potential
for being a major revenue producer, especially with an added alcohol testing
capability, provided that the program could be adequately financed. Therefore,
the Company has taken the following actions to provide a base for continued
development of its products. (1) U.S. Drug management has, been requested to
re-explore the possibilities of securing financing for U.S. Drug without SAT
being a party thereto (i.e., through sale of SAT securities), with venture
capital investments currently appearing to be the most likely source for U.S.
Drug to secure financing on a long-term basis. Investments by venture capital
investors would likely reduce SAT's ownership to an amount below 50%, which is
one of the reasons SAT's Board has not favored considering this approach until
now because of the potential benefits to SAT if the drug testing product is
successfully developed. SAT management still considers taking U.S. Drug private
an appropriate step to take. (2) The Company has agreed to continue to fund U.S.
Drug as needed. In addition, SAT will seek funding and use some of the cash
raised to purchase U.S. Drug common stock. The Board of Directors also
authorized the purchase of 2,000,000 shares of the U.S.
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<PAGE> 19
Drug Common Stock for $2,500,000 however such potential investment has been
delayed pending additional financing by SAT. (3) The company purchased 1,768,202
shares of U.S. Drug Common Stock in lieu of payment of debt owed to SAT. (4) To
focus management on the Drug research, the SAT Board accepted the resignation of
Linda Masterson as President of SAT so she could accept the position of C.E.O.
of U.S. Drug Testing. See "Effect of Merger -- U.S. Drug" under this caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Lastly, the SAT Board has concluded that the revenues of the Biochemical
Toxicology Laboratories ("BioTox") Division can be increased if certification is
obtained from NIDA and that this Division can be a valuable support to the other
operational units of the Company; however, the latter use is still under study.
ACQUISITION STRATEGY FOR HUMAN RESOURCE PROVIDER BUSINESS
The Employer Services Division provides single source services to assist
corporations in their hiring practices ranging from substance abuse testing and
background screening to total program management. Until recently this Division
has been attempting to build the business only by acquiring major customers
through its sales force. The Division has been dependent on the major
laboratories for its drug testing services, thereby risking increased costs if
these laboratories increased their charges to SAT. Installing the programs at a
customer site, depending on the customer's requirements, may take from three to
six months and, accordingly, there is a gap between the customer signing and the
customer beginning to pay for these services. As a result, the Division's
revenues were not significant in fiscal 1997, despite the number of significant
new users signed to contracts.
The third party administration of testing for substances of abuse as a part
of human resources management represents a fragmented industry. SAT's management
believes that its management team and unique selling approach will be able to
consolidate many of the competitors through acquisition. For the most part, many
of the businesses targeted by SAT have evolved into this type of business as an
adjunct to another area of expertise. As a result, management believes the TPA
business portion of their businesses are not necessarily profitable. Although
there can be no assurance, SAT management believes that the Employer Services
Division can successfully consolidate these companies and, by using economics of
scale, SAT's own resources and unique expertise in this area, coupled with the
services of the Robert Stutman & Associates Consulting Division, attain
profitability and, as a result, SAT would become a major influence in the area
of third party administration of substance abuse testing, background checking
and other similar human resource requirements.
SAT's two investment bankers have advised SAT management that, to the
extent the contemplated acquisition program requires cash as the medium for the
purchase prices, as contrasted with use of the SAT Common Stock for the target
companies, investors would be interested in financing these acquisitions. They
have especially noted the ability of the Company to become profitable at any
earlier date as a result of this program without giving effect to the operations
of U.S. Drug. There can, of course, be no assurance as to the availability of
this financing, as to SAT effecting the acquisitions or as to the profitability
of the Company.
The contemplated acquisition of the assets of the Datamed International
division of Global Med Technologies, Inc. ("Global Med"), assuming Global Med
obtains its shareholders' approval in August, will not only bring SAT over
$7,000,000 (on an annualized basis) in new revenues, but will also result in an
arrangement with National Medical Review Offices, Inc. ("NMRO"), a major
provider of medical review officer ("MRO") services This arrangement will result
in the Employer Services Division having lower costs for its MRO services, and
be a strong incentive for future customers to engage the services of the
Employer Service Division.
EFFECT OF MERGER -- U.S. DRUG
During May 1996, SAT filed the U.S. Drug Registration Statement to solicit
the consents of the minority stockholders of U.S. Drug to a merger of U.S. Drug
with and into a wholly-owned subsidiary of SAT (the "U.S. Drug Merger") and to
register under the Securities Act the shares of the SAT Common Stock to be
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<PAGE> 20
issued to the minority stockholders of U.S. Drug if the U.S. Drug Merger is
consummated. Based upon Amendment No. 2 to the U.S. Drug Registration Statement
filed on April 21, 1997, SAT would offer 1.62 shares of the SAT Common Stock for
each share of the U.S. Drug Common Stock or an aggregate of 2,789,478 shares of
the SAT Common Stock for the 1,721,900 shares of the U.S. Drug Common Stock held
by the U.S. Drug minority stockholders. SAT delayed filing Amendment No. 3 in
order to receive comments from the Staff of the Securities and Exchange
Commission as to Amendment No. 2 and to include, because of the delay in
receiving comments, the audited financial statements for fiscal 1997 for the
Company and U.S. Drug. SAT has been advised that upon such filing the Staff will
issue its comments on SAT's filings. The effects of the U.S. Drug Merger are
discussed below.
The latest estimates, both external and internal, which SAT management has
are that, to complete the development of a saliva based drug testing product,
will require incremental costs ranging from $15,000,000 to $18,400,000 and that
the product is not expected to be launched until some date in the first quarter
of 1999 (internal estimate) or August 1999 (external estimate). This contrasts
with SAT's previous and publicly announced incremental costs (from April 1,
1997) of $10,000,000 to $12,000,000 and a launch date of December 1998. A
consultant's report in June 1997 confirmed U.S. Drug's management's opinion that
the product could be developed and had market potential, especially with an
added feature of the device also testing for alcohol.
SAT's management until now believed that the best "partner" for U.S. Drug
was SAT, not only because it owned 67.0% (now 75.4%), but because of its related
synergistic operations which also would allow the Company to operate while the
development program proceeded and because SAT appeared to be the best source for
funding. The increase in estimated costs and the further delay in the probable
launch date has required SAT management to re-evaluate the methods of financing
and request the U.S. Drug management to seek financing in which SAT securities
are not offered. A probable source of such funding for this development stage
company is investments by venture capital investors which would result in a
substantial dilution of SAT's ownership percentage in U.S. Drug and, if the U.S.
Drug Merger is not consummated, that of the U.S. Drug minority stockholders'
interests. In addition, SAT management believes that a venture capital investor
would prefer to invest in a privately-owned company with an initial public
offering as the investor's exit strategy. Consummation of the U.S. Drug Merger
would facilitate that possibility.
U.S. Drug's management has also been requested to explore the possibility
of obtaining a strategic partner for U.S. Drug other than SAT. Current SAT and
U.S. Drug management have been of the opinion that obtaining one of the major
pharmaceutical or medical companies to assist in the product development at this
stage of development risked giving confidential data to potential competitors
that would not be fully protected by confidentiality agreements and also could
result in marketing rights demands that would later reduce the revenues to the
Company assuming successful consummation of the development program. Current
management also believed that a potential marketing partner could not be
obtained on acceptable terms until there was 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 April 1998 at the earliest and that, at that stage of
development, the greater part of the estimated development and manufacturing
build-out expenses would already have been incurred, making it less beneficial
to obtain a development partner at that time. Despite these reservations
continuing, management believes that the consultant's report may resolve the
concerns of these major companies as to there being no prototype available and
that U.S. Drug may have to assume the risks of disclosing confidential data as
the lesser evil than not to secure adequate financing. U.S. Drug's management
will pursue this potential avenue of funding, but does not currently rate U.S.
Drug's chances of succeeding as high as those with venture capital investors or
some other equity investor. There can be no assurance that U.S. Drug will be
successful in securing financing, whether through a venture capital investor or
otherwise, in which event a decision would have to be made as to whether SAT
would seek the additional funds through sales of its own securities or U.S. Drug
will have to suspend its development program.
If the U.S. Drug Merger is consummated on the currently proposed basis, SAT
will record a non-recurring charge to income of approximately $3,800,000 as
Incomplete Research and Development cost, representing the excess of the market
value of the SAT Common Stock issued in the U.S. Drug Merger over
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<PAGE> 21
the book value of the acquired minority investment in U.S. Drug. Nevertheless,
for the reasons which SAT will give in the U.S. Drug Registration Statement, SAT
still believes that the U.S. Drug Merger should be approved by the U.S. Drug
minority stockholders. SAT may delay the filing of Amendment No. 3 in order to
give the Staff of the Commission time to review the audited financial statements
and to permit SAT to mail the proxy material for a Special Meeting of
Stockholders to approve a proposed increase in the authorized shares of the SAT
Common Stock. There can be no assurance as to when the U.S. Drug Registration
Statement will be declared effective in view of the past delays.
EFFECT OF MERGER -- GOOD IDEAS
During April 1996, SAT filed the Good Ideas Registration Statement to
solicit the consents of the Good Ideas minority stockholders to a merger of a
wholly-owned subsidiary of SAT with and into Good Ideas (the "Good Ideas
Merger") and to register shares of the SAT Common Stock to be issued to the Good
Ideas minority stockholders if the Good Ideas Merger is consummated. Amendment
No. 2 to the Registration Statement filed on April 21, 1997 provided for an
exchange offer of .36 of a share of the SAT Common Stock for each share of the
Good Ideas Common Stock or an aggregate of 557,524 shares of the SAT Common
Stock for the 1,548,680 shares held by the Good Ideas minority stockholders. SAT
intends to file Amendment No. 3 to the Registration Statement, including the
audited financial statements reported in this Report and in Good Ideas Annual
Report, and then to seek to have such Registration Statement declared effective.
SAT may delay the filing in order to give the Staff of the Commission time to
review the audited financial statements and to permit mailing of proxy material
for a Special Meeting of Stockholders to approve the proposed increase in
authorized shares of the SAT Common Stock. There can be no assurance as to when
the Good Ideas Registration Statement will be declared effective in view of the
past delays.
Because of problems which management believed were 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 Good Ideas Merger was consummated,
the only way to improve operational results was to secure new toy products,
whether through licensing arrangements or otherwise; however, this type of
program, even if successful, as to which there could be no assurance, would
require substantial cash investments, which was 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 Company subsequently sold a portion of the Good Ideas
assets and has written off the remaining un sold assets.. The SAT Board believes
that liquidation of Good Ideas would be preferable than investing substantial
additional funds in Good Ideas. As of March 31, 1997, SAT owed Good Ideas
$2,032,455. The Good Ideas Merger would terminate SAT's obligation to repay such
indebtedness.
As indicated in the section "Necessity for Operational Changes" under this
caption "Management's Discussion and Analysis of Financial Condition and Results
of Operations," the SAT Board still believes that the reasons for the Good Ideas
Merger considered in February 1996 are still valid today.
LIQUIDITY AND CAPITAL RESOURCES
Although the Company has a history of operating losses through March 31,
1997 and the Company has $1,382,000 in negative working capital, compared to a
positive working capital in fiscal 1996 of $1,166,000, management believes that
the Company will be able to provide cash resources to meet all of its operating
requirements for the ensuing 12 months resulting from cost reduction actions as
described below and assuming the Company is able to raise additional capital
through the sale of common stock or issuance of additional long-term debt. In
addition to the change in cash available, the negative working capital is
largely attributable to approximately $500,000 additional reserve in accounts
receivable, an inventory write off associated with the abandonment of the
certain alcohol products and increased current liabilities
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Good Ideas and USRR have produced significant operating losses over the
last several years. Both operations have been discontinued. USRR was sold April
30, 1996. Good Ideas' operations have been terminated. Both actions have
substantially reduced the Company's cash requirements
Management believes that cash flow from operations will increase in fiscal
1998 through the addition of the RSA revenues and by developing the ESD human
resource business, both of which experienced significant growth in fiscal 1997.
Because of the increasing success in attracting customers to the these
divisions, management has decided to focus the majority of it's effort's into
this portion of it's business. The company believes this strategy will provide
the most effective use of it's resources. (see "Acquisition Strategy for Human
Resources Provider" above). The company believes both the ESD and RSA divisions
will be cash positive by the end of the fiscal year without acquisitions. With
acquisitions the Company believes these divisions can begin to generate enough
cash to fuel additional growth.
The Company engaged the services of an independent research firm to
determine the feasibility as to saliva based testing product by U.S. Drug. The
study, completed in June 1997, indicates further development is desirable. The
estimated cost to develop the product, from April 1, 1997, is $18,400,000. The
Company will seek a joint venture marketing partner to help in the development
program, which while reducing current expenditures, would also reduce future
revenues to the extent marketing rights are demanded by such "development
partner." As described above, the Company has decided to substantially focus on
the RSA/ESD business and the acquisition strategy associated with that decision.
Additionally, there will be limited cash reserves to both fund SAT operations
and a research and development operation.
In May 1997, the Company consummated a Convertible Debenture and Preferred
Stock Purchase Agreement. The Company issued and sold to an investor a
convertible debenture in the principal amount of $750,000 and 62,500 shares of
Class "B" preferred stock for $4.00 per share. The aggregate Purchase price for
the debentures and the common stock was $1,000,000.
On July 3 and July 7, 1997, the Company issued notes totaling $625,000 to a
director of the Company. The terms of the notes provided that, in addition to
the principal, the Company would pay to the director an additional $175,000 plus
issue shares of common stock with a market value of $50,000.
Between April 1, 1996 and June 5, 1996, warrants and options were exercised
to purchase 2,353,449 shares of the SAT Common Stock generating $4,242,000 in
cash. Outstanding unexercised SAT Common Stock purchase warrants as of March
1997 could generate approximately $15,348,000 of new capital to the Company.
Outstanding stock options could generate proceeds of approximately $1,040,000 if
exercised. SAT will have to update or file registration statements under the
Securities Act to make these exercises more attractive to the holders. There can
be no assurance that any of the remaining warrants or options will be exercised.
In the event that the Company is unable to generate sufficient cash flow
from operations or from sources other than those described above, then the
Company may have to provide for additional reductions in operating costs,
including eliminating funding for U.S. Drug research and development. This will
not only result in less cash from operations currently, but also delay 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 the SAT Common Stock
purchase warrants and the stock options and possibly discouraging potential new
investors, but also increasing the risk that a current investor in SAT may lose
the value of their investment.
CHANGES IN FINANCIAL CONDITION
OPERATING CASH FLOWS
Net loss for the Company was $15,444,000 for fiscal year 1997 of which
$7,051,000 was the result of non cash items compared to a net loss of $10,461,00
in fiscal 1996 of which $1,300,000 was non cash related. Cash used for
operations was $7,376,000 in fiscal 1997 compared to $8,711,000 for fiscal 1996.
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INVESTING CASH FLOWS
Cash used in investing activities was $2,321,000 for fiscal 1997 primarily
for the cash portion of the acquisition of Robert Stutman Association. In fiscal
1996 investing activities provided $3,376,000 primarily from the sale of
marketable securities.
FINANCING CASH FLOWS
Cash provided from financing activities was $9,092,000 during the fiscal
1997. The proceeds were the result of Warrants exercised amounting to $4,660,000
and sale of convertible debenture for net proceeds of $4,941,000. Cash from
financing activities totaled $4,906,000 in fiscal 1996 primarily from the sale
of common and preferred stock ($6,788,000) and loans ($1,000,000) offset by loan
payments of $2,569,000.
Cash resources for fiscal 1998 will be limited unless the Company is
successful in raising cash from additional investors. The Company has engaged
two investment bankers to help in the process of raising funds and the Company
is optimistic that the effort will be successful but there can be no assurances
of that success. The drug testing and background screening clients require an
initial setup period and therefor each new client can take a number of months
before contracted revenues are realized. In management's opinion, to meet the
Company's commitments which include lease obligations, royalty obligations and
development of products for at least the next 12 months additional investment
will be required. The Company expects that ultimately revenue generated from the
drug testing business will eventually provide enough working capital for the
business. There are currently no unfunded commitments for capital expenditures.
RESULTS OF OPERATIONS
FISCAL 1997 VS. FISCAL 1996
Revenues from continuing operations for fiscal 1997 were $2,724,000, an
increase of $1,558,000 or 134% from revenues of $1,166,000 reported for fiscal
1996. The revenue increase was primarily the result of the continued focus in
the human resource provider business. The current fiscal year includes a full
year of revenue from ProActive Synergies, Inc. (now referred to as "ESD"
division) acquired in September of 1995 and revenue from Robert Stutman &
Associates, Inc.,("RSA") acquired in May 1996. There was no revenue from RSA in
fiscal 1996. Revenue increase from the Alcohol division contributed, to a lesser
degree, to the increase in revenue year over year. The Alcohol division revenue
was primarily generated during the first nine months of fiscal tear 1997 as a
result of the early stages of the "cost per test" program. In December of 1996
the "cost per test" program was discontinued. (See Item 1 "Business of the
Company" for further discussion).
Cost of sales for the fiscal 1997 on continuing operations was 73.2% of
revenue as compared to 103.7% of revenues for fiscal 1996. The improvement in
cost of sales as a percentage of revenue in fiscal 1997 was primarily the result
of the Alcohol division's de-emphasizing the costly cost per test business. The
cost of sales as a percentage of revenue for products sold was 77.2% and for
services was 71.4% in fiscal 1997 compared to 120.7% and 73.1% respectively for
1996.
Selling, general and administrative ("S.G.&A") expenses were $9,085,000 for
fiscal year ended March 31, 1997 compared to $5,721,000 for fiscal 1996,
representing an increase of $3,364,000 or 58.8%. Primarily the increased expense
in fiscal 1997 was the result of incurring consulting services in regard to
investor relations activities and financial consulting services totaling
$1,890,000 which were not incurred in 1996. These services were paid for in
Common Stock Warrants. Additionally S.G.&A expenses associated with RSA and
ProActive which expenses were not included for a full fiscal year 1996 also
contributed to the increase in expenses year over year.
Research and development expenses for fiscal year 1997 were $1,787,000
compared to $1,006,000 for fiscal 1996, an increase of $781,000 or 77.7%.
Research and development expenses represent the increased activity in the
development of the Saliva testing program associated with the subsidiary U.S.
Drug. Increased personnel requirements and additional operating expenses to
bring Saliva testing to the next stage of development, attributed to the
increase.
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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, Inc. relating to a dispute
over the terms of their employment contracts. Fiscal 1997 included an accrual
for a settlement and legal fees of $416,000 associated with the settlement for
one of the Board members associated with a suit arising from actions concerning
the results of consent solicitation. (See Note 12 Commitments and Contingencies
for further discussion.
Depreciation and amortization was $1,167,000 for fiscal year 1997 compared
to $1,018,000 for fiscal 1996, representing an increase of $149,000 or 14.7%.
The majority of SAT's alcohol testing machines were placed in testing sites in
the fourth quarter of 1995, in connection with the cost per test agreements with
major laboratories. The depreciation expense in both fiscal 1996 and 1997
associated with this equipment is the primary depreciation expense. In December
1996, the Company discontinued the "cost per test" program and wrote off all of
the assets associated with the program.
Write off of assets associated with the abandonment of breath alcohol and
cost per test services in fiscal 1997 represents the write off of inventory and
fixed assets associated with the "cost per test" program. A change in Department
of Transportation alcohol testing requirements forced the Company's alcohol
testing products to compete with less expensive alternatives. Therefore the
anticipated market never materialized causing the write down of assets and
inventory related to this market. Combined inventory and assets write off
accounted for $1,850,000. The decision to abandon the breath alcohol and cost
per test services also resulted in the write-off of costs in excess of net
assets associated with Alconet of $714,000.
The Company accrued a royalty payment due to the inventor of the Alcohol
testing equipment. The amended royalty agreement required the Company to pay a
base royalty of $120,000 per year for the life of the inventor. As a result of
the Company's decision to cease the "cost per test" business, the royalty
agreement has no future value to the company but the payments are required by
the royalty agreement. Therefore the Company accrued $1,100,000, in fiscal 1997.
The accrual was calculated based on the life expectancy of the inventor.
The Company's operating loss of $15,128,000 for fiscal 1997 increased
$7,098,000 or 87.8% over the $8,598,000 loss for fiscal 1996. The increased
operating loss can be primarily attributed to losses associated with the
abandonment of the alcohol testing business, expenses related to consulting
services for three consultants, an accrual to cover settlement costs and legal
fees associated expenses arising from a suit concerning a consent solicitation
and legal fees associated with a settlement, write off of cost in excess of net
assets associated with Alconet and lastly expenses included in fiscal 1997 for
operations not included in fiscal 1996 Additionally, fiscal 1996 included a net
gain of $302,000 on marketable securities and there was no such gain in 1997.
U.S. DRUG TESTING, INC. (SUBSTANCE ABUSE TESTING)
During fiscal 1997, the Company continued as a development stage enterprise
with no revenues. Selling, general and administrative expenses were $185,000 in
fiscal 1997 compared to $417,000 in fiscal 1996 or a decrease of $232,000,
primarily the result of lower travel, utility and telephone expenses. Research
and development expenditures totaled $1,569,000 in fiscal 1997 compared to
$851,000 in fiscal 1996 or an increase of $718,000. The increase is primarily
the result of expanded personnel requirements and operating expenses to bring
the saliva testing to the next phase of development. Costs include engineering
and chemist consulting time as well as additional U.S. Drug full time employees.
Management fees paid to SAT were $420,000 in both fiscal 1997 and fiscal 1996.
For a description of the services rendered under the management agreement
relating to these fees, see the section "Subsidiaries -- U.S. Drug Testing,
Inc." in Item 1 to this Report. As of March 31, 1997, U.S. Drug did not
anticipate generating revenues from product sales during fiscal 1998 and,
accordingly, anticipated that operating losses would continue for at least a 12
to 24-month period.
Net expenses for fiscal year 1997 were $1,970,000 compared to $1,641,000
for fiscal year 1996. The increase of $329,000 was primarily the result of
additional people requirements. The costs include expenses for engineering and
chemists consulting time and additional employees.
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DISCONTINUED OPERATIONS
GOOD IDEAS ENTERPRISES, INC. (TOY)
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 liquidation basis. As a result there
was no Statement of Operations for fiscal 1997. The change in assets
(liabilities) held for liquidation included a reserve for $2,032,000 for a note
receivable due from SAT leaving a net deficit of $7,000
U.S. RUBBER RECYCLING, INC. (RECYCLED RUBBER PRODUCTS)
The SAT Board, on February 26, 1996, concluded that the Company should
concentrate on alcohol and drug testing and ESD's human resource provider
operations as its core businesses and, accordingly, authorized seeking a
purchaser for USRR. A sale of substantially all of the assets of USRR was
consummated on April 30, 1996. The net loss for fiscal 1996 included a $88,000
loss on disposal of USRR's assets.
FISCAL 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 ESD 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 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, Inc. relating to a dispute
over the terms of their employment contracts.
Depreciation and amortization was $1,018,000 for fiscal 1996, representing
an increase of $322,000 or 46.3% over depreciation and amortization in fiscal
1995, which increase was attributable primarily to depreciation on 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
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<PAGE> 26
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, the Company continued as a development stage enterprise
with no revenues. Selling, general and administrative expenses were $417,000 in
fiscal 1996 as compared with $850,000 in fiscal 1995 or a decrease of $433,000,
resulting primarily from a $325,000 reduction in the royalty payments on the 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 section "Subsidiaries-U.S. Drug Testing, Inc."
in Item 1 to this Report. Interest expenses on brokerage loans were $72,000
during fiscal 1996 as compared with $42,000 during fiscal 1995 or an increase of
$30,000 resulting from increased borrowings during fiscal 1996. Other income
(expense) resulted in net income of $263,000 in fiscal 1996 as compared with net
income of $31,000 in the prior year or an increase of $232,000. Fiscal 1996
other income (expense) is comprised of a gain of $76,000 on the sale of REMIC
bonds over their earnings value at March 31, 1995, interest income primarily
relating to the REMIC bonds of $105,000 and interest income on loans to 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.
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<PAGE> 27
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.
Gross profit for fiscal 1996 was $163,000 or 10.8% of net sales as compared
with $1,324,000 or 28.7% of net sales for the prior year. The decrease in gross
profit as a percentage of net sales was primarily due to a write-off of
inventory in the amount of $192,000.
Selling, general and administrative expenses for fiscal 1996 decreased to
$1,279,000 from $1,924,000 for the comparable period in fiscal 1995, which
decrease was attributable to reductions in payroll and related costs during
fiscal 1996.
Management fees paid to 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. Included above but excluded in discontinued operations in the
financial statements are intercompany allocations of general corporate overhead
of $225,000 and $305,121 in fiscal 1996 and 1995, respectively, and intercompany
allocations of interest income of $157,812 and $64,320 in fiscal 1996 and 1995,
respectively.
Unless Good Ideas were to add new products to its line, as to which there
can be no assurance, and there were a stronger demand for toy products in the
industry generally, management does not believe that a turnaround in Good Ideas'
operations would occur during the next 12 months, if not at a later date.
Although management of Good Ideas had in the past considered plans to expand the
product line, it was reluctant to implement these plans absent a change in the
industry conditions described above. On February 26, 1996, the 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.
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.
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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. Included above but excluded in discontinued operations in the
financial statements are intercompany allocations of general corporate overhead
of $89,193, $213,173 and $119,216 in fiscal 1996, 1995 and 1994, respectively,
and intercompany allocations of interest expense (income) of $122,545, $109,575
and $61,034 in fiscal 1996, 1995 and 1994, respectively.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
See Item 14 of this Report for an index to the Financial Statements and
SUPPLEMENTARY DATA.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
See Item 14 of this Report for an index to the Financial Statements and
Supplementary Data.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
On November 3, 1995, 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 criticism of, or dispute with, Wolinetz, but because they
concluded that, at that 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
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<PAGE> 29
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.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
DIRECTORS AND EXECUTIVE OFFICERS
The following table contains information concerning the current directors
and executive officers of SAT as of June 30, 1997:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Robert M. Stutman........... 54 Chairman, Chief Executive Officer and a director
David L. Dorff.............. 54 President, Chief Operating Officer and a director
Linda H. Masterson.......... 46 Director (also President and, since May 23, 1997, Chief
Executive Officer of U.S. Drug)
Robert Muccini.............. 55 Vice President, Finance, Treasurer, Chief Financial
Officer and Chief Accounting Officer
Brian Stutman............... 30 Vice President, Sales and Marketing
Alan I. Goldman............. 59 Director
John C. Lawn................ 60 Director
Peter M. Mark............... 51 Director
Michael S. McCord........... 53 Director
Lee S. Rosen................ 43 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), Mr. Dorff (who was first elected
effective May 23, 1997, with the number of authorized directors being
simultaneously increased from seven to eight) 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 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. Mr. Dorff's term will
expire at the next Annual Meeting of Stockholders, at which meeting 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 with
three executive officers named in the table, see the section "Employment and
Severance Agreements" under the caption "Executive Compensation."
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, then 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 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 -- Consulting
Division."
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. On May 23, 1997, the SAT Board made such increase and
election effective that date, elected him as the President of SAT and designated
him as its Chief Operating Officer. Mr. Dorff was an executive officer of (1)
the Triarc Restaurant Group of Triarc Corporation, a restaurant and beverage
company, from June 1995 to February 1997 and (2) the U.S. Shoe Footwear Group of
United States Shoe Corp., a shoe and women's clothing manufacturer, from
February
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<PAGE> 31
1991 to June 1995, and a consulting partner with the accounting firm of Deloitte
& Touche from September 1987 to February, 1991.
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 supervising the development program of U.S. Drug
and the operations of the Alcohol Products and BioTox Divisions of SAT. On May
23, 1997, she resigned as the President of SAT in order to become Chief
Executive Officer of U.S. Drug (she was already its President) as part of the
program to study the feasibility of separating the interlocking relationships
between SAT and U.S. Drug. See "Business of the Company -- U.S. Drug Testing"
elsewhere in this Report. 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 in such capacities 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 February 25, 1997. In anticipation of such
contemplated relocation, he joined SAT on December 16, 1996. From May 1996 until
he joined SAT, Mr. Muccini was 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.
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
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<PAGE> 32
and acquisitions, private placements and business and organization consulting.
From October 1986 to July 1990, he was a consultant to Goldmark Partners Ltd.,
an investment banking firm specializing in mergers and acquisitions. From June
1987 to March 1988, he was also the President of Goldmark Capital, Ltd., a
private investment firm. From May 1975 to January 1985, Mr. Goldman held the
position of Senior Vice President, Finance and Chief Financial Officer of
Management Assistance Inc. ("MAI"), then a $450 million multinational computer
manufacturing, marketing and maintenance company listed on the New York Stock
Exchange. In January 1985, MAI discontinued its operations when it sold its
Sorbus Service Division to a subsidiary of Bell Atlantic Corporation and its
Basic Four Computer Division to a corporation now called MAI Systems, Inc. From
June 1970 to May 1974, he was Vice President, Finance, Treasurer and Chief
Financial Officer of Interway Corporation, then a New York Stock
Exchange-listed, $200 million international company engaged in piggy-back
trailer and containing leasing and fleet management and now a part of
Transamerica Corporation. From 1969 to 1970, he was at Lehman Brothers where he
participated in investment banking and corporate finance activities; from 1962
to 1969, he was at Bankers Trust Company, where he managed several offices; and
from 1958 to 1962, he served in various positions at the Federal Reserve Bank of
New York. Mr. Goldman currently serves as a director of Production Systems
Acquisition Corporation, a public company seeking to enter the production
systems business by acquisition.
From December 8, 1994 to date, John C. Lawn has been serving as the
Chairman and Chief Executive Officer of The Century Council ("Century"), which
is a national not-for-profit organization dedicated to fighting alcohol abuse
which is supported by more than 800 concerned brewers, vintners, distillers and
wholesalers. From 1990 to 1994, Mr. Lawn served as Vice President and Chief of
Operations of the New York Yankees. From 1985 to 1990 he served as Chief
Administrator at the DEA, having previously served as Deputy Administrator from
1982 to 1985, and was awarded the President's Medal, the highest honor for
civilian service. Prior to joining the DEA, Mr. Lawn served with the Federal
Bureau of Investigation from 1967 to 1982.
In December 1994 Peter M. Mark formed Mark Energy Capital Group, Ltd.
("MECG"), a private investment group for which through a wholly-owned
corporation he served as the General Partner from December 1994 to the present.
The primary interest of MECG is to acquire proven producing oil and gas
properties in the United States. In April 1981, he formed Mark Resources
Corporation, a private oil and gas company whose operations were primarily
located in the Appalachian Basin, and served as its President, its Chief
Executive Officer and a director from April 1981 until December 1993 when it was
sold to Lomak Petroleum, Inc. ("Lomak"). Mr. Mark then served as a director and
the Vice Chairman of Lomak until December 1994 when he formed MECG. Between 1976
and 1991, Mr. Mark organized and managed 30 limited partnerships and numerous
joint ventures which explored and developed approximately 700 wells for oil and
gas.
Michael S. McCord is the owner of McCord Investments, a sole proprietorship
formed in 1980 which primarily invests in various capital markets. Mr. McCord is
also a stockholder, director and officer of McCord Brothers, Inc. and a partner
of McCord Brothers Partnership, a privately-owned company and partnership,
respectively, each of which invests in oil, gas and real estate properties. From
1974 to 1980, Mr. McCord served as Financial Vice President of the Wedge Group,
a privately held holding company which acquired and held control of
international multi-industry (including agricultural, construction, energy,
manufacturing and service) companies with aggregate revenues in excess of $1
billion. Mr. McCord was elected as a director of Good Ideas 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 Paine Webber
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
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<PAGE> 33
James & Associates, Inc. From February 1989 until September 1991, Mr. Rosen
worked for A.G. Edwards, Co., Inc.
FAMILY RELATIONSHIPS
There are no family relationships among the directors and executive
officers of SAT except that Robert M. Stutman and Brian Stutman are father and
son, respectively.
SECTION 16(A) REPORTING OBLIGATIONS
The following officers and directors of SAT filed late reports under
Section 16(a) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act") during fiscal 1997: (i) John C. Lawn, a director of SAT, filed one late
filing relating to one transaction; (ii) Peter M. Mark, a director of SAT, filed
one late filing relating to one transaction; and (iii) Robert M. Stutman,
Chairman, Chief Executive Officer and a director of SAT, filed one late filing
relating to three transactions. There are no known failures to file a required
report for any of SAT's reporting persons during such time period.
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth the cash compensation and certain other
components of the compensation of (1) James C. Witham who served as the Chairman
of the Board, the President and the Chief Executive Officer of SAT until April
18, 1996; (2) Robert M. Stutman who has been serving as the Chairman of the
Board and the Chief Executive Officer of SAT since April 18, 1996; and (3) the
three executive officers of SAT who were serving as of March 31, 1997 and who
received compensation in excess of $100,000 in fiscal 1997:
<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)................... 1997 $ -- -- -- --
Chairman, President and 1996 $412,500(2) $50,000 -- --
Chief Executive Officer 1995 $301,154 $50,000 150,000(3) --
Robert M. Stutman(4)................. 1997 $260,809 $ -- --(5) --
Chairman and Chief 1996 -- -- -- --
Executive Officer 1995 -- -- -- --
Linda H. Masterson(6)................ 1997 $152,827 $ -- 600,000(7) --
President 1996 -- -- 10,000(7) --
1995 -- -- -- --
Brian Stutman (8).................... 1997 $152,385 $ -- --(9) --
Vice President, Sales and 1996 -- -- -- --
Marketing 1995 -- -- -- --
Steven J. Kline(10).................. 1997 125,000 -- 50,000 --
Vice President, Research 1996 117,000 -- 10,000 --
and Development 1995 63,231 -- 5,000 --
</TABLE>
- ---------------
(1) Mr. Witham served in these capacities until April 18, 1996 and as an
employee of SAT until May 31, 1996. For information as to his former
employment agreement with SAT, see the section "Employment and Severance
Agreements" under this caption "Executive Compensation."
(2) The amount in the table exceeds the salary amount shown below in the
section "Employment and Severance Agreements" as a result of March 1996
company-wide payments of several years of unused vacation accruals, of
which $95,192.25 was paid to Mr. Witham.
(3) In August 1994, SAT granted non-qualified stock options expiring August 1,
2004 under the 1990 Restricted Stock, Non-Qualified Option and Incentive
Stock Option Plan to purchase an aggregate of
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<PAGE> 34
450,000 shares of the SAT Common Stock at $2.375 per share, of which Mr.
Witham received a stock option to purchase 100,000 shares of the SAT Common
Stock. The option expired unexercised on November 3, 1996.
(4) Robert M. Stutman was elected as the Chairman of the Board and designated
as Chief Executive Officer of SAT on April 18, 1996. For information as to
his severance arrangement with SAT, see the section "Employment and
Severance Agreements" under this caption "Executive Compensation."
(5) Robert M. Stutman has received various Common Stock purchase warrants from
SAT as a result of his having been a consultant to SAT prior to his
officership, directorship and employment with SAT and as a result of the
acquisition by SAT of RSA. For information as to these
non-executive-compensation warrants, see "Business of the
Company -- Consulting Division" and "Security Ownership of Certain
Beneficial Owners and Management" elsewhere in this Report.
(6) Ms. Masterson became President of SAT effective May 13, 1996, having served
as a director since September 26, 1995. She resigned as the President
effective May 23, 1997 in order to become the Chief Executive Officer of
U.S. Drug (she was already its President) as part of the program to study
the feasibility of separating the interlocking relationships between SAT
and U.S. Drug.
(7) For information as to the Common Stock purchase warrant to purchase 600,000
shares of the SAT Common Stock received by Ms. Masterson as an inducement
to become the President and an employee of SAT, see the section "Employment
and Severance Agreements" under this caption "Executive Compensation" and
"Security Ownership of Certain Beneficial Owners and Management." For more
information as to her Common Stock purchase warrant to purchase 10,000
shares of the SAT Common Stock received as a director of SAT, see the
section "Directors' Compensation" under this caption "Executive
Compensation" and "Security Ownership of Certain Beneficial Owners and
Management."
(8) Brian Stutman was elected as Vice President, Sales and Marketing of SAT on
December 3, 1996. From May 21 until December 31, 1996, he served as Vice
President of Business Development for RSA.
(9) Brian Stutman has received various Common Stock purchase warrants from SAT
as a result of the acquisition by SAT of RSA. For information as to these
non-executive-compensation warrants, see "Business of the
Company -- Consulting Division" and "Security Ownership of Certain
Principal Owners and Management." He received his first executive
compensation Common Stock purchase warrant on June 24, 1997. For
information as to this warrant and his severance agreement, see the section
"Employment and Severance Agreements" under this caption "Executive
Compensation."
(10) Mr. Kline served as Vice President, Research and Development of SAT from
March 25, 1997 until May 23, 1997, when he resigned as part of the program
to study the feasibility of separating the interlocking relationships
between SAT and U.S. Drug. He has served as a Vice President of U.S. Drug
since July 1994.
OPTION/SAR GRANTS TABLE
During fiscal 1997, no stock options were granted by SAT, whether to the
individuals named in the Summary Compensation Table or otherwise, and none were
outstanding as of March 31, 1997. SAT has never granted any stock appreciation
rights.
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<PAGE> 35
The following table sets forth certain information concerning Common Stock
purchase warrants granted during fiscal 1997 as executive compensation to the
individuals named in the Summary Compensation Table.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
----------------------------------------------- POTENTIAL REALIZABLE ALTERNATIVE TO
PERCENT VALUE AT ASSUMED (F) AND (G)
NUMBER OF OF TOTAL ANNUAL RATES OF GRANT DATE
SECURITIES WARRANTS STOCK PRICE VALUE
UNDERLYING GRANTED TO EXERCISE APPRECIATION FOR ----------------
WARRANT EMPLOYEES OF BASE OPTION TERM
GRANTED IN FISCAL PRICE EXPIRATION ---------------------- GRANT DATE
NAME (#) YEAR ($/SH) DATE 5%($) 10%($) PRESENT VALUE($)
(A) (B) (C) (D) (E) (F) (G) (H)
---- ---------- ---------- -------- ---------- ------- --------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
James C. Witham......... -0- N/A N/A N/A N/A N/A N/A
Robert M. Stutman....... -0- N/A N/A N/A N/A N/A N/A
Linda H. Masterson...... 600,000 57.7% $2.125(1) (3) 894,000 2,142,000 1,338,000
Steven J. Kline......... 50,000 4.8% $2.125(2) (4) 40,500 123,500 100,500
Brian Stutman........... -0- N/A N/A N/A N/A N/A N/A
</TABLE>
- ---------------
(1) Initially $3.125, but lowered to $2.125 later by SAT's Board of Directors.
(2) Initially $3.50, but lowered to $2.125 later by SAT's Board of Directors.
(3) The last installment expires May 12, 2003.
(4) The last installment expires May 2, 2003.
AGGREGATE OPTION EXERCISES IN FISCAL YEAR 1997
AND OPTION VALUES AT MARCH 31, 1997
As of March 31, 1997, there were no stock options outstanding and none had
been exercised during fiscal 1997 by the individuals named in the Summary
Compensation Table. SAT has never granted any stock appreciation rights.
The following table sets forth certain information concerning Common Stock
purchase warrants issued as executive compensation to the individuals named in
the Summary Compensation Table. No such warrants were exercised in fiscal 1997.
The table includes the number of shares covered by such warrants as of March 31,
1997. Also reported are the values for "in-the-money" executive compensation
warrants which represent the positive spread between the exercise price of any
such existing warrants and the closing market price of the SAT Common Stock at
March 31, 1997.
<TABLE>
<CAPTION>
NUMBER OF VALUE OF
SECURITIES UNEXERCISED
UNDERLYING IN-THE-MONEY
UNEXERCISED WARRANTS WARRANTS AT
SHARES AT MARCH 31, 1997 MARCH 31, 1997
ACQUIRED ON VALUE -------------------------- --------------------------
NAME EXERCISE REALIZED EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
---- ----------- -------- -------------------------- --------------------------
<S> <C> <C> <C> <C>
James C. Witham................. -0- -0- -0- -0-
Robert M. Stutman............... -0- -0- -0- -0-
Linda H. Masterson.............. -0- -0- 50,000/550,000
Steven J. Kline................. -0- -0- 10,000/ 60,000
Brian Stutman................... -0- -0- -0- -0-
</TABLE>
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 1998 or
thereafter. The Board is, however, considering adoption of a stock option plan
for directors, officers and key employees of the Company and implemented in
fiscal 1997 a 401(k) plan for all employees managed by Automated Data
Processing, Inc.
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<PAGE> 36
EMPLOYMENT AND SEVERANCE 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 Treasurer, 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. 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. Mr. Wolff
continued for a few months after July 3, 1996 to assist SAT in its efforts to
sell the stock or assets of Good Ideas.
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
Agreement if such breach was not cured within seven days after written notice
was given to the executive by the Board of Directors.
Effective April 18, 1996, Robert M. Stutman, the President and a principal
shareholder of RSA, became the Chief Executive Officer of SAT (also its Chairman
of the Board). From April 18, 1996 to May 20, 1997, Mr. Stutman's annual base
salary was $225,000; effective May 21, 1997, it became $350,000. The annual base
salary increases to (1) $400,000 upon the Company being profitable for a fiscal
year during the term of the Amended and Restated Severance Agreement dated May
21, 1997 (the "Restated Severance Agreement") between Mr. Stutman and SAT, a
copy of which is filed as an exhibit to this Report and is incorporated herein
by this reference, or any renewal thereof with sales equal to, or greater than,
$20,000,000 and (2) $500,000 upon the Company being profitable for a fiscal year
during the term of the Restated Severance Agreement or any renewal thereof with
sales equal to, or greater than, $40,000,000; provided that, in calculating
profitability and sales, the operations of U.S. Drug are excluded. 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 had net
earnings of $2,000,040 in fiscal 1997. However, because SAT did not achieve
profitability in fiscal 1997, this term of employment became moot. Mr. Stutman
received a one-time cash bonus of $50,000 upon ProActive satisfying certain
performance standards in fiscal 1996. In subsequent years, commencing with
fiscal 1998, Mr. Stutman will receive an aggregate year-end cash bonus (the
"Annual Bonus") equal to the bonus percentage (as set forth hereinafter)
multiplied by Mr. Stutman's annual base salary as follows: (a) if the Company
achieves its financial objectives in such fiscal year, based upon a
Board-approved budget, commencing with fiscal year 1998, the bonus percentage
shall be 75%; (b) if the Company achieves 100% of its financial objectives and
up to 150% of its financial objectives for a fiscal year, then the bonus
percentage shall equal the product of 75% and a fraction, the numerator of which
shall be the percentage of the financial objectives actually achieved (e.g.,
150%), except that any amount in excess of 150% shall be deemed to be 150% for
the purposes of this calculation, and the denominator of which shall be 75%; (c)
if the Company achieves 80% or more of its financial objectives for a fiscal
year up to 100%, Mr. Stutman shall receive an
35
<PAGE> 37
Annual Bonus based upon a pro rata amount of the bonus percentage (e.g., if 90%
of the financial objectives are achieved, the bonus percentage shall be 37.5%);
and (d) if the Company achieves less than 80% of its financial objectives for a
fiscal year, Mr. Stutman shall not receive any Annual Bonus. Pursuant to the
Restated Severance Agreement, a bonus payment in the amount of $50,000 shall be
paid to Mr. Stutman upon the renewal thereof. Mr. Stutman shall be granted a
stock option to purchase a minimum of 50,000 shares of SAT Common Stock per year
at the end of each year during the term of the Restated Severance Agreement or
renewal thereof at an exercise price equal to the closing sale price, as
reported on AMEX or such other exchange or national securities association on
which the SAT Common Stock may then be regularly quoted or, if not so quoted, as
reported in the over-the-counter market at the time of such grant and if such
day shall be a day on which the AMEX shall be closed, the preceding day on which
the SAT Common Stock is traded (the "Closing Sales Price") and expiring three
years from the date of grant. Mr. Stutman shall also be awarded 150,000 shares
of the SAT Common Stock for each $.75 increase in the Closing Sales Price of the
SAT Common Stock above $1.375, with such increase to be determined by the
average of the Closing Sales Prices of the SAT Common Stock during any 90-day
period commencing with the fiscal year ending March 31, 1998; provided, however,
once the average of the Closing Sales Prices of the SAT Common Stock reaches an
award level (e.g., $2.125), no awards will be made again until the average of
the Closing Sales Prices of the SAT Common Stock during a 90-day period reaches
the next award level (e.g., $2.875 after $2.125). In the event that Mr. Stutman
is terminated without cause (as defined in the Restated Severance Agreement)
during the first five years (originally three years (i.e., through May 20, 2001
(originally 1999) that he is employed by SAT, he shall receive severance pay in
a lump sum amount equal to his annual base salary that would have been paid to
him after the date of termination had Mr. Stutman not been terminated and he had
been employed by SAT for a period of five (originally 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 Products and BioTox Divisions of
SAT. Effective May 23, 1997, she resigned as the President of SAT in order to
become Chief Executive Officer of U.S. Drug (she was already its President) as
part of the program to study the feasibility of separating the interlocking
relationships between SAT and U.S. Drug. 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 was currently or became
exercisable on May 13, 1997 and (b) the warrant became 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. In
consideration of her assuming responsibility for U.S. Drug, on May 23, 1997, the
SAT Board of Directors reduced the exercise price on the remaining 400,000
shares from $3.125 to $2.125 and agreed that, if, as result of U.S. Drug ceasing
to be owned 50% or more by SAT, the restrictions on exercise terminate. 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 became moot. In the event that Ms. Masterson is terminated
without cause (as defined), she shall be paid, pursuant to a Severance
36
<PAGE> 38
Agreement dated June 27, 1996 (the "Masterson Severance Agreement") between Ms.
Masterson and SAT, a copy of which is filed as an exhibit to this Report and is
incorporated herein by this reference, severance equal to her annual base
salary. In view of her acceptance of the position in U.S. Drug, the Compensation
Committee is currently working out a new severance arrangement with Ms.
Masterson to take effect in U.S. Drug when it is no longer at least a 50%-owned
subsidiary of SAT as a result of financings. In the interim the Masterson
Severance Agreement remains in effect.
Effective May 23, 1997, David L. Dorff was employed as the President and
Chief Operating Officer of SAT with an annual base salary of $120,000. The
annual base salary increases to (1) $275,000 upon SAT being profitable for two
consecutive calendar months during the term of the Severance Agreement dated
June , 1997 (the "Dorff Severance Agreement") between Mr. Dorff and SAT, a
copy of which is filed as an exhibit to this Report and is incorporated herein
by this reference, or any renewal thereof, (2) $325,000 upon SAT being
profitable for a fiscal year during the term of the Dorff Severance Agreement or
any renewal thereof with sales equal to, or greater than, $20,000,000 and (3)
$375,000 upon SAT being profitable for a fiscal year during the term of the
Dorff Severance Agreement or any renewal thereof with sales equal to, or greater
than $40,000,000; provided that, in calculating profitability and sales, the
operations of U.S. Drug are excluded. Mr. Dorff shall receive an Annual Bonus
equal to the bonus percentage (as set forth hereinafter) multiplied by his
annual base salary as follows: (a) if the Company achieves 100% of its financial
objectives in such fiscal year, based upon a Board-approved budget excluding the
operations of U.S. Drug, commencing with fiscal 1998, the bonus percentage shall
be 75%; (b) if the Company achieves greater than 100% of its financial
objectives and up to 150% of its financial objectives for a fiscal year, then
the bonus percentage shall equal the product of 75% and a fraction, the
numerator of which shall be the percentage of the financial objectives actually
achieved (e.g., 150%), except that any amount in excess of 150% shall be deemed
to be 150% for the purposes of this calculation, and the denominator of which
shall be 75%; (c) if the Company achieves 80% or more of its financial
objectives for a fiscal year up to 100%, Mr. Dorff shall receive an Annual Bonus
based upon a pro rata amount of the bonus percentage (e.g., if 90% of the
financial objectives are achieved, the bonus percentage shall be 37.5%); and (d)
if the Company achieves less than 80% of its financial objectives for a fiscal
year, Mr. Dorff shall not receive any Annual Bonus. A bonus payment in the
amount of $50,000 shall be paid to Mr. Dorff upon each renewal of the Dorff
Severance Agreement. Mr. Dorff shall be granted, at the end of each fiscal year
during the term of the Dorff Severance Agreement or any renewal thereof, a stock
option to purchase a minimum of 50,000 shares of SAT Common Stock at an exercise
price equal to the Closing Sale Price on the date of grant and expiring three
years from the date of grant. Mr. Dorff shall be awarded 125,000 shares of SAT
Common Stock for each $.75 increase in the Closing Sales Price of the SAT Common
Stock above $1.375, with such increase to be determined by the average of the
Closing Sales Prices of the SAT Common Stock during any 90-day period commencing
with fiscal 1998; provided, however, once the average of the Closing Sales
Prices of the SAT Common Stock reach an award level (e.g., $2.125), no awards
will be made again until the average of the Closing Sales Prices of the SAT
Common Stock during a 90-day period reaches the next award level (e.g., $2.875
after $2.125). All shares of the SAT Common Stock awarded shall be vested over a
three-year period. In addition, Mr. Dorff was awarded Common Stock purchase
warrants upon the execution of the Dorff Severance Agreement to purchase (a)
700,000 shares of the SAT Common Stock at an exercise price of $1.8125 per
share, (b) 300,000 shares of the SAT Common Stock at an exercise price of
$2.3125 and (c) 300,000 shares of the SAT Common Stock at an exercise price of
$2.8125 per share. One-third of each warrant becomes exercisable on June 1998,
June 1999 and June 2000, provided that Mr. Dorff is employed by SAT on such
dates. The warrants expire five years from the date of the Dorff Severance
Agreement. In the event that Mr. Dorff is terminated without cause (as defined)
during the first three years of his employment by SAT, he shall receive
severance pay in a lump sum amount equal to his annual base salary at the time
of his termination for the period from the date of his termination through June
2000.
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 was eligible for a bonus of
$30,000 for fiscal 1997 if his business plan goals were met and received a
one-time bonus of $30,000 upon ProActive satisfying certain performance
standards in fiscal 1996. On June 24, 1997, the Compensation
37
<PAGE> 39
Committee authorized an increase, effective with the next pay period, in Mr.
Stutman's base annual salary to $175,000 and that his bonus for fiscal 1998
would be an amount up to 30% of his annual base salary, one half of which would
be based on the financial results of the Company, as compared to a
Board-approved budget, and one half of which would be based on his performance
with respect to individual goals to be determined by the President of SAT. The
Board also granted him a Common Stock purchase warrant to purchase 15,000 shares
of the SAT Common Stock at $2.125 per share on the same terms as other employee
warrants (i.e., becoming exercisable over a four-year period and each
installment expiring three years from the date it becomes exercisable). In the
event 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, then,
pursuant to a Severance Agreement dated May 21, 1996 between Mr. Stutman and
SAT, a copy of which is filed (by incorporation by reference) as an exhibit to
this Report and is incorporated herein by this reference, 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.
DIRECTORS' COMPENSATION
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
SAT Common Stock purchase warrant to purchase 10,000 shares of the SAT Common
Stock excercisable 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. Mark, Michael S. McCord
and Lee S. Rosen) at $1.8125, the closing sales price on November 15, 1996. The
Board approved the following compensation for all directors: the issuance of a
SAT 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.
It is also anticipated that the directors will not receive a Common Stock
purchase warrant in 1997 because there was no $1.00 rise over $2.9308 per share
of the SAT Common Stock.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information, as of June 30, 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 other executive officer of SAT who was paid more than $100,000 in
fiscal 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.
38
<PAGE> 40
<TABLE>
<CAPTION>
NUMBER OF SHARES
NAME AND ADDRESS BENEFICIALLY OWNED PERCENTAGE(1)
---------------- ------------------ -------------
<S> <C> <C>
Steven A. Cohen(2)............................... 3,468,300(3) 9.1%
777 Long Ridge Road
Stamford, CT 06902
S.A.C. Capital Associates, LLC(2)................ 2,134,400(4) 6.4%
777 Long Ridge Road
Stamford, CT 06902
Robert M. Stutman(5)............................. 930,500(6) 2.5%
4517 N.W. 31st Avenue
Fort Lauderdale, FL 33309
David L. Dorff(7)................................ 10,000(8) nil
4517 N.W. 31st Avenue
Fort Lauderdale, FL 33309
Linda H. Masterson(9)............................ 210,000(10) nil
10410 Trademark Street
Rancho Cucamonga, CA 91730
Alan I. Goldman(11).............................. 20,000(12) nil
497 Ridgewood Avenue
Glen Ridge, NJ 07028
John C. Lawn(11)................................. 20,000(12) nil
c/o The Century Council
550 South Hope Street, Suite 1950
Los Angeles, CA 90071-2604
Peter M. Mark(11)................................ 607,600(12) 1.7%
5531 Sugar Hill
Houston, TX 77056
Michael S. McCord(11)............................ 215,455(13) nil
Suite 701 2001 Kirby Avenue
Houston TX 77019
Lee S. Rosen(11)................................. 1,485,125(14) 4.0%
17332 Saint James Court
Boca Raton, FL 33486
Brian Stutman(15)................................ 553,376(16) 1.5%
4517 N.W. 31st Avenue
Fort Lauderdale, FL 33309
Steven J. Kline(17).............................. 30,500(18) nil
10410 Trademark Street
Rancho Cucamonga, CA 91730
All directors and executive officers as a group 4,315,065(19) 11.2%
(ten persons)..................................
</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 June 30, 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 Common Stock
purchase warrants which are currently excercisable or excercisable within
60 days of June 30, 1997 and to Convertible Notes which are convertible
within 60 days of June 30, 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 Amendment No. 4 to the Cohen
Schedule 13D and the Company's calculation under the anti-dilution
provisions, the group beneficially owned an aggregate of 5,902,700 shares
or 14.7% of the outstanding shares at June 30, 1997.
(3) The shares reported in the table as being beneficially owned reflect (a)
1,463,300 shares of the SAT Common Stock, (b) 5,000 shares of the SAT
Common Stock issuable at $1.8125 per share upon the exercise of a Common
Stock purchase warrant expiring November 1, 1999 (the "Lender's Warrant")
and (c) 2,000,000 shares of the SAT Common Stock issuable upon the
conversion of a Convertible
39
<PAGE> 41
Note at $1.25 per share. They do not reflect 2,000,000 shares of the Common
Stock issuable at $1.25 per share upon the exercise of a Common Stock
purchase warrant expiring June 30, 2000 (the "June 30 Warrant") because the
June 30 Warrants are not excercisable so long as, a result of any such
exercise, the holders would be the beneficial owners of 10% or more of the
outstanding shares of the SAT Common Stock. See Note 2 to the table.
(4) The shares reported in the table as being beneficially owned reflect (a)
429,400 shares of the SAT Common Stock, (b) 5,000 shares of the SAT Common
Stock issuable at $1.8125 per share upon the exercise of a Lenders Warrant
and (c) 2,000,000 shares of the SAT Common Stock issuable upon the
conversion of a Convertible Note at $1.25 per share. They do not reflect
2,000,000 shares of the SAT Common Stock issuable at $1.25 per share upon
the exercise of a June 30 Warrant because the June 30 Warrants are not
excercisable so long as, a result of any such exercise, the holders would
be the beneficial owners of 10% or more of the outstanding shares of the
SAT Common Stock. See Note 2 to the table. 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.
(5) Robert M. Stutman was elected 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) Mr. Dorff was elected a director of SAT effective May 23, 1997 and, on the
same date, was elected as its President and designated as its Chief
Operating Officer.
(8) The shares reported in the table do not include (a) 700,000 shares of the
SAT Common Stock issuable upon the exercise at $1.8125 per share of a
Common Stock purchase warrant expiring June 2002; (b) 300,000 shares of the
SAT Common Stock issuable upon the exercise at $2.3125 per share of a
Common Stock purchase warrant also expiring June 2002; and (c) 300,000
shares of the SAT Common Stock issuable upon the exercise at $2.8125 per
share of a Common Stock purchase warrant also expiring June, 2002 because
none of the foregoing warrants granted to Mr. Dorff for becoming President
and Chief Operating Officer of SAT are currently excercisable or
excercisable within 60 days of June 30, 1997.
(9) 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. Effective May 23, 1997, she resigned
as the President of SAT in order to become Chief Executive Officer of U.S.
Drug (she was already its President) as part of the program to study the
feasibility of separating the interlocking relationships between SAT and
U.S. Drug.
(10) 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 those described in note (12) to this
table and (b) 200,000 shares of the SAT Common Stock issuable upon the
exercise at $2.125 per share of a Common Stock purchase warrant, the last
installment of which expires May 12, 2003, issued pursuant to Ms.
Masterson's terms of employment, which 200,000 shares are the only shares
as to which the
40
<PAGE> 42
warrant to purchase an aggregate of 600,000 shares is currently
excercisable or excercisable within 60 days of May 31, 1997.
(11) A director of SAT.
(12) 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 $1.8125 per
share of a Common Stock purchase warrant expiring November 15, 1999, both
issued to the holder as a director of SAT who is not employed by SAT or any
subsidiary thereof.
(13) 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 $1.8125 per share of a
Common Stock purchase warrant expiring November 15, 1999 issued to him as a
director of SAT on the same basis as those described in Note 12 to this
table. The shares reported in the table do not include shares of the SAT
Common Stock beneficially owned by Mr. McCord's wife, as to which shares he
disclaims beneficial ownership.
(14) 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 as a
director on the same basis as those described in Note 12 to this table; (b)
10,000 shares of the SAT Common Stock issuable upon the exercise at $1.8125
per share of a Common Stock purchase warrant expiring November 15, 1999
issued to Mr. Rosen as a director on the same basis as those described in
Note 12 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; (g) 200,000 shares of the
SAT Common Stock issuable upon the exercise at $2.00 per share of a Common
Stock purchase warrant expiring December 2, 1999; and (h) 250,000 shares of
the SAT Common Stock issuable upon the exercise at $2.00 per share of a
Common Stock purchase warrant expiring December 17, 1999 acquired from his
father who purchased the warrant in the Company's private placement
consummated in February 1996. 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.
(15) Brian Stutman was elected Vice President, Sales and Marketing of SAT on
December 3, 1996.
(16) The shares reported in the table reflect (a) 176,250 shares of the SAT
Common Stock issued to Brian Stutman in exchange for his ownership interest
in RSA; (b) 59,876 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) 317,250 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. The shares reported in the table exclude 15,000 shares of the SAT
Common Stock issuable upon the exercise by Mr. Stutman at $2.125 per share
of a Common Stock purchase warrant, the last installment of which expires
June 23, 2004, because the warrant is not currently excercisable or
excercisable within 60 days of June 30, 1997.
41
<PAGE> 43
(17) Mr. Kline served as Vice President, Research and Development of SAT from
March 25, 1997 to May 23, 1997, when he resigned as part of the program to
study the feasibility of separating the interlocking relationships between
SAT and U.S. Drug.
(18) The shares reported in the table include (a) 5,000 shares of the SAT Common
Stock issuable upon the exercise at $2.125 per share of a Common Stock
purchase warrant expiring July 17, 1998; (b) 10,000 shares of the SAT
Common Stock issuable upon the exercise at $2.125 per share of a Common
Stock purchase warrant expiring July 7, 1999; and (c) 12,500 shares of the
SAT Common Stock issuable upon the exercise at $2.125 per share of a Common
Stock purchase warrant, the last installment of which expires May 2, 2003,
which are the only shares of a total of 50,000 shares subject to that
warrant which are currently excercisable or excercisable within 60 days of
June 30, 1997.
(19) The shares represented in the table reflect the shares of the SAT Common
Stock reported elsewhere in the table (see the text relating to Notes 6, 8,
10, 12, 13, 14, 16 and 18) and do not reflect 40,000 shares of the SAT
Common Stock issuable upon the exercise by an executive officer of SAT (not
named in the table) at $2.125 per share of a Common Stock purchase warrant,
the last installment of which expires December 15, 2003, because such
Common Stock purchase warrant is not currently excercisable or excercisable
within 60 days of June 30, 1997.
As indicated elsewhere in this Report (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 June 30, 1997, no director or executive officer of SAT owned
beneficially any shares of the Good Ideas Common Stock except for Mr. McCord who
owned 10,000 shares. No director or officer of SAT owns any of the outstanding
Good Ideas Common Stock purchase 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 June 30, 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 or 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 percentages computed in this column of the table are based upon
6,990,103 shares of the U.S. Drug Common Stock outstanding on June 30, 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, all of which are currently excercisable, 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 5,268,203 shares of the 6,990,103 shares of the U.S. Drug Common
Stock outstanding as of June 30, 1997 or 75.4% thereof. SAT's Board has
authorized the purchase of 2,000,000 additional shares of the U.S. Drug Common
Stock for $2,500,000 between May 1 and June 24, 1997, which would result in SAT
owning 7,268,203 of the outstanding 8,990,103 shares of the U.S. Drug Common
Stock or 80.8%.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On November 8, 1996, SAT entered into a Convertible Loan and Warrant
Agreement (the "Loan Agreement"), a copy of which is filed (by incorporation by
reference) as an exhibit to this Report and is incorporated herein by this
reference, 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"). Prior thereto, the Lenders
beneficially owned an aggregate of 2,342,200 shares of the SAT Common Stock.
(For information as to the Lenders' beneficial ownership of shares of the SAT
Common
42
<PAGE> 44
Stock as of June 30, 1997, see the table under "Security Ownership of Certain
Beneficial Owners and Management" elsewhere in this Report.) 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 become convertible into shares of the SAT Common
Stock after July 1, 1997 at a conversion price (the "Conversion Price")
initially 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. As a result of these
anti-dilution provisions, the Conversion Price as of June 30, 1997 was $1.25 and
the Lenders could acquire upon conversion 4,000,000 shares of the SAT Common
Stock.
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 SAT 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 that 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
Bylaws 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 initial exercise price of $2.00 per share. The June 30 Warrants were not
excercisable to any extent before July 1, 1997 and thereafter are excercisable
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 . 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
anti-dilution provisions if SAT sells shares at less than the exercise price. As
a result of these anti-dilution provisions, the June 30 Warrants were, as of
June 30, 1997, excercisable at $1.25 per share into 4,000,000 shares of the SAT
Common Stock. The June 30 Warrants are transferable subject to compliance with
the Securities Act.
43
<PAGE> 45
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. Registration Statement on Form S-3,
File No. 333-19979, was filed to fulfill such commitment, but is not yet
effective 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, a copy of which is filed (by incorporation by
reference) as an exhibit to this Report and is incorporated herein by this
reference, 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 sold in Open Market
Transactions. After the sale of 1,000,000 such owned shares in Open Market
Transaction, 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 as part of their annual compensation, each of the Lenders
received a Common Stock purchase warrant expiring November 15, 1999 (the
"Lenders Warrant") to purchase 5,000 shares of the SAT Common Stock at $1.8125
per share. 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 Common Stock as compensation for 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, the other terms and conditions of the Lender Warrant to
be similar to those of the director's warrant.
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 $3.125 per share be reduced to $2.125 per share on Robert
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 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
44
<PAGE> 46
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
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).
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
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 19, 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 of the 400,000 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 19, 1996 or $575,000); (2) the issuance to Mr. Rosen of a Common Stock
purchase warrant expiring December 2, 1999 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, 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 259,000 shares of the SAT
Common Stock held by employees of the Company.
As a result of a consent solicitation against SAT which was settled in
September 1995, Mr. Rosen became the defendant in two arbitration proceedings in
which a judgment of $170,000 was entered in one proceeding and the other was
settled for $221,000. On January 23, 1997, the Board of Directors informally
agreed (and on June 24, 1997 formally authorized) payment of these amounts plus
Mr. Rosen's legal expenses, the total payments aggregating $416,000 as delayed
expenses due to the consent solicitation as to which SAT had agreed to pay all
expenses of the member of the dissident Committee (of which Mr. Rosen was a
member).
45
<PAGE> 47
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) 1. Financial Statements
The Company's financial statements appear in a separate section of this
Report commencing on the pages referenced below:
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of the Independent Certified Public Accountants...... F-1
Report of the Independent Certified Public Accountants...... F-2
Consolidated Balance Sheets at March 31, 1997 and 1996...... F-3
Consolidated Statements of Operations for the Years Ended
March 31, 1997, 1996 and 1995............................. F-4
Consolidated Statements of Stockholders Equity for the Years
Ended March 31, 1997, 1996 and 1995....................... F-5
Consolidated Statements of Cash Flows for the Years Ended
March 31, 1997, 1996 and 1995............................. F-7
Notes to Consolidated Financial Statements.................. F-9
</TABLE>
(a) 2. Financial Statement Schedules
The following financial statement schedule of Substance Abuse Technologies,
Inc. and subsidiaries are included herein.
Schedule II Valuation and qualifying accounts
All other schedules are omitted as they are not required, are inapplicable,
or the information is included in the financial statements or notes thereto.
(a) 3. 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 or U.S. Drug pursuant to Section 13 of the
Exchange Act. An exhibit marked with an asterisk is filed with this Report.
<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.(2)
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.
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.(3)
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.(4)
3(a)(1) Copy of Amendment to the Certificate of Incorporation as
filed in Delaware on July 10, 1989.(4)
</TABLE>
46
<PAGE> 48
<TABLE>
<CAPTION>
NUMBER EXHIBITS
------ --------
<S> <C>
3(a)(2) Copy of Amendment to the Certificate of Incorporation as
filed in Delaware on September 25, 1989.(4)
3(a)(3) Copy of Amendment to the Certificate of Incorporation as
filed in Delaware on October 5, 1990.(4)
3(a)(4) Copy of Amendment to the Certificate of Incorporation as
filed in Delaware on December 26, 1990.(5)
3(a)(5) Copy of Amendment to the Certificate of Incorporation as
filed in Delaware on November 1, 1991.(5)
3(a)(6) Copy of Amendment to the Certificate of Incorporation as
filed in Delaware on May 20, 1992.(6)
3(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.(4)
4(a) Specimen of Common Stock certificate of U.S. Alcohol Testing
of America, Inc.(4)
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.(4)
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.(7)
4(d) 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.(13)
4(d)(1) Form of Registration Rights Agreement is Exhibit A to
Exhibit 4(d) hereto.(13)
4(d)(2) Form of Convertible Senior Promissory Note due November 8,
1999 is Exhibit B to Exhibit 4(d) hereto.(13)
4(d)(3) Form of Common Stock Purchase Warrant expiring June 30, 2000
is Exhibit C to Exhibit 4(d) hereto.(13)
4(e)* Copy of Convertible Debenture and Preferred Stock Purchase
Agreement dated as of May 8, 1997 between SAT and Southbrook
International Investments, Ltd. ("Southbrook").
4(e)(1)* Registration Rights Agreement dated as of May 8, 1996
between SAT and Southbrook.
4(e)(2)* Class B Exchange Agreement dated as of May 8, 1997 between
SAT and Southbrook.
4(e)(3)* 14% Convertible Debenture of SAT due May 8, 2000.
4(e)(4)* Form of Common Stock Purchase Warrant expiring May 8, 2000.
10(a) Form of the Company's Indemnification Agreement with
Officers and Directors.(4)
10(b) 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.)(8)
10(b)(1) Copy of Amendment dated March 15, 1994 to License Agreement
filed as Exhibit 10(b) hereto.(3)
10(b)(2) Copy of Amendment dated June 16, 1995 to License Agreement
filed as Exhibit 10(b) hereto.(3)
10(b)(3) Copy of Letter dated May 15, 1995 from the USN to SAT.(3)
10(c) Copy of Assignment dated as of January 1, 1993 between SAT
and U.S. Drug of the Licensing Agreement filed as Exhibit
10(b) hereto.(8)
</TABLE>
47
<PAGE> 49
<TABLE>
<CAPTION>
NUMBER EXHIBITS
------ --------
<S> <C>
10(c)(1) Copy of Amended Sublicense Agreement dated September 23,
1993 superseding the Assignment filed as Exhibit 10(b)
hereto.(3)
10(c)(2) Copy of Approval dated September 24, 1993 by the USN of
Amended Sublicense Agreement filed as Exhibit 10(b)
hereto.(3)
10(d) 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.(8)
10(d)(1) Copy of Assignment of CRDA Agreement dated as of January 1,
1993 by and between U.S. Drug and SAT.(8)
10(e) Copy of Management Agreement dated April 1, 1993 by and
between U.S. Drug and SAT.(8)
10(e)(1) Copy of Amendment dated July 20, 1993 to Management Services
Agreement filed as Exhibit 10(e) hereto.(8)
10(f) Copy of Management Services Agreement dated December 29,
1993 by and between Good Ideas and SAT.(2)
10(g) Copy of Equipment, Licensing, Servicing and Maintenance
Agreement dated as of December 13, 1994 by and between SAT
and METPATH, Inc.(7)
10(h) Copy of Equipment, Licensing, Servicing and Maintenance
Agreement dated as of December 22, 1994 by and between SAT
and National Health Laboratories Incorporated.(7)
10(i) Copy of Lease dated March 18, 1991 by and between Rancho
Cucamonga Business Park (now The Realty Trust) as landlord
and SAT as tenant.(7)
10(j)(1) Copy of Lease Modification Agreement to Lease filed as
Exhibit 10(o) hereto.(7)
10(j)(2) Copy of Sub-Lease Agreement dated as of January 1, 1993 by
and between SAT as sublandlord and U.S. Drug as
subtenant.(8)
10(j)(3)* Copy of Third Amendment dated January 2, 1997 to Lease filed
as Exhibit 10(j) hereto.
10(k) Copy of Lease dated December 9, 1992 by and between Melvin
E. Evans as landlord and Good Ideas as tenant.(1)
10(l) Copy of Lease expiring June 30, 1999 by and between Rancho
Cucamonga Business Park as landlord and U.S. Rubber
Recycling, Inc. ("USRR") as tenant.(7)
10(m) Copy of Consulting and Royalty Agreement dated June 20, 1988
between Manley Luckey and SAT.(4)
10(m)(1) Copy of Amendment dated August 1990 to Consulting and
Royalty Agreement filed as Exhibit 10(m) hereto.(4)
10(n) Form of Warrant Agreement dated December 17, 1990 between J.
Gregory & Company Inc. and SAT.(4)
10(n)(1) Form of Underwriter's Warrant expiring December 17, 1997 of
SAT.(4)
10(o) Form of Common Stock purchase warrant expiring October 31,
1996 of SAT.(6)
10(p) Form of Common Stock purchase warrant.(5)
</TABLE>
48
<PAGE> 50
<TABLE>
<CAPTION>
NUMBER EXHIBITS
------ --------
<S> <C>
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(p) 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(q) Restricted Stock, Non-Qualified Option and Incentive Stock
Option Plan of SAT.(4)
10(q)(1) Form of Stock Option expiring August 1, 2004 issued pursuant
to Exhibit 10(q) hereto.(7)
10(r) Form of Common Stock purchase warrant expiring December 17,
1999.(9)
10(s) Form of Warrant Agreement by and between Good Ideas and
Baraban Securities, Incorporated.(1)
10(s)(1) Form of Common Stock purchase warrant expiring February 16,
1999 of Good Ideas.(1)
10(s)(2) 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(s)(1)
hereto.
10(t) 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(u) Copy of Asset Purchase Agreement dated April 30, 1996 by and
among USRR, SAT and Reclamation Resources Inc.(11)
10(v) 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(v)(1) Form of Secured Promissory Note dated May 21, 1996 is
Exhibit A to Exhibit 10(v) hereto.
10(v)(2) Form of Security Agreement dated May 21, 1996 by and among
SAT, Robert Stutman and Brian Stutman is Exhibit C to
Exhibit 10(v) hereto.
10(v)(3) Form of SAT Warrant expiring May 20, 1999 is Exhibit B to
Exhibit 10(v) hereto.
10(v)(4) Form of Registration Rights Agreement dated as of May 21,
1996 by and between SAT, Robert Stutman, Brian Stutman,
Michael Rochelle, Kimberly Rochelle and Sandra DeBow is
Exhibit D to Exhibit 10(v) hereto.
10(w) Copy of Severance Agreement dated May 21, 1996 by and
between SAT and Robert Stutman.(11)
10(w)(1)* Copy of Amended and Restated Severance Agreement dated May
21, 1997 by and between SAT and Robert Stutman.
10(x) Copy of Severance Agreement dated May 21, 1996 by and
between SAT and Brian Stutman.(11)
10(y)* Copy of Severance Agreement dated June 27, 1996 by and
between SAT and Linda H. Masterson.
10(z)* Copy of Severance Agreement dated June , 1997 by and
between David L. Dorff.
</TABLE>
49
<PAGE> 51
<TABLE>
<CAPTION>
NUMBER EXHIBITS
------ --------
<S> <C>
10(aa)* Copy of Sublease dated as of June 20, 1996 by and between
Lifecare Investments, Inc. ("Lifecare"), Sublessor, and SAT,
Sublessee.
10(aa)(1)* Copy of Wingate Commons Business Park Net Lease dated
September 27, 1991 by and between Reynolds Metals
Development Company, Landlord, and Lifecare, Tenant.
10(aa)(2)* Copy of First Addendum to the Lease filed as Exhibit
10(aa)(1) hereto.
10(aa)(3)* Copy of Second Addendum to the Lease filed as Exhibit
10(aa)(1) hereto.
10(bb) Copy of Demand Promissory Note dated March 31, 1995 executed
by SAT in favor of Good Ideas.(12)
10(bb)(1) Copy of Demand Promissory Note dated March 31, 1995 executed
by USRR in favor of Good Ideas.(12)
10(cc) Form of Warrant Agreement by and between U.S. Drug and
Baraban Securities, Incorporated.(8)
10(cc)(1) Form of Common Stock purchase warrant expiring October 13,
1998 of U.S. Drug.(8).
10(cc)(2)* Form of Common Stock purchase warrant expiring October 13,
1998 of SAT to be issued in lieu of the Common Stock
purchase warrant of U.S. Drug filed as Exhibit 10(cc)(1)
hereto.
10(dd)* 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(dd) 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(ee)* 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 June 23, 2004, are
substantially identical to the form of Common Stock purchase
warrant filed as Exhibit 10(ee) 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(ff) Copy of Employment Agreement dated December 31, 1993 between
SAT and James C. Witham.(7)
10(gg) Copy of Employment Agreement dated December 13, 1993 between
SAT and Karen B. Laustsen.(7)
10(hh) Copy of Employment Agreement dated December 13, 1993 between
SAT and Gary S. Wolff.(7)
10(ii) Copy of Employment Agreement dated December 13, 1993 between
SAT and Michael J. Witham.(7)
16 Copy of Letter dated November 16, 1995 from Wolinetz,
Gottlieb & Lafazan, P.C. to the Securities and Exchange
Commission.(14)
21* Subsidiaries of SAT.
</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 Good Ideas' Annual Report on Form 10-K for the
fiscal year ended March 31, 1996 and incorporated herein by this reference.
50
<PAGE> 52
(3) 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.
(4) Filed as an exhibit to SAT's Registration Statement on Form S-18, File No.
33-29718, and incorporated herein by this reference.
(5) Filed as an exhibit to SAT's Registration Statement on Form S-1, File No.
33-43337, and incorporated herein by this reference.
(6) Filed as an exhibit to SAT's Registration Statement on Form S-1, File No.
33-47855, and incorporated herein by this reference.
(7) 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.
(8) Filed as an exhibit to U.S. Drug's Registration Statement on Form SB-2,
File No. 33-61786, and incorporated herein by this reference.
(9) Filed as an exhibit to SAT's Current Report on Form 8-K filed on November
2, 1992 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.
(13) 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.
(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.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the quarter ended March 31,
1997.
51
<PAGE> 53
SIGNATURES
Pursuant to the requirement of Section 13 or 15(d) of Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized, on July 14, 1997.
SUBSTANCE ABUSE TECHNOLOGIES, INC.
(Company)
By: /s/ ROBERT M. STUTMAN
------------------------------------
Robert M. Stutman
Chairman and Chief Executive
Officer
Pursuant to the requirement of the Securities Act of 1934, this report has
been signed below by the following persons on behalf of the Company and in the
capacities indicated on July 14, 1997.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
/s/ ROBERT M. STUTMAN Principal Executive Officer and Director
- -----------------------------------------------------
Robert M. Stutman
/s/ ROBERT MUCCINI Principal 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/ LEE S. ROSEN Director
- -----------------------------------------------------
Lee S. Rosen
/s/ MICHAEL S. MCCORD Director
- -----------------------------------------------------
Michael S. McCord
/s/ DAVID L. DORFF Director
- -----------------------------------------------------
David L. Dorff
</TABLE>
52
<PAGE> 54
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
Substance Abuse Technologies, Inc.
Fort Lauderdale, Florida
We have audited the accompanying consolidated balance sheets of Substance
Abuse Technologies, Inc. (formerly U.S. Alcohol Testing of America, Inc.) and
subsidiaries (the Company) as of March 31, 1997 and 1996, and the related
consolidated statements of operations, stockholders' (deficit) equity, and cash
flows for the years then ended. Our audits also included the financial statement
schedule listed in the Index at Item 14(a). These financial statements and
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and schedule 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 consolidated financial position of Substance Abuse
Technologies, Inc. and subsidiaries at March 31, 1997 and 1996, and the
consolidated results of their operations and their cash flows for the years then
ended in conformity with generally accepted accounting principles. Also, in our
opinion, the related financial statement schedule, when considered in relation
to the basic financial statements as a whole, present fairly in all material
respects the information set forth therein.
The accompanying financial statements have been prepared assuming that
Substance Abuse Technologies, Inc. will continue as a going concern. As more
fully described in Note 2, the Company has incurred recurring operating losses
and, at March 31, 1997, has a working capital deficiency and a deficiency in
stockholders' equity. These conditions raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note 2. The financial statements do not
include any adjustments to reflect the possible future effects on the
recoverability and classification of assets or the amounts and classification of
liabilities that may result from the outcome of this uncertainty.
ERNST & YOUNG LLP
Miami, Florida
July 3, 1997, except for Note 13,
as to which the date is July 7, 1997
F-1
<PAGE> 55
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors and Shareholders
Substance Abuse Technologies, Inc.
Fort Lauderdale, Florida
We have audited the accompanying consolidated statements of operations,
stockholders' equity and cash flows of Substance Abuse Technologies, Inc.
(formerly U.S. Alcohol Testing of America, Inc.) and subsidiaries for the year
ended March 31, 1995. These consolidated statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
consolidated 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 these 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 statement presentation. We believe
that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated statements referred to above present
fairly, in all material respects, the results of operations and cash flows of
Substance Abuse Technologies, Inc. and subsidiaries for the year ended March 31,
1995, in conformity with generally accepted accounting principles.
WOLINETZ, GOTTLIEB & LAFAZAN, P.C.
Rockville Centre, New York
May 26, 1995
F-2
<PAGE> 56
SUBSTANCE ABUSE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, MARCH 31,
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 634,429 $ 1,204,646
Accounts receivable (net of allowance for bad debts of
$650,000 in 1997 and $112,000 in 1996).................. 473,115 278,874
Inventories............................................... 16,675 681,839
Prepaid expenses and other current assets................. 224,634 255,637
Current portion of note receivable........................ 50,000 --
Current assets of discontinued operations, net............ -- 256,654
------------ ------------
Total current assets............................... 1,398,853 2,677,650
Property and equipment (net of accumulated depreciation of
$1,137,300 in 1997 and $1,469,692 in 1996)................ 1,246,374 2,691,979
Costs in excess of net assets acquired (net of accumulated
amortization of $306,300 in 1997 and $93,912 in 1996)..... 4,774,099 797,393
Other assets................................................ 484,394 60,950
Note receivable............................................. 250,000 --
Noncurrent assets of discontinued operations, net........... -- 307,868
------------ ------------
$ 8,153,720 $ 6,535,840
============ ============
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
Current liabilities:
Accounts payable.......................................... $ 1,305,484 $ 487,320
Accrued expenses.......................................... 1,389,339 468,150
Current liabilities of discontinued operations, net....... 7,396 --
Current portion of capital lease obligations.............. 71,324 29,395
Preferred stock dividend payable.......................... 7,202 7,202
------------ ------------
Total current liabilities.......................... 2,780,745 992,067
Convertible debentures, net of unamortized discount of
$1,151,161................................................ 3,848,839 --
Long-term portion of capital lease obligations.............. 295,271 32,935
Long-term portion of royalties payable...................... 980,000 --
Commitments and contingencies
Minority interest........................................... 845,349 1,478,508
Stockholders' (deficit) equity:
Class "A" preferred stock, $.01 par value; 500,000 shares
authorized, 41,157 shares issued and outstanding in 1997
and 1996 (liquidation preference of $205,785 in 1997 and
1996)................................................... 412 412
Class "B" preferred stock, $.01 par value; 1,500,000
shares authorized, no shares issued and outstanding..... -- --
Common stock, $.01 par value; 50,000,000 shares
authorized, 36,030,591 and 32,480,010 shares issued and
outstanding in 1997 and 1996, respectively.............. 360,306 324,800
Additional paid-in capital................................ 55,956,113 45,176,619
Accumulated deficit....................................... (56,913,315) (41,469,501)
------------ ------------
Total stockholders' equity (deficit)............... (596,484) 4,032,330
------------ ------------
$ 8,153,720 $ 6,535,840
============ ============
</TABLE>
See accompanying notes.
F-3
<PAGE> 57
SUBSTANCE ABUSE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED MARCH 31
-------------------------------------------
1997 1996 1995
------------ ------------ -----------
<S> <C> <C> <C>
Continuing operations:
Net sales:
Alcohol products........................................ $ 952,719 $ 748,793 $ 1,069,498
Services................................................ 1,771,086 416,868 625,717
------------ ------------ -----------
2,723,805 1,165,661 1,695,215
Costs and expenses:
Cost of alcohol products sales (exclusive of
depreciation shown below).............................. 735,498 903,984 936,991
Cost of services provided............................... 1,258,037 304,742 460,043
Selling, general and administrative expenses (exclusive
of depreciation shown below) .......................... 9,085,331 5,720,592 5,284,405
Research and development................................ 1,787,213 1,005,832 1,248,962
Depreciation and amortization........................... 1,166,698 1,017,534 695,367
Write-off of costs in excess of net assets acquired..... 714,377 -- --
Write-off of assets associated with abandonment of
breath alcohol and cost-per-test services.............. 1,850,209 -- --
Present value of future royalty payments................ 1,100,000 -- --
Loss from settlement of litigation...................... 416,421 1,137,914 --
------------ ------------ -----------
Total costs and expenses............................ 18,113,784 10,090,598 8,625,768
------------ ------------ -----------
Loss from operations...................................... (15,389,979) (8,924,937) (6,930,553)
Other income (expense):
Interest expense........................................ (330,558) (81,450) (46,069)
Interest income......................................... 75,065 116,075 250,486
Loss on sale of marketable securities................... -- (1,889,216) (154,707)
Unrealized gain (loss) on marketable securities......... -- 2,190,721 (579,991)
Loss on disposal of property and equipment.............. (50,922) -- --
Other................................................... -- (8,704) (14,925)
------------ ------------ -----------
Total other (expense) income........................ (306,415) 327,426 (545,206)
------------ ------------ -----------
Loss from continuing operations before minority interest
in net loss of subsidiaries............................. (15,696,394) (8,597,511) (7,475,759)
Minority interest in net loss of subsidiaries, net of
subsidiary preferred stock dividends paid............... 567,469 541,466 769,632
------------ ------------ -----------
Loss from continuing operations........................... (15,128,925) (8,056,045) (6,706,127)
Discontinued operations:
Loss from operations before minority interest............. -- (1,545,457) (857,575)
Minority interest in net loss............................. -- 467,183 327,306
Loss on disposal, net of minority interest of $58,591 in
1997 and $143,671 in 1996............................... (314,889) (1,326,267) --
------------ ------------ -----------
Loss from discontinued operations........................... (314,889) (2,404,541) (530,269)
------------ ------------ -----------
Net loss.................................................... $(15,443,814) $(10,460,586) $(7,236,396)
============ ============ ===========
Weighted average common shares outstanding.................. 35,327,631 29,834,502 25,691,674
============ ============ ===========
Loss applicable to common stock:
Net loss.................................................. $(15,443,814) $(10,460,586) $(7,236,396)
Class "A" preferred stock dividend........................ (28,810) (28,810) (39,179)
Class "B" preferred stock dividend........................ -- -- (2,425)
------------ ------------ -----------
Loss applicable to common stock............................. $(15,472,624) $(10,489,396) $(7,278,000)
============ ============ ===========
Loss per common share:
Loss from continuing operations........................... $ (0.43) $ (0.27) $ (0.26)
Loss from discontinued operations......................... (0.01) (0.08) (0.02)
------------ ------------ -----------
Net loss per common share................................... $ (0.44) $ (0.35) $ (0.28)
============ ============ ===========
</TABLE>
See accompanying notes.
F-4
<PAGE> 58
SUBSTANCE ABUSE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY
YEARS ENDED MARCH 31, 1997, 1996 AND 1995
<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 at April 1, 1994........... $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 at March 31, 1995.......... 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
</TABLE>
F-5
<PAGE> 59
SUBSTANCE ABUSE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY -- (CONTINUED)
<TABLE>
<CAPTION>
CLASS "A" CLASS "B" ADDITIONAL
PREFERRED PREFERRED COMMON PAID-IN ACCUMULATED
STOCK STOCK STOCK CAPITAL DEFICIT TOTAL
----------- ----------- -------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
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 at March 31, 1996.......... 412 -- 324,800 45,176,619 (41,469,501) 4,032,330
Dividend on Class "A" preferred
stock.......................... -- -- -- (28,810) -- (28,810)
Exercise of warrants by director
for 200,000 shares of common
stock which were issued, on
behalf of the company to a
consultant..................... -- -- 2,000 573,000 -- 575,000
Issuance of 2,630,582 shares of
common stock upon exercise of
warrants, net of expenses...... -- -- 26,306 4,204,316 -- 4,230,622
Issuance of 207,499 shares of
common stock upon exercise of
warrants by officers in
connection with the
extinguishment of a $400,000
note payable, plus accrued
interest....................... -- -- 2,075 412,925 -- 415,000
Issuance of 500,000 shares of
common stock and warrants to
purchase 900,000 shares of
common stock in connection with
an acquisition................. -- -- 5,000 2,757,500 -- 2,762,500
Value of warrants issued to
consultants for investor
relations and financial
consulting services............ -- -- -- 1,317,000 -- 1,317,000
Value of warrants attached to
convertible debentures......... -- -- -- 1,300,000 -- 1,300,000
Issuance of 12,500 shares of
common stock upon exercise of
stock options.................. -- -- 125 29,563 -- 29,688
Change in value of warrants
resulting from modification of
terms.......................... -- -- -- 214,000 -- 214,000
Net loss for year ended March 31,
1997........................... -- -- -- -- (15,443,814) (15,443,814)
---- ---- -------- ----------- ------------ ------------
Balance at March 31, 1997.......... $412 $ -- $360,306 $55,956,113 $(56,913,315) $ (596,484)
==== ==== ======== =========== ============ ============
</TABLE>
See accompanying notes.
F-6
<PAGE> 60
SUBSTANCE ABUSE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31
--------------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss................................................... $(15,443,814) $(10,460,586) $ (7,236,396)
Adjustments to reconcile net loss to net cash used by
operating activities:
Provision for bad debts.................................. 582,821 131,551 64,000
Depreciation and amortization............................ 1,166,698 1,311,354 799,858
Write-off of assets associated with abandoned services... 1,850,209 -- --
Write-off of costs in excess of net assets acquired...... 714,377 -- --
Loss on disposal of property and equipment............... 50,922 22,335 40,400
Loss on disposal of discontinued operations.............. 150,940 1,326,267 --
Amortization of debt discount............................ 148,839 -- --
Amortization of deferred financing costs................. 8,133 -- --
Minority interest in net loss of subsidiaries, net of
subsidiary preferred stock dividends paid.............. (568,540) (1,008,649) (1,096,938)
Value of common stock issued to directors for services... -- 37,500 54,375
Value of common stock issued for consulting services..... 575,000 100,000 --
Value of common stock in subsidiary issued to officer for
services............................................... -- 5,000 --
Value of warrants issued for consulting services......... 1,317,000 -- --
Value of warrant modifications, net of deferred
amounts................................................ 84,833 -- --
Present value of future royalty payments................. 1,100,000 -- --
Unrealized loss on marketable securities................. -- (2,190,721) 579,991
Realized loss on marketable securities................... -- 1,889,216 154,707
Amortization of discount................................. -- (779) (3,116)
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable............. (777,062) 360,682 697,719
(Increase) decrease in inventories..................... (83,585) 1,301,593 (833,681)
Decrease (increase) in prepaid expenses and other
assets............................................... 1,198 44,185 (79,854)
Decrease in restricted funds in escrow................. -- -- 1,578,671
Increase (decrease) in accounts payable................ 828,424 (1,011,022) 135,794
Increase (decrease) in accrued expenses................ 815,538 (4,103) 24,492
Decrease in accrued class action settlement............ -- -- (1,578,671)
Decrease (increase) in net assets of discontinued
operations........................................... 102,196 (564,522) --
------------ ------------ ------------
Net cash used by operating activities...................... (7,375,873) (8,710,699) (6,698,649)
INVESTING ACTIVITIES
Sale of marketable securities.............................. -- 3,609,826 13,320
Purchase of property and equipment......................... (320,205) (269,756) (2,555,133)
Purchase of patents and related costs...................... -- -- (9,633)
Proceeds from disposals of property and equipment.......... 50,575 59,438 --
Other...................................................... -- (23,221) 1,456
Deferred costs of minority interest consent
solicitations............................................ (141,443) -- --
Proceeds from sale of assets of discontinued operations.... 200,000 -- --
Costs of business acquisitions, net of cash acquired of
$111,825 in 1997 and $593,261 in 1995.................... (2,075,024) -- 588,141
------------ ------------ ------------
Net cash (used) provided by investing activities........... (2,286,097) 3,376,287 (1,961,849)
</TABLE>
F-7
<PAGE> 61
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31
--------------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
FINANCING ACTIVITIES
Sales and issuance of common and preferred stock........... -- 6,788,505 1,694,063
Proceeds of convertible debentures and warrants, net of
issuance costs........................................... 4,941,442 -- --
Proceeds of long-term debt................................. 450,000 -- 81,151
Payments of long-term debt................................. (450,000) -- (93,584)
Payments of capital lease obligations...................... (81,189) (88,248) --
Proceeds of brokerage loans payable........................ -- 1,000,000 1,674,683
Payments of brokerage loans payable........................ -- (2,569,592) (105,091)
Proceeds from sale of common stock by Good Ideas
Enterprises, Inc......................................... -- -- 326,000
Expenses of stock offerings of subsidiaries................ -- -- (44,703)
Expenses of stock offering and exercise of warrants........ (400,000) (362,500) (124,433)
Payment of dividend on Class "A" preferred stock........... (28,810) (28,810) (31,977)
Issuance of common stock upon exercise of warrants and
options ................................................. 4,660,310 166,605 1,770,518
------------ ------------ ------------
Net cash provided by financing activities.................. 9,091,753 4,905,960 5,146,627
------------ ------------ ------------
Decrease in cash and cash equivalents...................... (570,217) (428,452) (3,513,871)
Cash and cash equivalents, beginning of year............... 1,204,646 1,633,098 5,146,969
------------ ------------ ------------
Cash and cash equivalents, end of year..................... $ 634,429 $ 1,204,646 $ 1,633,098
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH INFORMATION
Cash paid for interest..................................... $ 330,732 $ 81,450 $ 50,139
============ ============ ============
NONCASH FINANCING ACTIVITIES
Preferred stock dividends accrued.......................... $ 7,202 $ 7,202 $ 7,202
============ ============ ============
Property and equipment acquired under capital leases....... $ 385,454 $ 17,843 $ --
============ ============ ============
Issuance of common stock upon exercise of warrants in
connection with extinguishment of note payable........... $ 415,000 $ -- $ --
============ ============ ============
Issuance of common stock and warrants in connection with
acquisition.............................................. $ 2,762,500 $ -- $ 976,501
============ ============ ============
Issuance of common stock as payment for Class "B"
dividend................................................. $ -- $ -- $ 2,465
============ ============ ============
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
============ ============ ============
</TABLE>
See accompanying notes.
F-8
<PAGE> 62
SUBSTANCE ABUSE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Effective October 28, 1996, U.S. Alcohol Testing of America, Inc. changed
its name to Substance Abuse Technologies, Inc. (the Company). Also during fiscal
1997, the Company made a strategic decision to abandon a substantial portion of
its breath and cost-per-test alcohol equipment manufacturing, sales and service
and focus on its human resource provider business. Consequently, the Company's
major emphasis has become designing and administering drug testing and
background checking services for employers as well as developing customized loss
prevention programs specifically designed to reduce the negative effect of
workplace substance abuse. The Company will continue to operate its forensic
laboratory in California and package and sell an alcohol breath sampling device.
As a result of the Company's new strategic direction, the Company has
decided to initiate a program to have its 67.0% (increased to 75.4% as of May
31, 1997) owned subsidiary, U.S. Drug Testing, Inc. (U.S. Drug) (a developmental
stage enterprise) seek its own financing or identify a strategic partner that
will fund the future costs to develop U.S. Drug's saliva and urine based on-site
drug testing systems. To facilitate that effort, the Company intends to pursue
its proposed offer to acquire all of the outstanding shares in U.S. Drug.
The Company also owns a 60.8% interest in Good Ideas Enterprises, Inc.
(Good Ideas), a toy manufacturer, and all of the outstanding stock of U.S.
Rubber Recycling, Inc. (USRR), a manufacturer of floor coverings. The Company
discontinued the operations of Good Ideas in February 1996 and sold the assets
of USRR in April 1996.
Principles of Consolidation
The consolidated financial statements include the accounts of Substance
Abuse Technologies, Inc. and its wholly and majority owned subsidiaries. All
significant intercompany accounts and transactions are eliminated in
consolidation.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires 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.
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 using
the straight-line method over the estimated useful lives of the related assets.
Amortization of assets under capital leases is included in depreciation expense.
F-9
<PAGE> 63
SUBSTANCE ABUSE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Costs in Excess of Net Assets Acquired
Costs in excess of net assets acquired are amortized using the
straight-line method over 5 to 15 years.
Covenants Not to Compete
Covenants not to compete are included in other assets and are being
amortized using the straight-line method over the life of the agreement,
generally five to eight years.
The Company continually monitors events and changes in circumstances that
could indicate carrying amounts may not be recoverable. When events or changes
in circumstances are present that indicate the carrying amount may not be
recoverable, the Company assesses the recoverability by determining whether the
carrying value will be recovered through undiscounted expected future cash flows
after interest charges associated with the business acquired. Costs in excess of
net assets acquired relating to the acquisition of Good Ideas in the amount of
$1,013,304 was included in the loss on disposal of discontinued operations in
fiscal 1996. In fiscal 1997, costs in excess of net assets acquired of $714,377
associated with the acquisition of abandoned services were written off.
Impairments would be recognized in operating results if an other than temporary
diminution in value were to occur.
Impairment of Long-Lived Assets
The Company accounts for the impairment of long-lived assets under
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). SFAS 121 requires impairment losses to be recorded on long-lived
assets used in operations when indicators of impairment are present and the
undiscounted cash flows estimated to be generated by those assets are less than
the assets' carrying amount. Based on current circumstances, the Company does
not believe that any impairment indicators are present.
Revenue Recognition
Service and test revenue are recognized in the period that the service/test
is performed. Product sales are recorded when title transfers.
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 No. 109, Accounting for Income Taxes (SFAS 109). In
accordance with SFAS 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.
Accounting for Stock Based Compensation
The Company grants stock options and warrants for a fixed number of shares
to employees with an exercise price equal to the fair value of the shares at the
date of grant. The Company accounts for stock option and warrant grants in
accordance with Accounting Principles Board (APB) Opinion No. 25, Accounting for
Stock Issued to Employees, and, accordingly, recognizes no compensation expense
for employee stock option and warrant grants.
F-10
<PAGE> 64
SUBSTANCE ABUSE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company accounts for common stock, stock options or warrants to
purchase common stock issued to nonemployees by recording an expense at the date
of issuance based upon the fair market value of the security issued.
Concentration of Credit Risks
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, 1997, 1996 or 1995.
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.
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.
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, Earnings per Share (SFAS 128). SFAS
128, which applies to entities with publicly held common stock, simplifies the
standards for computing earnings per share previously required in APB Opinion
No. 15, Earnings per Share, and makes them comparable to international earnings
per share standards. SFAS 128 is effective for financial statements issued for
periods ending after December 15, 1997, including interim periods; earlier
adoption is not permitted. Management is currently reviewing the provisions of
SFAS 128; however, it does not believe that adoption of this new accounting
pronouncement will have a material impact on the calculation and presentation of
earnings per share.
Reclassification
Certain prior year balances have been reclassified to conform with the
current year's presentation.
2. CONTINUING OPERATIONS
The Company has incurred recurring operating losses and at March 31, 1997
has a deficiency in working capital of approximately $1,400,000 and a deficiency
in stockholders' equity of approximately $596,000. These conditions raise
substantial doubt about the Company's ability to continue as a going concern.
The financial statements do not include any adjustments to reflect the possible
future effects, if any, on the recoverability and classification of assets or
the amounts and classifications of liabilities that may result from this
situation. The Company anticipates raising additional capital through the sale
of common stock or issuance of additional long-term debt. In addition,
management believes the focus on the human resource provider business,
elimination of the losses associated with a substantial portion of its breath
alcohol and cost per test services as well as identification of a strategic
partner to fund the future costs to develop U.S. Drug's saliva and urine based
testing systems will substantially enhance future operating results. In
management's opinion, these actions will provide the Company the capital
necessary for the Company to continue operations.
3. ACQUISITIONS
On March 30, 1995, the Company acquired, in transactions accounted for as
purchases, 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).
F-11
<PAGE> 65
SUBSTANCE ABUSE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The transactions provided for the issuance of 782,321 shares of the Company's
common stock valued at $1,565,000. In connection with the transactions certain
of the shares issued by the Company to the selling shareholders of Alconet were
used as payment of obligations of Alconet to the Company in the approximate
amount of $109,000. The purchase price of the acquisitions exceeded the net book
value of the net assets acquired, which included cash of $593,000, by $818,000.
This amount has been recorded as costs in excess of net assets acquired.
On April 18, 1996, the Company agreed in principle to acquire Robert
Stutman & Associates, Inc. (RSA), a provider of corporate "Drug Free Workplace"
programs, and elected Robert Stutman as Chairman of the Board, a director of the
Company and Chief Executive Officer. On May 21, 1996, the Company completed the
acquisition, in a transaction accounted for as a purchase, of all of the common
stock of RSA. The purchase price totaled approximately $5,400,000, including
approximately $100,000 of costs, and was comprised of $2,100,000 in cash,
$400,000 in notes, 500,000 shares of the Company's common stock (valued at
$1,562,500) and warrants to purchase 900,000 shares of the Company's common
stock at $3.125 per share (valued at $1,200,000). The acquisition resulted in
costs in excess of net assets acquired of approximately $5,300,000.
The following unaudited pro forma 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 1996, with pro forma adjustments to give
effect to amortization of costs in excess of net intangible assets acquired and
certain other adjustments, together with related income tax effects:
<TABLE>
<CAPTION>
MARCH 31 MARCH 31
1997 1996
------------ ------------
<S> <C> <C>
Net sales....................................... $ 2,936,778 $ 2,267,260
Loss from continuing operations................. (15,090,698) (8,451,579)
Net loss........................................ (15,434,397) (10,856,120)
Loss from continuing operations per common
share......................................... $ $
(0.43) (0.27)
Net loss per common share....................... $ (0.44) $ (0.35)
</TABLE>
The Company has filed two Registration Statements on Form S-4, which are
not yet effective, in an attempt, through consent solicitations, to acquire the
common shares owned by the minority interests of U.S. Drug and Good Ideas. If
the Company is successful, it will own 100% of these subsidiaries. There is no
assurance that either consent solicitation will be successfully completed. The
Company would issue 557,524 shares to acquire the 1,548,689 shares held by the
Good Ideas minority stockholders and 2,789,478 shares to acquire the 1,721,900
shares held by the U.S. Drug minority stockholders. The difference between the
fair value of the Company's common stock to be issued in the proposed
transaction and the book value of the minority interest of U.S. Drug acquired,
estimated at $3,800,000 at March 31, 1997, will be treated as incomplete
research and development because U.S. Drug is a developmental stage enterprise
and recorded in the statement of operations.
4. RESTRUCTURING OF OPERATIONS
In December 1996, the Company discontinued its breath alcohol and cost per
test program. The equipment being used by the customers was returned to the
Company. The Company refurbished the equipment associated with this program and
attempted to market it to no avail. Therefore, in the fourth quarter of fiscal
1997, the net book value of this equipment of approximately $1,850,000 was
determined to have no value to the Company and was written off. The unamortized
costs in excess of net assets acquired of $714,377 associated with the
acquisition of Alconet was also written off since the Alconet operations have
been closed as a result of the Company's decision.
F-12
<PAGE> 66
SUBSTANCE ABUSE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. DISCONTINUED OPERATIONS
On February 26, 1996, the Board of Directors approved a strategic decision
to focus on the Company's core alcohol, drug and human resource provider
businesses and to dispose of its non core rubber recycling and toy operations,
namely USRR and Good Ideas. These business units are accounted for as
discontinued operations and, accordingly, their operations are segregated in the
accompanying statements of operations. Sales, operating costs and expenses,
other income and expense and applicable minority share of losses for the year
ended March 31, 1995 were reclassified for amounts associated with the
discontinued units. All operations for USRR and Good Ideas have been classified
as Loss from Discontinued Operations in the accompanying statements of
operations.
Discontinued operations include management's best estimates of the amounts
expected to be realized from the sale or liquidation of these 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.
On April 30, 1996, the Company completed the sale of certain of USRR's
assets, net of trade payables of approximately $79,000, to Reclamation
Resources, Inc. (RRI), a private California corporation, for $150,000 cash and a
$300,000 secured promissory note bearing interest at the rate of 7% per annum,
with annual payments of $50,000 plus interest. The note contains a prepayment
clause that enables USRR to receive 12 1/2% of product sales in excess of
$1,400,000.
In the fourth quarter of fiscal 1997, RRI exercised its rights under the
agreement to revalue certain assets. The cost of this revaluation amounted to
approximately $70,000 thereby eliminating the first year's payment of the note
and interest due the Company. The result was a reduction in the loan payment and
an adjustment to the charge to discontinued operations.
The Company has been unable to finalize an agreement with a potential buyer
for Good Ideas or certain of its related assets. Consequently, the Company
believes these assets are of questionable value and have written off
approximately $147,000 of Good Ideas inventory to discontinued operations in the
fourth quarter of fiscal 1997.
6. INVENTORIES
Inventories are summarized as follows:
<TABLE>
<CAPTION>
MARCH 31 MARCH 31
1997 1996
--------- ---------
<S> <C> <C>
Finished goods......................................... $ -- $ 64,437
Work in process........................................ -- 334,699
Raw materials.......................................... 16,675 282,703
------- --------
$16,675 $681,839
======= ========
</TABLE>
A substantial portion of the inventory at March 31, 1996 related to the
breath alcohol and cost per test operations which were abandoned in fiscal 1997.
Consequently, this inventory has been written off.
F-13
<PAGE> 67
SUBSTANCE ABUSE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. PROPERTY AND EQUIPMENT
Property and equipment is summarized as follows:
<TABLE>
<CAPTION>
MARCH 31 MARCH 31
1997 1996
---------- ----------
<S> <C> <C>
Furniture and fixtures.............................. $ 174,507 $ 78,286
Equipment........................................... 1,425,423 811,333
Equipment -- network/per test (see Note 4).......... -- 2,327,553
Test equipment...................................... 400,798 476,765
Leasehold improvements.............................. 373,837 343,692
Vehicles............................................ 9,109 124,042
---------- ----------
2,383,674 4,161,671
Less: Accumulated depreciation...................... 1,137,300 1,469,692
---------- ----------
$1,246,374 $2,691,979
========== ==========
</TABLE>
8. CONVERTIBLE DEBENTURES
On November 8, 1996, the Company entered into an agreement to borrow
$5,000,000 evidenced by two $2.5 million convertible, unsecured senior notes
(the Notes). The Notes are due on November 8, 1999, bear interest, payable
quarterly commencing December 15, 1996, at 7%, and are convertible at $2.00 per
share subject to adjustment. The conversion price of $2.00 is subject to
downward adjustment during the period from May 1, 1997 through May 1, 1998 based
on the market price of the Company's common stock but will not decrease below a
floor of $1.375. In addition, the conversion price contains certain
anti-dilution provisions that can reduce the conversion price below the floor.
As a result of these provisions, at June 30, 1997, the conversion price was
$1.25 per share. As a part of the note agreement, the Company issued, for
$1,000, warrants to purchase 2,500,000 shares of common stock at $2.00 per share
with an adjustment to the exercise price similar to that of the convertible
notes. As a result, at June 30, 1997, the warrants are exercisable at $1.25 per
share. Of the $5,001,000 proceeds, $1,300,000 was allocated as the fair value of
the warrants (resulting in an effective interest rate of 18.4% on the
convertible debentures). This amount is being amortized over the three year life
of the Notes. The Notes and warrant agreements contain certain restrictive
covenants including a restriction on the payment of dividends, purchase of
capital stock, additional borrowings and capital expenditures.
As a result of its financial condition, the Company is unable to estimate
the fair value for its convertible debentures.
In May 1997, the Company consummated a Convertible Debenture and Preferred
Stock Purchase Agreement. The Company issued and sold to an investor a
convertible debenture in the principal amount of $750,000 and 62,500 shares of
Class "B" preferred stock for $4.00 per share. The aggregate Purchase price for
the debentures and the common stock was $1,000,000.
9. INCOME TAXES
The Company and its majority owned subsidiaries file their corporation
income tax returns on an unconsolidated basis and together have net operating
loss carryforwards at March 31, 1997 of approximately $51,000,000, expiring from
March 31, 2004 to March 31, 2012 if not offset against future federal taxable
income. In addition, the company and its majority owned subsidiaries have
capital loss carryforwards at March 31, 1997 of approximately $1,890,000
expiring on March 31, 2001, if not offset against future capital gains. Pursuant
to Section 382 of the Internal Revenue Code, due to changes in the ownership of
the
F-14
<PAGE> 68
SUBSTANCE ABUSE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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>
FISCAL YEAR ENDED MARCH 31
-----------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Computed "expected" tax benefit............. $ 5,440,000 $ 3,740,000 $ 2,720,000
Decrease in tax benefit resulting from:
Net operating loss for which no benefit is
currently available.................... (5,440,000) (3,740,000) (2,720,000)
----------- ----------- -----------
$ -- $ -- $ --
=========== =========== ===========
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the net deferred tax asset at March 31 are presented below:
<TABLE>
<CAPTION>
MARCH 31 MARCH 31
1997 1996
----------- -----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards........................ $17,367,000 $12,800,000
Capital loss carryforward............................... 642,600 642,600
----------- -----------
18,009,600 13,442,600
Less:
Valuation allowance under SFAS 109...................... 18,009,600 13,442,600
----------- -----------
Net deferred tax assets................................... $ -- $ --
=========== ===========
</TABLE>
SFAS 109 requires a valuation allowance to reduce the deferred tax assets
reported if, based on the weight of evidence, it is more likely than not that
some portion or all of the deferred tax assets will not be realized. After
consideration of all the evidence, both positive and negative, management has
determined that a $18,009,600 valuation allowance at March 31, 1997 is necessary
to reduce the deferred tax assets to the amount that will more likely than not
be realized. The change in the valuation allowance for the current year is
$4,567,000.
10. STOCKHOLDERS' EQUITY
Shares of the Company's common stock reserved for future issuance at March
31, 1997 are as follows:
<TABLE>
<S> <C>
Preferred stock.......................................... 185,207
Warrants................................................. 9,069,246
Convertible debentures................................... 2,500,000
Good Ideas merger........................................ 631,809
U.S. Drug merger......................................... 3,302,478
----------
Total.......................................... 15,688,740
==========
</TABLE>
Insufficient Authorized Shares
As of March 31, 1997, there were 50,000,000 shares of the Company's common
stock authorized, of which 36,030,591 shares were outstanding. The Company's
Board of Directors had authorized issuance of an additional 16,108,740 shares,
including 631,809 shares to be issued to the Good Ideas minority stockholders
F-15
<PAGE> 69
SUBSTANCE ABUSE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
and warrant holders and 3,302,478 shares to be issued to the U.S. Drug minority
stockholders and warrant holders assuming that the Good Ideas merger and the
U.S. Drug merger are consummated. Were all of such shares to be issued, there
would be 51,719,331 shares outstanding, or 2,139,331 shares in excess of the
authorized shares. However, as of March 31, 1997, common stock purchase warrants
to purchase an aggregate of 3,494,500 shares and the convertible notes as to
2,500,000 shares included in the reserved shares are not currently excercisable
or convertible. 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 common stock purchase warrants and in the convertible notes. Even though
there are currently a sufficient number of authorized shares of the Company's
common stock to consummate both the Good Ideas and U.S. Drug mergers, the
Company has authorized the calling of a Special Meeting of Stockholders for the
purpose of increasing the authorized number of shares of the Company's common
stock from 50,000,000 to 80,000,000. There can be no assurance that the
Company's 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 financing which the Company intends to initiate
to raise funds (see Note 2).
Preferred Stock
Each share of Class "A" preferred stock is convertible into 4.5 shares of
common stock and accrues dividends at the rate of 14% per annum (or $.70 per
share) on the liquidation preference of $5 per share. Dividends are payable
semi-annually. The holders of the preferred stock have no voting rights.
Common Stock
In June 1994, the Company authorized the issuance of 30,000 shares of
common stock valued at $54,375 as directors' compensation. 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
were charged to operations in the respective periods.
In August 1995, the Company completed a private placement to international
investors, who were not related to the Company, in which it sold 2,152,469
shares of common stock resulting in gross proceeds of $3,038,505.
In February 1996, the Company completed a private placement realizing gross
proceeds of $3,750,000 for 2,000,000 shares of its common stock and warrants
expiring December 17, 1999 to purchase 2,000,000 shares of common stock at $2.00
per share warrant. Mr. Lee 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. 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
in proportion to the shares issued upon the exercise of the common stock
purchase warrants issued to the purchasers in the private placement.
On June 19, 1996, the Company engaged a consultant to provide financing
related services. The consideration for such services was to be 200,000 shares
of the Company's common stock. Mr. Rosen exercised warrants to purchase 200,000
shares of common stock and delivered these shares, with the Board's approval, to
the consultant to fulfill the Company's obligation under the consulting
arrangement. The Company recorded the cost of the agreement based on the fair
market value of the Company's common stock on June 19, 1996. In consideration
thereof, the Company authorized the issuance to Mr. Rosen of 200,000 warrants at
$2.00 per share and reduced the exercise price of other warrants owned by Mr.
Rosen from $4.00 to $2.00 per share.
F-16
<PAGE> 70
SUBSTANCE ABUSE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In May 1997 the Company filed a registration statement under the Securities
Act of 1933 in order to register 117,500 shares of its common stock issuable
upon the exercise at $2.125 per share of common stock purchase warrants granted
to employees of the Company. If all of these warrants are exercised, the Company
will receive gross proceeds of $249,688. In addition, the stockholders named in
the registration statement are offering 6,422,500 shares of the Company's common
stock. The Company would receive gross proceeds of $7,854,063 if all the common
stock warrants underlying the shares being registered were exercised.
Stock Options
The Company had adopted an Employees' Incentive Compensation Plan (the
Plan). The Plan provided for the issuance of restricted stock to employees under
certain conditions, as well as nonqualified stock options and incentive stock
options.
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. In fiscal 1997, subsequent to the expiration of all outstanding
options, the Company terminated the option plan.
Warrants
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.
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
Mr. Rosen in connection with his services in a capacity other than as a
director, including those related to a private placement. The warrants were
issued for three to five-year periods at exercise prices ranging from $1.94 to
$4.00 per share.
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. 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 RSA on
April 1, 1996. The Company did not record the value of the 200,000 warrants
issued on April 1, 1996 until the fourth quarter of fiscal 1997.
During January 1996, the Company issued four-year warrants for the purchase
of 150,000 shares of common stock at $2.25 to an individual in connection with
the settlement of litigation against the Company.
During February 1996, the Board of Directors authorized the issuance of
three-year warrants for the purchase of 700,000 shares of common stock at $2.44
per share to a consultant providing financial public relation services to the
Company. The agreement with the consultant was terminated in November 1996. The
Company did not record the value of these warrants until the fourth quarter of
fiscal 1997.
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.
From April 1, 1996 through June 5, 1996, the Company received gross
proceeds of $4,242,000 from the exercise of warrants and options to purchase
2,353,449 shares of the common stock. In connection with the exercise of these
common stock purchase warrants the Company issued Mr. Rosen warrants to purchase
300,000 shares of common stock at $3.125 per share and paid Mr. Rosen $400,000
for services rendered. Since this amount was directly related to raising capital
the Company charged this amount to additional paid-in
F-17
<PAGE> 71
SUBSTANCE ABUSE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
capital. On January 23, 1997, the exercise price of the warrants issued to Mr.
Rosen was reduced from $3.125 to $2.125 per share.
Effective May 13, 1996, warrants to purchase 600,000 shares of the
Company's common stock were issued to an officer of the Company. The warrants
become exercisable as follows: (a) 50,000 upon issuance (b) 100,000 on May 13,
1997 and (c) 150,000 at May 13, 1998, 1999 and 2000. On December 6, 1996, the
exercise price for 200,000 shares was reduced from $3.125 to $2.125 per share
and 50,000 of the warrants exercisable on May 13, 2000 were modified to become
exercisable on May 13, 1997. On May 23, 1997 the exercise price of the remaining
400,000 warrants was reduced from $3.125 to $2.125 per share.
On October 31, 1996, 1,172,342 Class B Warrants from a private placement in
1990 expired. On November 4, 1996, 437,500 of the options issued to former
officers and directors expired.
On December 6, 1996, the exercise price of 792,000 warrants issued to
officers of the Company as selling stockholders pursuant to the Company's
acquisition of RSA was reduced from $3.125 to $2.125 per share. The reduction in
exercise price was in consideration of the warrant holders surrendering their
secured position with respect to promissory notes issued to them in connection
with the acquisition, and agreeing that the notes could not be repaid except
through the issuance of the Company's common stock, in order to permit the
Company to execute the placement of the convertible debentures in November 1996.
The Company recorded the estimated value of the exercise price reduction of
$150,000 as a cost of the convertible debenture financing. Simultaneously, the
$400,000 note payable and accrued interest thereon was extinguished upon
exercise of warrants to acquire 207,499 shares of common stock.
In December 1996, in connection with consulting services, the Company
issued four-year warrants to purchase 100,000 shares at $2.00 per share with
additional warrants to be issued. The consultant's services were terminated in
May 1997 with the issuance of an additional 400,000 four-year warrants with an
exercise price of $2.00 per share.
In addition to the warrant grants discussed above, during the year ended
March 31, 1997, the Company granted three-year warrants to employees and
directors to acquire 439,000 shares of common stock at prices ranging from $1.81
to $3.13 per share. In addition to the modifications discussed above, on
December 6, 1996, the exercise price of 259,000 warrants previously issued to
employees, ranging from $2.38 to $3.50 per share, was reduced to $2.13 per
share.
F-18
<PAGE> 72
SUBSTANCE ABUSE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Common shares reserved for stock options and for outstanding stock purchase
warrants are presented in the following table:
<TABLE>
<CAPTION>
INCENTIVE STOCK OPTIONS NON QUALIFIED OPTIONS WARRANT AGREEMENTS
----------------------- --------------------- -------------------------
NUMBER OF PRICE PER NUMBER OF PRICE PER NUMBER OF PRICE RANGE
SHARES SHARE SHARES SHARE SHARES PER SHARE
---------- ---------- --------- --------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, April 1 1994... -- $ -- -- $ -- 4,188,683 $1.06 - 4.00
Granted..................... 420,000 2.38 30,000 2.38 869,750 1.81 - 2.50
Canceled.................... -- -- -- -- (6,000) 2.19
Exercised................... -- -- -- -- (812,018) 1.33 - 3.00
-------- ----- ------- ----- ----------
Outstanding, March 31,
1995...................... 420,000 2.38 30,000 2.38 4,240,415 1.06 - 4.00
Granted..................... -- -- -- -- 3,951,000 1.88 - 4.00
Exercised................... -- -- -- -- (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
Granted..................... -- -- -- -- 5,249,000 1.81 - 3.13
Cancelled................... (420,000) -- (17,500) 2.38 (1,216,588) 2.22
Exercised................... -- 2.38 (12,500) 2.38 (3,038,081) 1.06 - 2.50
-------- ----- ------- ----- ----------
Outstanding, March 31,
1997...................... -- $ -- -- $ -- 9,069,246 $1.06 - 4.00
======== ===== ======= ===== ==========
</TABLE>
At March 31, 1997, the exercise price of outstanding warrants are as
follows:
<TABLE>
<CAPTION>
NUMBER OF RANGE OF
WARRANTS EXERCISE PRICE
- --------- --------------
<C> <S> <C>
8,281,296................................................. $1.08 to 2.49
787,950................................................. $2.50 to 4.00
- ---------
9,069,246
=========
</TABLE>
The weighted-average remaining contractual life of those warrants is
approximately 3 years. The weighted average exercise price of outstanding
warrants at March 31, 1997 is $2.13. The weighted average fair value of warrants
granted to employees during fiscal 1997 was $1.87.
Pro forma information regarding net income and earnings per share is
required by Statement of Financial Accounting Standards No. 123 for fiscal 1997
and 1996, and has been determined as if the Company had accounted for warrants
granted to employees under the fair value method of that Statement. The fair
value for these warrants was estimated at the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions for 1997 and 1996, respectively: risk-free interest rates of 6%;
dividend yields of 0%; volatility factors of the expected market price of the
Company's common stock of 63.8% and 68.7, respectively; and a weighted-average
expected life of the warrants of 6.8 and 3.10 years, respectively.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options and warrants have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its employee
stock options and warrants.
F-19
<PAGE> 73
SUBSTANCE ABUSE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
For purposes of pro forma disclosures, the estimated fair value of the
options and warrants is amortized to expense over the vesting period. The
Company's pro forma information follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED MARCH 31
----------------------------
1997 1996
------------ ------------
<S> <C> <C>
Pro forma net loss.............................. $(16,270,050) $(10,552,536)
Pro forma net loss per share.................... (0.46) (0.35)
</TABLE>
11. LITIGATION
In September 1995, the Company settled litigation relating to a consent
solicitation filed against it by a group of stockholders. Terms of the
settlement included the payment of legal costs of the stockholder group. The
costs incurred by the Company and the stockholder group for the year ended March
31, 1996 totaled approximately $1,000,000 and are included in the caption "Loss
from Settlement of Litigation" in the accompanying statement of operations.
In connection with the settlement of the 1995 consent solicitation against
the Company, the Company's Board of Directors (the Board) on September 26, 1995
authorized payment of all amounts incurred by the insurgents (which included Mr.
Rosen) as a result of the consent solicitation effort. At a January 23, 1997
meeting the Board reaffirmed the Board's earlier authorization to pay Mr.
Rosen's legal expenses and settlements. The total cost of these expenses is
estimated to be approximately $416,000. The Company has booked a reserve for
these expenses and recorded the settlement amount as a "Loss from Settlement of
Litigation" in the accompanying statement of operations for the year ended March
31, 1997. Approximately $170,000 of such expenses which qualified for
recognition in December 1996 were not recorded by the Company until the fourth
quarter of fiscal 1997.
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 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" in the
accompanying statement of operations for the year ended March 31, 1996.
12. COMMITMENTS AND CONTINGENCIES
Royalty Agreements
The Company entered into a covenant not to compete with the principal of a
company acquired in 1988. As a part of the agreement, 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.
The royalty terms extend for the lifetime of the principal with no minimum
guarantee after June 1993, but were limited to $120,000 per year or 3% of gross
sales, whichever is less. In September 1994, the Company re-negotiated 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 to
the date of the principal's death. The agreement also provides for a CPI
adjustment every six months starting June 1, 1995.
As a result of abandoning the business from which this royalty agreement
arose (see Note 4), a liability for $1,100,000, the entire amount of estimated
payments that will be made under the agreement, were accrued in fiscal 1997. The
accrual was determined based on the life expectancy of the principal and has
been discounted at 7%.
F-20
<PAGE> 74
SUBSTANCE ABUSE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 license agreement was re-negotiated 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 and, accordingly, has an obligation to the Company for the
royalty payments required by the License Agreement. Royalties paid by the
Company under the License Agreement amounted to $100,000, $50,000 and $375,000
for the years ended March 31, 1997, 1996 and 1995 respectively.
Lease Commitments
The Company owns certain property and equipment under leases that are
classified as capital leases. As of March 31, 1997, future minimum lease
payments under capital leases together with the present value of the net minimum
lease payments are as follows:
<TABLE>
<S> <C>
Fiscal year ending March 31:
1998................................................... $ 112,962
1999................................................... 109,215
2000................................................... 101,890
2001................................................... 94,831
2002................................................... 57,564
---------
Total minimum lease payments............................. 476,462
Less amount representing interest........................ (109,867)
---------
Present value of minimum lease payments (including
current portion of $71,324)............................ $ 366,595
=========
</TABLE>
The Company has leases for certain of its facilities 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 as of March 31, 1997:
<TABLE>
<S> <C>
Fiscal year ending March 31:
1998................................................... $ 353,526
1999................................................... 354,773
2000................................................... 339,725
2001................................................... 323,462
2002................................................... 252,492
----------
$1,623,978
==========
</TABLE>
Rent expense was approximately $308,000, $293,000, and $276,000, for the
years ended March 31, 1997, 1996 and 1995, respectively.
Although the purchaser of the discontinued USRR business has assumed the
lease of the building the business occupied, the landlord did not release USRR
from liability on the lease if the purchaser does not perform. Approximate
future lease payments, which are not included above, 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.
F-21
<PAGE> 75
SUBSTANCE ABUSE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. SUBSEQUENT EVENTS
On July 3 and July 7, 1997, the Company issued notes totaling $625,000 to a
director of the Company. The terms of the notes provided that, in addition to
the principal, the Company would pay to the director an additional $175,000 plus
issue shares of common stock with a market value of $50,000.
On July 7, 1997, the Company entered into a letter of intent and made a
$600,000 deposit to acquire, for $1,600,000, the assets of the third party
administrator business of National Medical Review Offices, Inc (NMRO). The
agreement is subject to due diligence by the Company and the acquisition of the
entity which contains the assets being acquired by NMRO.
14. FOURTH QUARTER TRANSACTIONS (UNAUDITED)
In the fourth quarter of fiscal 1997, the Company recorded adjustments for
warrant transactions that occurred in earlier quarters (see Note 10) and for
litigation settlement costs which qualified for recognition in an earlier
quarter (see Note 11). The Company is amending its previously filed quarterly
reports on Form 10-Q for fiscal 1997 to reflect these and certain other
transactions in the proper period. As a result, the net losses for the previous
quarters will be restated as follows:
<TABLE>
<CAPTION>
PREVIOUSLY
QUARTER ENDED REPORTED AS RESTATED
- ------------- ---------- -----------
<S> <C> <C>
June 30, 1996....................................... $1,389,000 $2,034,300
September 30, 1996.................................. 3,013,200 3,308,500
December 31, 1996................................... 2,605,200 3,238,500
</TABLE>
As discussed in Note 4, in the fourth quarter of fiscal 1997, the Company
wrote off fixed assets, goodwill and inventory totaling approximately $2,600,000
related to its breath alcohol and cost-per-test products and services that were
abandoned in fiscal 1997. Also in the fourth quarter, the Company accrued future
royalty payments associated with these products of $1,100,000 (see Note 12).
F-22
<PAGE> 76
Schedule -- Valuation and Qualifying Accounts
Substance Abuse Technologies, Inc. and Subsidiaries
Years Ended March 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
COL. A COL. B COL. C COL. D COL. E
----------- ---------- -------- ---------- ----------
BALANCE AT CHARGED TO CHARGED BALANCE AT
BEGINNING COSTS AND TO OTHER END OF
FISCAL YEAR ENDING MARCH 31 OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
--------------------------- ----------- ---------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C>
1995......................................... $ 61,000 $ 64,000 -- $ -- $125,000
1996......................................... 125,000 131,551 -- 144,551 112,000
1997......................................... 112,000 582,821 -- 44,821 650,000
</TABLE>
F-23
<PAGE> 1
Exhibit 4(e)
================================================================================
CONVERTIBLE DEBENTURE AND PREFERRED STOCK PURCHASE AGREEMENT
Between
SUBSTANCE ABUSE TECHNOLOGIES, INC.,
and
SOUTHBROOK INTERNATIONAL INVESTMENTS, LTD.
------------------------------
Dated as of May 8, 1997
------------------------------
================================================================================
<PAGE> 2
CONVERTIBLE DEBENTURE AND PREFERRED STOCK PURCHASE AGREEMENT,
dated as of May 8, 1997 (this "Agreement"), between Substance Abuse
Technologies, Inc., a Delaware corporation (the "Company"), and Southbrook
International Investments, Ltd., a corporation organized and existing under the
laws of the British Virgin Islands (the "Purchaser").
WHEREAS, subject to the terms and conditions set forth in this
Agreement, the Company desires to issue and sell to the Purchaser and the
Purchaser desires to acquire certain of the Company's 14% Convertible Debentures
due May 8, 2000, in the form attached hereto as Exhibit A(1) (the "Convertible
Debentures") and shares of the Company Class B Convertible Preferred Stock, $.01
par value per share (the "Preferred Stock").
IN CONSIDERATION of the mutual covenants and agreements set
forth herein and for good and valuable consideration, the receipt of which is
hereby acknowledged, the parties agree as follows:
ARTICLE I
CERTAIN DEFINITIONS
Section 1.1. Certain Definitions. As used in this Agreement,
unless the context requires a different meaning, the following terms have the
meanings indicated in this Section 1.1:
"Affiliate" means, with respect to any Person, any Person
that, directly or indirectly, controls, is controlled by or is under common
control with such Person. For the purposes of this definition, "control"
(including, with correlative meanings, the terms "controlled by" and "under
common control with") shall mean the possession, directly or indirectly, of the
power to direct or cause the direction of the management and policies of such
Person, whether through the ownership of voting securities or by contract or
otherwise.
"Agreement" shall have the meaning set forth in the recitals
hereto.
"Business Day" means any day except Saturday, Sunday and any
day which shall be a Federal legal holiday or a day on which banking
institutions in the State of New York are authorized or required by law or other
government actions to close.
"Certificate of Incorporation" means the Company's Certificate
of Incorporation, as amended to the date of this Agreement, as filed with the
Secretary of State of Delaware and which sets forth certain rights, preferences
and privileges of the Preferred Stock.
<PAGE> 3
"Class B Exchange Agreement" shall have the meaning set forth
in Section 2.1(a).
"Closing" shall have the meaning set forth in Section 2.1(b).
"Closing Date" shall have the meaning set forth in Section
2.1(b).
"Code" means the Internal Revenue Code of 1986, as amended,
and the rules and regulations thereunder as in effect on the date hereof.
"Commission" means the Securities and Exchange Commission.
"Common Stock" means the Company's common stock, par value
$.01 per share.
"Company" shall have the meaning set forth in the recitals
hereto.
"Convertible Debentures" shall have the meaning set forth in
the recitals hereto.
"Conversion Price" shall have the meaning set forth in the
Convertible Debentures.
"Disclosure Materials" means, collectively, the SEC Documents,
the disclosure package delivered to the Purchaser in connection with the
offering by the Company of the Convertible Debentures and the Shares and the
Schedules to this Agreement furnished by, or on behalf of, the Company pursuant
to Section 3.1.
"Exchange Act" means the Securities Exchange Act of 1934, as
amended.
"Exchange Ratio" shall have the meaning set forth in the Class
B Exchange Agreement.
"Lien" means, with respect to any asset, any mortgage, lien,
pledge, right of first refusal, charge, security interest or encumbrance of any
kind in or on such asset or the revenues or income thereon or therefrom.
"Material Adverse Effect" shall have the meaning set forth in
Section 3.1(a).
"Original Issue Date" shall have the meaning set forth in the
Convertible Debenture or the Class B Exchange Agreement, as applicable.
"Per Share Market Value" shall have the meaning set forth in
the Convertible Debentures or the Class B Exchange Agreement, as applicable.
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<PAGE> 4
"Person" means an individual or a corporation, partnership,
trust, incorporated or unincorporated association, joint venture, limited
liability company, joint stock company, government (or an agency or political
subdivision thereof) or other entity of any kind.
"Preferred Stock" shall have the meaning set forth in the
recitals hereto.
"Purchase Price" shall have the meaning set forth in Section
2.1(a).
"Purchaser" shall have the meaning set forth in the recitals
hereto.
"Registration Rights Agreement" means the registration rights
agreement, dated as of the date hereof, between the Company and the Purchaser,
in the form of Exhibit B, as the same may be amended, supplemented or otherwise
modified in accordance with its terms.
"Required Approvals" shall have the meaning set forth in
Section 3.1(f).
"SEC Documents" shall have the meaning set forth in Section
3.1(l).
"Securities Act" means the Securities Act of 1933, as amended.
"Shares" means the shares of Preferred Stock to be purchased
by the Purchaser pursuant to this Agreement.
"Stated Value" shall have the meaning set forth in Section
2.1(a).
"Subsequent Financing" shall have the meaning set forth in
Section 4.9.
"Subsequent Financing Notice" shall have the meaning set forth
in Section 4.9.
"Subsidiaries" shall have the meaning set forth in Section
3.1(a).
"Trading Day" shall have the meaning set forth in the
Convertible Debentures.
"Transaction Documents" shall have the meaning set forth in
Section 3.1(b).
"Underlying Shares" means the shares of Common Stock issuable
upon conversion of Convertible Debentures and Shares in accordance with the
terms hereof, the Convertible Debentures and the Certificate of Incorporation
and issuable upon exchange of Shares in accordance with the terms of the Class B
Exchange Agreement.
"Underlying Shares Registration Statement" shall have the
meaning set forth in Section 3.1(f).
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<PAGE> 5
ARTICLE II
PURCHASE OF CONVERTIBLE DEBENTURES
Section 2.1. Purchase of Convertible Debentures and Shares;
Closing.
(a) Subject to the terms and conditions set forth in this
Agreement, the Company shall issue and sell to the Purchaser, and the Purchaser
shall purchase from the Company, on the Closing Date an aggregate principal
amount of $750,000 of Convertible Debentures and an aggregate of 62,500 Shares,
which shall have the respective rights, privileges and preferences substantially
as set forth in the Certificate of Incorporation and a certain agreement between
the Company and the Purchaser dated the date hereof (the "Class B Exchange
Agreement"), at a price per share of $4 (the "Stated Value"). The aggregate
"Purchase Price" for the Debentures and the Shares is $1,000,000.
(b) The closing of the purchase and sale of the Convertible
Debentures and the Shares (the "Closing") shall take place at the offices of
Robinson Silverman Pearce Aronsohn & Berman, LLP, 1290 Avenue of the Americas,
New York, New York 10104, immediately following the execution hereof, or at such
other time and/or place as the Purchaser and the Company may agree. The date of
the Closing is referred to herein as the "Closing Date".
(c) At the Closing, the Company shall deliver (i) to the
Purchaser, (A) Convertible Debentures in an aggregate principal amount equal to
$750,000 and one or more stock certificates representing the 62,500 Shares
purchased by it hereunder, registered in the name of the Purchaser, and (B) the
legal opinion addressed to it and dated the Closing Date of Gold & Wachtel, LLP,
counsel for the Company, substantially in the form of Exhibit C; (ii) to the
Company, the Purchase Price, less the fees to Wharton Capital Partners, Ltd. and
the legal fees and expenses of the Purchaser's counsel contemplated by Section
5.1 hereof, in United States dollars in immediately available funds by wire
transfer to an account designated in writing by the Company prior to the
Closing; and (iii) to the party entitled thereto, all documents, instruments and
writings required to have been delivered at or prior to Closing by either the
Company or the Purchaser pursuant to this Agreement.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
Section 3.1. Representations and Warranties of the Company.
The Company hereby represents and warrants to Purchaser as follows:
(a) Organization and Qualification. The Company is a
corporation, duly incorporated, validly existing and in good standing under the
laws of the jurisdiction of its
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<PAGE> 6
incorporation, with the requisite corporate power and authority to own and use
its properties and assets and to carry on its business as currently conducted.
The Company has no subsidiaries other than as set forth in the SEC Documents or
in Schedule 3.1(a) (collectively, the "Subsidiaries"). Each of the Subsidiaries
is a corporation, duly incorporated, validly existing and in good standing under
the laws of the jurisdiction of its incorporation, with the requisite corporate
power and authority to own and use its properties and assets and to carry on its
business as currently conducted. Each of the Company and the Subsidiaries is
duly qualified to do business and is in good standing as a foreign corporation
in each jurisdiction in which the nature of the business conducted or property
owned by it makes such qualification necessary, except where the failure to be
so qualified or in good standing, as the case may be, could not, individually or
in the aggregate, (x) adversely affect the legality, validity or enforceability
of any of the Transaction Documents, (y) have a material adverse effect on the
results of operations, assets, prospects, or financial condition of the Company
and the Subsidiaries taken as a whole or (z) adversely impair the Company's
ability to perform fully on a timely basis its obligations under the Transaction
Documents (a "Material Adverse Effect").
(b) Authorization; Enforcement. The Company has the requisite
corporate power and authority to enter into and to consummate the transactions
contemplated hereby and by the Registration Rights Agreement, the Convertible
Debentures and the Class B Exchange Agreement (collectively with this Agreement,
the "Transaction Documents") and to otherwise carry out its obligations
hereunder and thereunder. The execution and delivery of each of the Transaction
Documents by the Company and the consummation by it of the transactions
contemplated thereby have been duly authorized by all necessary action on the
part of the Company, including, without limitation, approval thereof by the
Company's Board of Directors. Each of the Transaction Documents has been duly
executed and delivered by the Company and constitutes the legal, valid and
binding obligation of the Company enforceable against the Company in accordance
with its terms, except as such enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium, liquidation or similar laws
relating to, or affecting generally the enforcement of, creditors' rights and
remedies or by other equitable principles of general application. Neither the
Company nor any Subsidiary is in violation of any of the provisions of its
respective certificate of incorporation, bylaws or other charter documents.
(c) Capitalization. The authorized, issued and outstanding
capital stock of the Company and each of the Subsidiaries is set forth in
Schedule 3.1(c). No shares of the Common Stock are entitled to preemptive or
similar rights. Except as specifically disclosed in Schedule 3.1(c), there are
no outstanding options, warrants, script rights to subscribe to, calls or
commitments of any character whatsoever relating to, or, except as a result of
the purchase and sale of the Convertible Debentures and Shares hereunder,
securities, rights or obligations convertible into, or exchangeable for, or
giving any Person any right to subscribe for or acquire, any shares of Common
Stock, or contracts, commitments, understandings, or arrangements by which the
Company or any Subsidiary is, or may become, bound to issue additional shares of
Common Stock, or securities or rights convertible or exchangeable into shares of
Common Stock. To the knowledge of the Company, except as specifically disclosed
in the SEC Documents or Schedule 3.1(c), no Person beneficially owns (as
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<PAGE> 7
determined pursuant to Rule 13d-3 promulgated under the Exchange Act) or has the
right to acquire by agreement with, or by obligation binding upon, the Company
beneficial ownership of in excess of 5% of the Common Stock.
(d) Issuance of Convertible Debentures, Shares and Underlying
Shares. The Convertible Debentures have been duly and validly authorized for
issuance, offer and sale pursuant to this Agreement and, when issued and
delivered as provided hereunder against payment therefor, shall be valid and
legally binding obligations of the Company enforceable against the Company in
accordance with their terms, except as such enforceability may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium, liquidation or
similar laws relating to, or affecting generally the enforcement of, creditors'
rights and remedies or by other equitable principles of general application. The
Shares have been duly and validly authorized for offer and sale pursuant to this
Agreement and, when issued and delivered as provided hereunder against payment
therefor, shall have been duly and validly issued, fully paid and nonassessable,
free and clear of any Liens. The Company has and at all times while the
Convertible Debentures and Shares are outstanding will maintain a reserve of
shares of Common Stock to enable it to perform its conversion and/or exchange,
as the case may be, and other obligations under this Agreement, the Convertible
Debentures, Certificate of Incorporation, and Class B Exchange Agreement, which
reserve shall be no less than the sum of twice the number of shares of Common
Stock issuable upon (i) conversion of the aggregate principal balance of all
then outstanding and previously unconverted Convertible Debentures into Common
Stock pursuant to the terms hereof and the Convertible Debentures and (ii)
conversion of Shares into Common Stock pursuant to the terms hereof and the
Certificate of Incorporation or exchange of Shares into Common Stock pursuant to
the terms hereof and the Class B Exchange Agreement, assuming in the case of
clause (i) or (ii) above that such conversion or exchange, as the case may be,
occurred on the Original Issue Date. When issued in accordance with the terms
hereof, the Convertible Debentures, the Certificate of Incorporation and Class B
Exchange Agreement, the Underlying Shares will have been duly authorized,
validly issued, fully paid and nonassessable, and free and clear of any Liens.
(e) No Conflicts. The execution, delivery and performance of
the Transaction Documents by the Company and the consummation by the Company of
the transactions contemplated thereby do not and will not (i) conflict with or
violate any provision of its Certificate of Incorporation or bylaws (each as
amended through the date hereof) or (ii) subject to obtaining the consents
specified in Section 3.1(f), conflict with, or constitute a default (or an event
which with notice or lapse of time or both would become a default) under, or
give to others any rights of termination, amendment, acceleration or
cancellation of, any agreement, indenture, loans or credit agreement or other
instrument or agreement to which the Company is a party, (iii) subject to
obtaining the consents specified in Section 3.1(f), conflict with, or constitute
a default (or an event which with notice or lapse of time or both would become a
default), under the Convertible Loan and Warrant Agreement, dated as of November
8, 1996, by and between the Company and the Noteholders thereto, pursuant to
which the Company issued its Convertible Senior Promissory Notes due November 8,
1999 (the "Senior Notes"), or (iv) result in a violation of any law, rule,
regulation, order, judgment, injunction, decree or other restriction of any
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<PAGE> 8
court or governmental authority to which the Company is subject (including
Federal and state securities laws and regulations), or by which any property or
asset of the Company is bound or affected, except in the case of each of clauses
(ii) and (iv), such conflicts, defaults, terminations, amendments,
accelerations, cancellations and violations as could not, individually or in the
aggregate, have or result in a Material Adverse Effect. The business of the
Company is not being conducted in violation of any law, ordinance or regulation
of any governmental authority.
(f) Consents and Approvals. Except as specifically set forth
in Schedule 3.1(f), neither the Company nor any Subsidiary is required to obtain
any consent, waiver, authorization or order of, or make any filing or
registration with, any court or other Federal, state, local or other
governmental authority or other Person in connection with the execution,
delivery and performance by the Company of the Transaction Documents, except for
(i) the filing of the registration statement covering, among other things, as
specified and limited by the terms of the Registration Rights Agreement, the
Underlying Shares (the "Underlying Shares Registration Statement") with the
Commission and the making of the applicable blue- sky filings under state
securities laws, each as contemplated by the Registration Rights Agreement, and
(ii) other than, in all other cases, where the failure to obtain such consent,
waiver, authorization or order, or to give or make such notice or filing, could
not, individually or in the aggregate, have or would result in a Material
Adverse Effect (together with the consents, waivers, authorizations, orders,
notices and filings referred to in Schedule 3.1(f), the "Required Approvals").
(g) Litigation; Proceedings. There is no action, suit, notice
of violation, proceeding or investigation pending or, to the best knowledge of
the Company, threatened against or affecting the Company or any of its
Subsidiaries or any of their respective properties before or by any court,
governmental or administrative agency or regulatory authority (Federal, state,
county, local or foreign) which relates to or challenges the legality, validity
or enforceability of the Transaction Documents, Convertible Debentures, Shares,
or Underlying Shares or which could, individually or in the aggregate, have or
result in a Material Adverse Effect.
(h) No Default or Violation. Neither the Company nor any
Subsidiary (i) is in default under, or in violation of, any indenture, loan or
credit agreement or any other agreement or instrument to which it is a party or
by which it or any of its properties is bound, (ii) is in violation of any order
of any court, arbitrator or governmental body, or (iii) is in violation of any
statute, rule or regulation of any governmental authority, except as could not,
in any case of (i) above, individually or in the aggregate, have or result in a
Material Adverse Effect.
(i) Certain Fees. Except for fees payable by the Company to
Wharton Capital Partners, Ltd., no fees or commissions are or will be payable by
the Company to any broker, finder, investment banker or bank with respect to the
consummation of the transactions contemplated hereby. The Purchaser shall have
no obligation with respect to such fees or with respect to any claims made by
other Persons for fees of a type contemplated in this Section due in connection
with this transaction.
-7-
<PAGE> 9
(j) Disclosure Materials. The Disclosure Materials (other than
the SEC Documents) do not contain any untrue statement of a material fact or
omit to state any material fact necessary in order to make the statements made
therein, in light of the circumstances under which they were made, not
misleading.
(k) Private Offering. Neither the Company nor any Person
acting on its behalf has taken or will take any action (including, without
limitation, any offering of securities of the Company under circumstances which
would require the integration of such offering with the offering of the
Convertible Debentures, the Shares or the Underlying Shares under the Securities
Act) which might subject the offering, issuance or sale of the Convertible
Debentures, the Shares or the Underlying Shares to the registration requirements
of Section 5 of the Securities Act.
(l) SEC Documents. The Company has filed all reports required
to be filed by it under the Exchange Act, including pursuant to Section 13(a) or
15(d) thereof, for the period on and after October 1, 1995 (the foregoing
materials being collectively referred to herein as the "SEC Documents") on a
timely basis, or has received a valid extension of such time of filing (in which
case it has made all such filings in the time required by such extension). As of
their respective dates, the SEC Documents complied in all material respects with
the requirements of the Securities Act and the Exchange Act and the published
rules and regulations of the Commission promulgated thereunder, and none of the
SEC Documents, when filed, contained any untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under which
they were made, not misleading. The financial statements of the Company included
in the SEC Documents comply in all material respects with applicable accounting
requirements and the rules and regulations of the Commission with respect
thereto. Such financial statements have been prepared in accordance with
generally accepted accounting principles applied on a consistent basis during
the periods involved, except as may be otherwise specifically indicated in such
financial statements or the notes thereto, and fairly present in all material
respects the financial position of the Company and its consolidated subsidiaries
as of and for the dates thereof and the results of operations and cash flows for
the periods then ended, subject, in the case of unaudited statements, to normal
year-end audit adjustments. The date of the Company's last filed audited
financial statements with the Commission was July 1, 1996 filed as part of its
Form 10-K (the Company filed a Form 10-K/A on September 23, 1996), and the
Company has not received any comments from the Commission in respect of such
audited financial statements since the filing of the Form 10-K/A. Since the date
of the financial statements included in the Company's Quarterly Report on Form
10-Q for the quarterly period ended December 31, 1996, there has been no event,
occurrence or development that has had, could have or would result in a Material
Adverse Effect which is not specifically disclosed in the Disclosure Materials.
(m) Form S-3 Eligibility. The Company is, and at the Closing
Date will be, eligible to register securities for resale with the Commission
under Form S-3 promulgated under the Securities Act.
-8-
<PAGE> 10
(n) Investment Company. The Company is not, and is not an
Affiliate of, an "investment company" within the meaning of the Investment
Company Act of 1940, as amended.
(o) Exclusivity. The Company shall not issue and sell the
Convertible Debentures or Shares to any Person other than the Purchaser other
than with the specific prior written consent of the Purchaser.
(p) Listing and Maintenance Requirements Compliance. Other
than as specifically listed in Schedule 3.1(p), the Company has not in the two
years prior to the date hereof received written notice from any stock exchange
or market on which the Common Stock is or has been listed (or on which it is or
has been quoted) to the effect that the Company is not in compliance with the
listing or maintenance requirements of such exchange or market. The Company has
provided to the Purchaser true and complete copies of any notices referenced in
Schedule 3.1(p).
Purchaser acknowledges that the representations and warranties
of the Company in this Section 3.1 are based upon the assumption that the
Company's stockholders will approve an increase in the authorized capitalization
of the Company to 65,000,000 at a meeting duly called therefor.
Section 3.2. Representations and Warranties of the Purchaser.
The Purchaser hereby represents and warrants to the Company as follows:
(a) Organization; Authority. Purchaser is a corporation duly
and validly existing and in good standing under the laws of the jurisdiction of
its incorporation. Purchaser has the requisite corporate power and authority to
enter into and to consummate the transactions contemplated hereby and by the
Class B Exchange Agreement and the Registration Rights Agreement and otherwise
to carry out its obligations hereunder and thereunder. The purchase of the
Convertible Debentures and Shares by Purchaser hereunder has been duly
authorized by all necessary action on the part of Purchaser. Each of this
Agreement, the Class B Exchange Agreement and the Registration Rights Agreement
has been duly executed and delivered by or on behalf of Purchaser and
constitutes the valid and legally binding obligation of Purchaser, enforceable
against it in accordance with its terms, except as such enforceability may be
limited by applicable bankruptcy, insolvency, reorganization, moratorium,
liquidation or similar laws relating to, or affecting generally the enforcement
of, creditors' rights and remedies or by other equitable principles of general
application.
(b) Investment Intent. Purchaser is acquiring the Convertible
Debentures, the Shares and the Underlying Shares for its own account (and/or on
behalf of managed accounts who are purchasing solely for their own accounts for
investment) for investment purposes only and not with a view to or for
distributing or reselling such Convertible Debentures, Shares or Underlying
Shares or any part thereof or interest therein, without prejudice, however, to
Purchaser's right, subject to the provisions of the Transaction Documents, at
all times to sell or otherwise dispose of all or any part of such Convertible
-9-
<PAGE> 11
Debentures, Shares or Underlying Shares under an effective registration
statement under the Securities Act and in compliance with applicable State
securities laws or under an exemption or exclusion from such registration.
(c) Purchaser Status. At the time Purchaser (and any account
for which it is purchasing) was offered the Convertible Debentures and the
Shares, it (and any managed account for which it is purchasing) was, and at the
date hereof, it (and any managed account for which it is purchasing) is, and at
the Closing Date, it (and any managed account for which it is purchasing) will
be, an "accredited investor" as defined in Rule 501(a) under the Securities Act.
(d) Experience of Purchaser. Purchaser, either alone or
together with its representatives, has such knowledge, sophistication and
experience in business and financial matters so as to be capable of evaluating
the merits and risks of the prospective investment in the Convertible Debentures
and the Shares, and has so evaluated the merits and risks of such investment.
(e) Ability of Purchaser to Bear Risk of Investment. Purchaser
is able to bear the economic risk of an investment in the Convertible Debentures
and the Shares and, at the present time, is able to afford a complete loss of
such investment.
(f) Prohibited Transactions. The Convertible Debentures and
the Shares are not being acquired, directly or indirectly, with the assets of
any "employee benefit plan", within the meaning of Section 3(3) of the Employee
Retirement Income Security Act of 1974, as amended.
(g) Reliance. Purchaser understands and acknowledges that (i)
the Convertible Debentures and the Shares are being offered and sold, and the
Underlying Shares are being offered, to it without registration under the
Securities Act in a private placement that is exempt from the registration
provisions of the Securities Act and (ii) the availability of such exemption
depends in part on, and that the Company will rely upon the accuracy and
truthfulness of, the foregoing representations and the Purchaser hereby consents
to such reliance.
The Company acknowledges and agrees that the Purchaser makes
no representation or warranty with respect to the transactions contemplated
hereby other than those specifically set forth in this Section 3.2.
ARTICLE IV
OTHER AGREEMENTS OF THE PARTIES
Section 4.1. Transfer Restrictions. (a) If the Purchaser
should decide to dispose of any portion of the principal amount of the
Convertible Debentures or any of the Shares (and upon conversion or exchange
thereof, as the case may be, any of the Underlying
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<PAGE> 12
Shares) held by it, the Purchaser understands and agrees that it may do so only
pursuant to an effective registration statement under the Securities Act, to the
Company or pursuant to an available exemption from the registration requirements
thereof. In connection with any transfer of any portion of the principal amount
of the Convertible Debentures, any Shares or any Underlying Shares other than
pursuant to an effective registration statement or to the Company, the Company
may require the transferor of such Convertible Debentures or Shares to provide
to the Company an opinion of counsel experienced in the area of United States
securities laws selected by the transferor, the form and substance of which
opinion shall be reasonably satisfactory to the Company, to the effect that such
transfer does not require registration of such Convertible Debentures, Shares or
Underlying Shares under the Securities Act.
(b) The Purchaser agrees to the imprinting, so long as is
required by this Section 4.1(b), of the following legend on the Convertible
Debentures, the Shares or Underlying Shares:
[NEITHER THESE SECURITIES NOR THE SECURITIES INTO WHICH THESE
SECURITIES ARE [CONVERTIBLE] [EXCHANGEABLE] [THE SECURITIES REPRESENTED
HEREBY] HAVE [NOT] BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE
COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON
AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "SECURITIES ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR
SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A
TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE
SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS.
[FOR CONVERTIBLE DEBENTURES AND SHARES ONLY] THIS [CONVERTIBLE
DEBENTURE IS] [THE SHARES REPRESENTED BY THIS CERTIFICATE ARE] SUBJECT
TO CERTAIN RESTRICTIONS ON TRANSFER AND [CONVERSION] [EXCHANGE] SET
FORTH IN A CONVERTIBLE DEBENTURE AND PREFERRED STOCK PURCHASE
AGREEMENT, DATED AS OF MAY 8, 1997, BETWEEN THE COMPANY AND THE
ORIGINAL HOLDER HEREOF. A COPY OF THAT AGREEMENT IS ON FILE AT THE
PRINCIPAL OFFICE OF SUBSTANCE ABUSE TECHNOLOGIES, INC.
The Underlying Shares issuable upon conversion of the
Convertible Debentures and Shares or exchange of Shares, as the case may be,
shall not contain the legend set forth above if the conversion of the
Convertible Debentures, or exchange of Shares, as the case may be, occurs at any
time while the Underlying Shares Registration Statement is effective under the
Securities Act or in the event there is not an effective Underlying Shares
Registration Statement at such time, if in the opinion of counsel to the Company
experienced in the area of United States securities laws determines that such
legend is not required under applicable requirements of the Securities Act
(including judicial
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<PAGE> 13
interpretations and pronouncements issued by the staff of the Commission). The
Convertible Debentures, the Shares and the Underlying Shares shall also bear any
other legends required by applicable Federal or state securities laws, which
legends shall be removed when not required in accordance with this Section
4.1(b). The Company agrees that it will provide the Purchaser, upon request,
with a certificate or certificates representing Underlying Shares, free from
such legend at such time as such legend is no longer required hereunder. The
Purchaser agrees that, in connection with any transfer of Underlying Shares by
it pursuant to an effective registration statement under the Securities Act, it
will comply with the prospectus delivery requirements of the Securities Act,
Regulation M or any other requirements imposed by the staff of the Commission.
Section 4.2. Stop Transfer Instruction. The Company may not
make any notation on its records or give instructions to any transfer agent of
the Company which enlarge the restrictions of transfer set forth in Section 4.1.
Section 4.3. Furnishing of Information. For so long as the
Purchaser owns Convertible Debentures, Shares or Underlying Shares, the Company
covenants to timely file (or obtain valid extensions in respect thereof) all
reports required to be filed by the Company after the date hereof pursuant to
Section 13(a) or 15(d) of the Exchange Act and to promptly furnish the Purchaser
with true and complete copies of all such filings. If the Company is not at the
time required to file reports pursuant to such sections, it will prepare and
furnish to the Purchaser annual and quarterly financial statements, together
with a discussion and analysis of such financial statements in form and
substance substantially similar to those that would otherwise be required to be
included in reports required by Section 13(a) or 15(d) of the Exchange Act in
the time period that such filings would have been required to have been made
under the Exchange Act.
Section 4.4. Use of Disclosure Materials. The Company consents
to the use of the Disclosure Materials, and any amendments and supplements
thereto, by the Purchaser in connection with resales of Underlying Shares other
than pursuant to an effective registration statement.
Section 4.5. Increase in Authorized Shares. At such time as
the Company would be, if a notice of conversion or exchange, as the case may be,
were to be delivered on such date, precluded from converting or exchanging, as
the case may be, the full outstanding principal amount of Convertible Debentures
and all outstanding Shares that remain unconverted or unexchanged, as the case
may be, at such date due to the unavailability of authorized but unissued or
re-acquired shares of the Common Stock, the Board of Directors of the Company
shall promptly (and in any case within 14 Business Days from such date, or such
other time period as the Company is permitted to mail pursuant to Section 14 of
the Exchange Act and Regulation 14A thereunder) prepare and mail to the
stockholders of the Company proxy materials requesting authorization to amend
the Company's Certificate of Incorporation to increase the number of shares of
Common Stock which the Company is authorized to issue to at least 70,000,000
shares. In connection therewith, the Board of Directors shall (a) adopt proper
resolutions authorizing such increase, (b) recommend to and otherwise use its
best efforts to promptly and duly obtain stockholder approval to carry out
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<PAGE> 14
such resolutions (and hold a special meeting of the stockholders no later than
the 30th day after delivery of the proxy materials relating to such meeting) and
(c) within five Business Days of obtaining such shareholder authorization, file
an appropriate amendment to the Company's certificate of incorporation to
evidence such increase.
Section 4.6. Blue Sky Laws. In accordance with the
Registration Rights Agreement, the Company shall qualify the Underlying Shares
under the securities or Blue Sky laws of such jurisdictions as the Purchaser may
reasonably request and continue such qualification at all times until the
Purchaser notifies the Company in writing that it no longer owns Convertible
Debentures, Shares or Underlying Shares; provided, however, that neither the
Company nor its Subsidiaries shall be required in connection therewith to
qualify as a foreign corporation where they are not now so qualified.
Section 4.7. Integration. The Company shall not, and shall use
its best efforts to ensure that no Affiliate shall, sell, offer for sale or
solicit offers to buy or otherwise negotiate in respect of any security (as
defined in Section 2 of the Securities Act) that would be integrated with the
offer or sale of the Convertible Debentures, the Shares or the Underlying Shares
in a manner that would require the registration under the Securities Act of the
sale of the Convertible Debentures, the Shares or Underlying Shares to the
Purchaser.
Section 4.8. Solicitation Materials. The Company shall not (i)
distribute any offering materials in connection with the offering and sale of
the Convertible Debentures, the Shares or Underlying Shares other than the
Disclosure Materials and any amendments and supplements thereto prepared in
compliance herewith or (ii) solicit any offer to buy or sell Convertible
Debentures, Shares or Underlying Shares by means of any form of general
solicitation or advertising.
Section 4.9. Right of First Refusal; Subsequent Registrations;
Certain Corporate Actions. (a) The Company shall not, directly or indirectly,
without the prior written consent of the Purchaser, offer, sell, grant any
option to purchase, or otherwise dispose (or announce any offer, sale, grant or
any option to purchase or other disposition) of any of its or its Affiliates
equity or equity-equivalent securities (which shall include debt instruments
convertible into shares of the Common Stock) at a price which is on the face
thereof or implied therein, less than either the market price or fair market
value for such securities (a "Subsequent Financing") for a period of 180 days
after the Closing Date, except (i) the granting of options to employees,
officers and directors, and the issuance of shares upon exercise of options
granted, under any stock option plan heretofore or hereinafter duly adopted by
the Company, (ii) shares issued upon exercise of any currently outstanding
warrants and upon conversion of any currently outstanding convertible preferred
stock or convertible notes in each case disclosed in Schedule 3.1(c), (iii)
shares of the Common Stock issued upon conversion of the Convertible Debentures
in accordance herewith and the terms of the Convertible Debentures, (iv) shares
of the Common Stock issued upon conversion or exchange, as the case may be, of
the Shares in accordance herewith and the terms of the Certificate of
Incorporation or the Class B Exchange Agreement, as the case may be, and (v)
shares issued in connection with an acquisition by the Company of assets or
securities, unless
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<PAGE> 15
(A) the Company delivers to the Purchaser a written notice (the "Subsequent
Financing Notice") of its intention to effect such Subsequent Financing, which
Subsequent Financing Notice shall describe in reasonable detail the proposed
terms of such Subsequent Financing, the amount of proceeds intended to be raised
thereunder, the Person with whom such Subsequent Financing shall be affected,
and a term sheet or similar document relating thereto shall be attached to such
Subsequent Financing Notice and (B) the Purchaser shall not have notified the
Company by 5:00 p.m. (Eastern Time) on the tenth Business Day after its receipt
of the Subsequent Financing Notice of its willingness to enter into good faith
negotiations to provide (or to cause its sole designee to provide) financing to
the Company on substantially the terms set forth in the Subsequent Financing
Notice. If Purchaser notifies the Company of its intention to enter into such
negotiations within such time period, the Company may effect the Subsequent
Financing substantially upon the terms and to the Persons (or Affiliates of such
Persons) set forth in the Subsequent Financing Notice; provided, that the
Company shall provide the Purchaser with a second Subsequent Financing Notice,
and the Purchaser shall again have the right of first refusal set forth above in
this paragraph (a), if the Subsequent Financing subject to the initial
Subsequent Financing Notice shall not have been consummated for any reason on
the terms set forth in such Subsequent Financing Notice within 60 Business Days
after the date of the initial Subsequent Financing Notice with the Person (or an
Affiliate of such Person) identified in the Subsequent Financing Notice.
(b) Other than Underlying Shares and other "Registrable
Securities" (as such term is defined in the Registration Rights Agreement) to be
registered in accordance with the Registration Rights Agreement and the issuance
of shares of Common Stock in connection with the acquisition of the minority
ownership interest in U.S. Drug Testing, Inc. and Good Ideas Enterprises, Inc.
as previously disclosed to the public, the Company shall not, without the prior
written consent of the Purchaser, (i) issue or sell any of its or any of its
Affiliates' equity or equity-equivalent securities (which shall include debt
instruments convertible into shares of Common Stock) pursuant to Regulation S
promulgated under the Securities Act, or (ii) register for resale any securities
of the Company for a period of not less than 60 Trading Days after the date that
the Underlying Shares Registration Statement is declared effective by the
Commission. Any days that Purchaser is unable to sell Underlying Shares under
the Underlying Shares Registration Statement shall be added to such 60 Trading
Day period for the purposes of (i) and (ii) above.
(c) As long as there are Convertible Debentures and Shares
outstanding, the Company shall not, and shall cause the Subsidiaries not to,
without the consent of the Purchaser, (i) amend its Certificate of
Incorporation, bylaws or other charter documents so as to adversely affect any
rights of the Purchaser generally or to alter or amend terms relating to the
Preferred Stock; (ii) repay, repurchase or offer to repay, repurchase or
otherwise acquire shares of its Common Stock or any outstanding Company
indebtedness other than as to the Underlying Shares, the Senior Notes or
capitalized leases not to exceed an aggregate principal amount of $750,000
outstanding at any time on a consolidated basis; or (iii) enter into any
agreement with respect to any of the foregoing.
No redemption of the Preferred Stock or repayment of the
Convertible Debentures shall affect the terms of this Section 4.9.
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<PAGE> 16
Section 4.10. Purchaser Ownership of Common Stock. Purchaser
may not use its ability to convert or exchange, as the case may be, Convertible
Debentures and Shares hereunder or under the terms of the Convertible
Debentures, the Certificate of Incorporation and the Class B Exchange Agreement
to the extent that such conversion would result in Purchaser beneficially owning
(for purposes of Rule 13d-3 under the Exchange Act) more than 4.9% of the
outstanding shares of the Common Stock; provided, however, that if ten days
shall have elapsed since Purchaser has declared an event of default under any
Transaction Document and such event shall not have been cured to Purchaser's
satisfaction prior to the expiration of such ten-day period, the provisions of
this Section 4.10 shall be null and void ab initio.
Section 4.11. Listing of Underlying Shares. The Company shall
(a) not later than the fifth Business Day following the Closing Date, prepare
and file with the American Stock Exchange (and each other national securities
exchange or market on which the Common Stock is then listed) an additional
shares listing application covering at least 2,229,501 Underlying Shares, (b)
take all steps necessary to cause such shares to be approved for listing on such
exchanges and markets as soon as possible thereafter, and (c) provide to the
Purchaser evidence of such filing and listing, and the Company shall maintain
the listing of its Common Stock on such exchange.
Section 4.12. Purchaser's Rights if Trading in Common Stock is
Suspended or Delisted. In the event that at any time within the three-year
period after the Closing Date trading in the shares of the Common Stock is
suspended on (other than as a result of the suspension of trading in securities
on such market or exchange generally or temporary suspensions pending the
release of material information) or delisted from, the American Stock Exchange,
unless immediately therewith the Common Stock is listed for trading in the
Nasdaq National Market, the New York Stock Exchange or the Nasdaq SmallCap
Market, for more than three Trading Days, at Purchaser's option exercisable by
five Business Days prior written notice to the Company, the Company shall repay
the entire principal amount of then outstanding Convertible Debentures, redeem
all Shares and redeem all then outstanding Underlying Shares then held by
Purchaser, at an aggregate purchase price equal to the sum of (I) the aggregate
outstanding principal amount of Convertible Debentures then held by Purchaser
multiplied by (1) the average Per Share Market Value for the five (5) Trading
Days immediately preceding (a) the day of such notice or (b) the date of payment
in full of the repurchase price calculated under this Section 4.12, whichever is
greater, divided by (2) the Conversion Price on the date of the repurchase
notice, (II) the aggregate of all accrued but unpaid interest and other
non-principal amounts then payable in respect of all Convertible Debentures to
be repaid, (III) the number of Shares then held by the Purchaser multiplied by
the product of (1) the average Per Share Market Value for the five (5) Trading
Days immediately preceding (a) the day of such notice or (b) the date of payment
in full of the redemption price calculated under this Section 4.12, whichever is
greater, multiplied by the Exchange Ratio on the date of the redemption notice,
(IV) the aggregate of all accrued but unpaid dividends and all other amounts
then due and payable on account of all Shares to be redeemed, (V) the number of
Underlying Shares then held by Purchaser multiplied by the average Per Share
Market Value for the five (5) Trading Days immediately preceding (A) the date of
the notice or (B) the date of payment in full by the Company of the repurchase
price
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<PAGE> 17
calculated under this Section 4.12, whichever is greater, and (VI) interest on
the amounts set forth in I - V above accruing from the 5th day after such notice
until the repurchase price under this Section 4.12 is paid in full at the rate
of 15% per annum.
Section 4.13. No Violation of Applicable Law. Notwithstanding
any provision of this Agreement to the contrary, if any repurchase or redemption
of Convertible Debentures, Shares or Underlying Shares otherwise required under
the Transaction Documents would be prohibited by the relevant provisions of the
Delaware General Corporation Law, such repurchase or redemption shall be
effected as soon as it is permitted under such law; provided, however, that,
interest payable by the Company with respect to any such repurchase or
redemption shall continue to accrue in accordance with Section 4.12 during any
such period.
Section 4.14. Redemption Restrictions. Notwithstanding any
provision of this Agreement to the contrary, if any repurchase of Convertible
Debentures or redemption of Shares or Underlying Shares otherwise required under
this Agreement would be prohibited in the absence of consent from any lender of
the Company or of any Subsidiary, or by the holders of any class of securities
of the Company, the Company shall use its best efforts to obtain such consent as
promptly as practicable after the redemption is required. Interest payable by
the Company with respect to any such repurchase or redemption shall continue to
accrue in accordance with Section 4.12 until such consent is obtained. Nothing
contained in this Section shall be construed as a waiver by the Purchaser of any
rights they may have by virtue of any breach of any representation or warranty
of the Company herein as to the absence of any requirement to obtain any such
consent.
Section 4.15. Notice of Breaches. Each of the Company and the
Purchaser shall give prompt written notice to the other of any breach of any
representation, warranty or other agreement contained in this Agreement or in
the Registration Rights Agreement, as well as any events or occurrences arising
after the date hereof and prior to the Closing Date, which could reasonably be
likely to cause any representation or warranty or other agreement of such party,
as the case may be, contained herein or therein to be incorrect or breached as
of such Closing Date. However, no disclosure by any party pursuant to this
Section shall be deemed to cure any breach of any representation, warranty or
other agreement contained herein or in the Registration Rights Agreement.
Neither the Company, any Subsidiary nor the Purchaser will take, or agree to
commit to take, any action that is intended to make any representation or
warranty of the Company or the Purchaser, as the case may be, contained herein
or in the Registration Rights Agreement inaccurate in any respect at the Closing
Date.
Notwithstanding the generality of the foregoing, the Company
shall promptly notify the Purchaser of any notice or claim (written or oral)
that it receives from any lender or by any holder of any class of securities of
the Company to the effect that the consummation of the transactions contemplated
by any of the Transaction Documents violates or would violate any written
agreement or understanding between such lender or such holder and the Company,
and the Company shall promptly furnish by facsimile to the holders of the
Convertible Debentures and holders of Shares a copy of any written statement in
support of, or relating to, such claim or notice.
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<PAGE> 18
Section 4.16. Conversion and Exchange Procedures. Exhibit D
attached hereto sets forth the procedures with respect to the conversion and
exchange, as the case may be, of the Convertible Debentures and the Shares,
including the forms of conversion notice to be provided upon conversion, the
form of exchange notice to be provided upon exchange, instructions as to the
procedures for conversion and exchange, as the case may be, the form of legal
opinion, if necessary, that shall be rendered to the Company's transfer agent
and such other information and instructions as may be reasonably necessary to
enable the Purchaser to exercise their right of conversion or exchange smoothly
and expeditiously.
Section 4.17. Conversion Obligations of the Company. The
Company covenants to convert Convertible Debentures and Shares and exchange
Shares, as the case may be, and to deliver Underlying Shares in accordance with
the terms and conditions and time periods set forth in the Convertible
Debenture, Certificate of Incorporation and Class B Exchange Agreement.
ARTICLE V
MISCELLANEOUS
Section 5.1. Fees and Expenses. Each party shall pay the fees
and expenses of its advisers, counsel, accountants and other experts, if any,
and all other expenses incurred by such party incident to the negotiation,
preparation, execution, delivery and performance of this Agreement, except as
set forth in the Registration Rights Agreement and except that the Company shall
reimburse the Purchaser at the Closing for $12,000 for its legal fees and
disbursements incurred in connection with the transactions contemplated hereby.
The Company shall pay all stamp and other taxes and duties levied in connection
with the issuance of the Convertible Debentures and the Shares (and upon
conversion or exchange thereof, the Underlying Shares) pursuant hereto. The
Purchaser shall be responsible for their own tax liability that may arise as a
result of the investment hereunder or the transactions contemplated by this
Agreement.
Section 5.2. Entire Agreement; Amendments. This Agreement,
together with the Exhibits and Schedules hereto, the Convertible Debentures, the
Class B Exchange Agreement and the Registration Rights Agreement (together with
the respective Exhibits and Schedules thereto), contain the entire understanding
of the parties with respect to the subject matter hereof and supersede all prior
agreements and understandings, oral or written, with respect to such matters.
Section 5.3. Notices. Any and all notices or other
communications or deliveries required or permitted to be provided hereunder
shall be in writing and shall be deemed given and effective on the earliest of
(i) the date of transmission, if such notice or communication is delivered via
facsimile at the facsimile telephone number specified in this Section prior to
4:30 p.m. (New York City time) on a Business Day, (ii) the Business Day after
the date of transmission, if such notice or communication is delivered via
facsimile at the facsimile telephone number specified in the Purchase Agreement
later than 4:30 p.m.
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<PAGE> 19
(New York City time) on any date and earlier than 11:59 p.m. (New York City
time) on such date, (iii) the Business Day following the date of mailing, if
sent by nationally recognized overnight courier service, or (iv) upon actual
receipt by the party to whom such notice is required to be given.
If to the Company: Substance Abuse Technologies, Inc.
4517 N.W. 31st Avenue
Ft. Lauderdale, FL 33309
Facsimile No.: (954) 714-5049
Attn: Chief Executive Officer
With copies to: Gold & Wachtel, LLP
110 East 59th Street
New York, New York 10022
Facsimile No.: (212) 909-9455
Attn: Robert W. Berend
If to the Purchaser: Southbrook International Investments, Ltd
c/o Trippoak Advisors, Inc.
630 Fifth Avenue, Suite 2000
New York, NY 10111
Facsimile No.: (212) 332-3256
Attn: Robert Miller
With copies to: Robinson Silverman Pearce Aronsohn &
Berman LLP
1290 Avenue of the Americas
New York, NY 10104
Facsimile No.: (212) 541-4630
Attn: Eric L. Cohen
or such other address as may be designated in writing hereafter, in the same
manner, by such Person.
Section 5.4. Amendments; Waivers. No provision of this
Agreement may be waived or amended except in a written instrument signed, in the
case of an amendment, by the Company and the Purchaser, or, in the case of a
waiver, by the party against whom enforcement of any such waiver is sought. No
waiver of any default with respect to any provision, condition or requirement of
this Agreement shall be deemed to be a continuing waiver in the future or a
waiver of any other provision, condition or requirement hereof, nor shall any
delay or omission of either party to exercise any right hereunder in any manner
impair the exercise of any such right accruing to it thereafter.
Section 5.5. Headings. The headings herein are for convenience
only, do not constitute a part of this Agreement and shall not be deemed to
limit or affect any of the provisions hereof.
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<PAGE> 20
Section 5.6. Successors and Assigns. This Agreement shall be
binding upon, and inure to the benefit of, the parties and their successors and
permitted assigns. Neither the Company nor Purchaser may assign this Agreement
or any rights or obligations hereunder or under the Convertible Debentures,
Shares, Registration Rights Agreement or Class B Exchange Agreement without the
prior written consent of the other, except that the Purchaser may assign their
rights hereunder and under each of such instruments and agreements to an
Affiliate thereof or to a managed account of either the Purchaser or such
Affiliate, provided, that such assignee demonstrates to the reasonable
satisfaction of the Company its satisfaction of the representations and
warranties set forth in Section 3.2 herein and does not violate Section 5 of the
Securities Act. The assignment by a party of this Agreement or any rights
hereunder shall not affect the obligations of such party under this Agreement.
Section 5.7. No Third-Party Beneficiaries. This Agreement is
intended for the benefit of the parties hereto and their respective permitted
successors and assigns and, other than with respect to permitted assignees under
Section 5.6, is not for the benefit of, nor may any provision hereof be enforced
by, any other person.
Section 5.8. Governing Law. This Agreement shall be governed
by and construed and enforced in accordance with the internal laws of the State
of New York without regard to the principles of conflicts of law thereof.
Section 5.9. Survival. The representations and warranties of
the Company and the Purchaser contained in Article III and the agreements and
covenants of the parties contained in Article IV and this Article V shall
survive the Closing (or any earlier termination of this Agreement) and any
conversion of Convertible Debentures or Shares and exchange of Shares, as the
case may be, hereunder.
Section 5.10. Counterpart Signatures. This Agreement may be
executed in two or more counterparts, all of which when taken together shall be
considered one and the same agreement and shall become effective when
counterparts have been signed by each party and delivered to the other party, it
being understood that both parties need not sign the same counterpart. In the
event that any signature is delivered by facsimile transmission, such signature
shall create a valid and binding obligation of the party executing (or on whose
behalf such signature is executed) the same with the same force and effect as if
such facsimile signature page were an original thereof.
Section 5.11. Publicity. The Company and the Purchaser shall
consult with each other in issuing any press releases or otherwise making public
statements with respect to the transactions contemplated hereby and neither
party shall issue any such press release or otherwise make any such public
statement without the prior written consent of the other, which consent shall
not be unreasonably withheld or delayed, except that no prior consent shall be
required if such disclosure is required by law, in which such case the
disclosing party shall provide the other party with prior notice of such public
statement.
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<PAGE> 21
Section 5.12. Severability. In case any one or more of the
provisions of this Agreement shall be invalid or unenforceable in any respect,
the validity and enforceability of the remaining terms and provisions of this
Agreement shall not in any way be affecting or impaired thereby and the parties
will attempt to agree upon a valid and enforceable provision which shall be a
reasonable substitute therefor, and upon so agreeing, shall incorporate such
substitute provision in this Agreement.
Section 5.13. Remedies. In addition to being entitled to
exercise all rights provided herein or granted by law, including recovery of
damages, the Purchaser will be entitled to specific performance of the
obligations of the Company under this Agreement and the Company will be entitled
to specific performance of the obligations of the Purchaser hereunder with
respect to the subsequent transfer of Convertible Debentures, Shares and the
Underlying Shares. Each of the Company and the Purchaser agree that monetary
damages would not be adequate compensation for any loss incurred by reason of
any breach of its obligations described in the foregoing sentence and hereby
agrees to waive in any action for specific performance of any such obligation
the defense that a remedy at law would be adequate.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK,
SIGNATURE PAGE FOLLOWS]
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<PAGE> 22
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed as of the date first indicated above.
Company:
SUBSTANCE ABUSE TECHNOLOGIES, INC.
By:_________________________________
Name:
Title:
Purchaser:
SOUTHBROOK INTERNATIONAL
INVESTMENTS, LTD
By:_________________________________
Name:
Title:
<PAGE> 23
Schedule 3.1(a)
[To be provided by Company prior to the Closing]
<PAGE> 24
Schedule 3.1(c)
[To be provided by Company prior to the Closing]
<PAGE> 25
Schedule 3.1(f)
[To be provided by Company prior to the Closing]
<PAGE> 1
Exhibit 4(e)(1)
REGISTRATION RIGHTS AGREEMENT
This Registration Rights Agreement (this "Agreement") is made
and entered into as of May 8, 1997, between Substance Abuse Technologies, Inc.,
a Delaware corporation (the "Company") and Southbrook International Investments,
Ltd., a corporation organized and existing under the laws of the British Virgin
Islands (the "Purchaser").
This Agreement is made pursuant to the Convertible Debenture
and Preferred Stock Purchase Agreement, dated as of the date hereof between the
Company and the Purchaser (the "Purchase Agreement").
The Company and the Purchaser hereby agree as follows:
1. Definitions
Capitalized terms used and not otherwise defined herein shall
have the meanings given such terms in the Purchase Agreement. As used in this
Agreement, the following terms shall have the following meanings:
"Advice" shall have meaning set forth in Section 3(o).
"Affiliate" means, with respect to any Person, any other
Person that directly or indirectly controls or is controlled by or under common
control with such Person. For the purposes of this definition, "control," when
used with respect to any Person, means the possession, direct or indirect, of
the power to direct or cause the direction of the management and policies of
such Person, whether through the ownership of voting securities, by contract or
otherwise; and the terms of "affiliated," "controlling" and "controlled" have
meanings correlative to the foregoing.
"Business Day" means any day except Saturday, Sunday and any
day which shall be a legal holiday or a day on which banking institutions in the
state of New York generally are authorized or required by law or other
government actions to close.
"Closing Date" shall have the meaning set forth in the
Purchase Agreement.
"Commission" means the Securities and Exchange Commission.
"Common Stock" means the Company's Common Stock, par value
$.01 per share.
<PAGE> 2
"Debentures" mean the 14% Convertible Debentures due May 8,
2000 purchased by the Purchaser pursuant to the Purchase Agreement.
"Effectiveness Date" means the 120th day following the Closing
Date.
"Effectiveness Period" shall have the meaning set forth in
Section 2(a).
"Exchange Act" means the Securities Exchange Act of 1934, as
amended.
"Filing Date" means July 7, 1997.
"Holder" or "Holders" means the holder or holders, as the case
may be, from time to time of Registrable Securities.
"Indemnified Party" shall have the meaning set forth in
Section 5(c).
"Indemnifying Party" shall have the meaning set forth in
Section 5(c).
"Losses" shall have the meaning set forth in Section 5(a).
"New York Courts" shall have the meaning set forth in Section
7(h).
"Person" means an individual or a corporation, partnership,
trust, incorporated or unincorporated association, joint venture, limited
liability company, joint stock company, government (or an agency or political
subdivision thereof) or other entity of any kind.
"Preferred Stock" means the shares of Class B Preferred Stock,
par value $.01 per share, of the Company issued to the Purchaser pursuant to the
Purchase Agreement.
"Proceeding" means an action, claim, suit, investigation or
proceeding (including, without limitation, an investigation or partial
proceeding, such as a deposition), whether commenced or threatened.
"Prospectus" means the prospectus included in the Registration
Statement (including, without limitation, a prospectus that includes any
information previously omitted from a prospectus filed as part of an effective
registration statement in reliance upon Rule 430A promulgated under the
Securities Act), as amended or supplemented by any prospectus supplement, with
respect to the terms of the offering of any portion of the Registrable
Securities covered by the Registration Statement, and all other amendments and
supplements to the Prospectus, including post-effective amendments, and all
material incorporated by reference or deemed to be incorporated by reference in
such Prospectus.
"Registrable Securities" means the shares of Common Stock
issuable (a) upon conversion of the aggregate outstanding principal amount of
Debentures (b) upon payment of
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<PAGE> 3
interest in respect of the Debentures, (c) upon conversion or exchange, as the
case may be, of all shares of Preferred Stock, (d) upon payment of dividends in
respect of the Preferred Stock and (e) upon exercise of the Common Stock
purchase warrants issued by the Company to Wharton Capital Partners, Ltd. in
connection with the transactions contemplated by the Purchase Agreement;
provided, however that in order to account for the fact that the number of
shares of the Common Stock that are issuable upon conversion of the aggregate
outstanding principal amount of the Debentures and conversion or exchange of the
Preferred Stock, as the case may be, is determined in part upon the market price
of the Common Stock at the time of conversion or exchange, as the case may be,
Registrable Securities shall include (but not be limited to) a number of shares
of the Common Stock equal to no less than the sum of (1) two times the number of
shares of the Common Stock issuable upon (i) conversion in full of the aggregate
principal amount of the Debentures and (ii) conversion and exchange, as the case
may be, in full of the Preferred Stock, assuming such conversion or exchange, as
the case may be, occurred on the Closing Date, (2) the number of shares of the
Common Stock issuable upon payment of interest under the Debentures and
dividends under the Preferred Stock (assuming all such interest and dividends
were paid in shares of the Common Stock) for all such interest and dividends
assuming a one-year period and (3) the number of shares of the Common Stock
issuable upon conversion in full of warrants described above. Notwithstanding
anything herein contained to the contrary, if the actual number of shares of the
Common Stock issuable upon conversion in full of the Debentures and conversion
or exchange, as the case may be, of the Preferred Stock at any time exceeds
twice the number of shares of the Common Stock issuable if such conversion or
exchange, as the case may be occurred on the Closing Date, the term "Registrable
Securities" shall be deemed to include such additional shares of the Common
Stock and the Company shall promptly, but in any case within seven (7) days of
notice of such fact, file one or more additional Registration Statements
covering such additional shares of the Common Stock. The Company shall use its
best efforts to cause such additional Registration Statements to be declared
effective as promptly as possible, but in any event within 60 days after the
date of the notice triggering such requirement.
"Registration Statement" means the registration statement
contemplated by Section 2(a) (and any additional Registration Statements
contemplated in the definition of Registrable Securities), including (in each
case) the Prospectus, amendments and supplements to such registration statement
or Prospectus, including pre- and post-effective amendments, all exhibits
thereto, and all material incorporated by reference or deemed to be incorporated
by reference in such registration statement.
"Rule 144" means Rule 144 promulgated by the Commission
pursuant to the Securities Act, as such Rule may be amended from time to time,
or any similar rule or regulation hereafter adopted by the Commission having
substantially the same effect as such Rule.
"Rule 158" means Rule 158 promulgated by the Commission
pursuant to the Securities Act, as such Rule may be amended from time to time,
or any similar rule or
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regulation hereafter adopted by the Commission having substantially the same
effect as such Rule.
"Rule 415" means Rule 415 promulgated by the Commission
pursuant to the Securities Act, as such Rule may be amended from time to time,
or any similar rule or regulation hereafter adopted by the Commission having
substantially the same effect as such Rule.
"Securities Act" means the Securities Act of 1933, as amended.
"Special Counsel" means any special counsel to the Holders,
for which the Holders will be reimbursed by the Company pursuant to Section 4.
"Underwritten Registration or Underwritten Offering" means a
registration in connection with which securities of the Company are sold to an
underwriter for reoffering to the public pursuant to an effective registration
statement.
2. Shelf Registration
(a) On or prior to the Filing Date, the Company shall prepare
and file with the Commission a "Shelf" Registration Statement covering all
Registrable Securities for an offering to be made on a continuous basis pursuant
to Rule 415. The Registration Statement shall be on Form S-3 (except if
otherwise directed by the Holders in accordance herewith). The Company shall (i)
not permit any securities other than the Registrable Securities to be included
in the Registration Statement and (ii) use its best efforts to cause the
Registration Statement to be declared effective under the Securities Act as
promptly as possible after the filing thereof, but in any event prior to the
Effectiveness Date, and to keep such Registration Statement continuously
effective under the Securities Act until the date which is three years after the
date that such Registration Statement is declared effective by the Commission or
such earlier date when all Registrable Securities covered by such Registration
Statement have been sold or may be sold without volume restrictions pursuant to
Rule 144 as determined by the counsel to the Company pursuant to a written
opinion letter, addressed to the Holders to such effect (the "Effectiveness
Period"); provided, however, that the Company shall not be deemed to have used
its best efforts to keep the Registration Statement effective during the
Effectiveness Period if it voluntarily takes any action that would result in the
Holders not being able to sell the Registrable Securities covered by such
Registration Statement during the Effectiveness Period, unless such action is
required under applicable law or the Company has filed a post-effective
amendment to the Registration Statement and the Commission has not declared it
effective.
(b) If the Holders of a majority of the Registrable Securities
so elect, an offering of Registrable Securities pursuant to the Registration
Statement may be effected in the form of an Underwritten Offering. In such
event, and if the managing underwriters advise the Company and such Holders in
writing that in their opinion the amount of
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Registrable Securities proposed to be sold in such Underwritten Offering exceeds
the amount of Registrable Securities which can be sold in such Underwritten
Offering, there shall be included in such Underwritten Offering the amount of
such Registrable Securities which in the opinion of such managing underwriters
can be sold, and such amount shall be allocated pro rata among the Holders
proposing to sell Registrable Securities in such Underwritten Offering.
(c) If any of the Registrable Securities are to be sold in an
Underwritten Offering, the investment banker or investment bankers and manager
or managers that will administer the offering will be selected by the Holders of
a majority of the Registrable Securities included in such offering. No Holder
may participate in any Underwritten Offering hereunder unless such Person (i)
agrees to sell its Registrable Securities on the basis provided in any
underwriting agreements approved by the Persons entitled hereunder to approve
such arrangements and (ii) completes and executes all questionnaires, powers of
attorney, indemnities, underwriting agreements and other documents required
under the terms of such arrangements.
3. Registration Procedures
In connection with the Company's registration obligations
hereunder, the Company shall:
(a) Prepare and file with the Commission on or prior to the
Filing Date a Registration Statement on Form S-3 (or such other form if directed
by the Holders in connection with an Underwritten Offering hereunder) in
accordance with the method or methods of distribution thereof as specified by
the Holders (except if otherwise directed by the Holders), and cause the
Registration Statement to become effective and remain effective as provided
herein; provided, however, that not less than five (5) Business Days prior to
the filing of the Registration Statement or any related Prospectus or any
amendment or supplement thereto (including any document that would be
incorporated or deemed to be incorporated therein by reference), the Company
shall (i) furnish to the Holders, their Special Counsel and any managing
underwriters, copies of all such documents proposed to be filed, which documents
(other than those incorporated or deemed to be incorporated by reference) will
be subject to the review of such Holders, their Special Counsel and such
managing underwriters, and (ii) cause its officers and directors, counsel and
independent certified public accountants to respond to such inquiries as shall
be necessary, in the opinion of respective counsel to such Holders and such
underwriters, to conduct a reasonable investigation within the meaning of the
Securities Act. The Company shall not file the Registration Statement or any
such Prospectus or any amendments or supplements thereto to which the Holders of
a majority of the Registrable Securities, their Special Counsel, or any managing
underwriters, shall reasonably object within five (5) Business Days of their
receipt thereof.
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<PAGE> 6
(b) (i) Prepare and file with the Commission such amendments,
including post-effective amendments, to the Registration Statement as may be
necessary to keep the Registration Statement continuously effective as to all
Registrable Securities for the Effectiveness Period and prepare and file with
the Commission such additional Registration Statements in order to register for
resale under the Securities Act all of the Registrable Securities; (ii) cause
the related Prospectus to be amended or supplemented by any required Prospectus
supplement, and as so supplemented or amended to be filed pursuant to Rule 424
(or any similar provisions then in force) promulgated under the Securities Act;
(iii) respond as promptly as practicable to any comments received from the
Commission with respect to the Registration Statement or any amendment thereto
and promptly provide the Holders true and complete copies of all correspondence
from and to the Commission relating to the Registration Statement; and (iv)
comply with the provisions of the Securities Act and the Exchange Act with
respect to the disposition of all Registrable Securities covered by the
Registration Statement during the applicable period in accordance with the
intended methods of disposition by the Holders thereof set forth in the
Registration Statement as so amended or in such Prospectus as so supplemented.
(c) Notify the Holders of Registrable Securities to be sold,
their Special Counsel and any managing underwriters immediately (and, in the
case of (i)(A) below, not less than five (5) days prior to such filing) and (if
requested by any such Person) confirm such notice in writing no later than one
(1) Business Day following the day (i)(A) when a Prospectus or any Prospectus
supplement or post-effective amendment to the Registration Statement is proposed
to be filed; (B) when the Commission notifies the Company whether there will be
a "review" of such Registration Statement and whenever the Commission comments
in writing on such Registration Statement and (C) with respect to the
Registration Statement or any post-effective amendment, when the same has become
effective; (ii) of any request by the Commission or any other Federal or state
governmental authority for amendments or supplements to the Registration
Statement or Prospectus or for additional information; (iii) of the issuance by
the Commission of any stop order suspending the effectiveness of the
Registration Statement covering any or all of the Registrable Securities or the
initiation of any Proceedings for that purpose; (iv) if at any time any of the
representations and warranties of the Company contained in any agreement
(including any underwriting agreement) contemplated hereby ceases to be true and
correct in all material respects; (v) of the receipt by the Company of any
notification with respect to the suspension of the qualification or exemption
from qualification of any of the Registrable Securities for sale in any
jurisdiction, or the initiation or threatening of any Proceeding for such
purpose; and (vi) of the occurrence of any event that makes any statement made
in the Registration Statement or Prospectus or any document incorporated or
deemed to be incorporated therein by reference untrue in any material respect or
that requires any revisions to the Registration Statement, Prospectus or other
documents so that, in the case of the Registration Statement or the Prospectus,
as the case may be, it will not contain any untrue statement of a material fact
or omit to state any material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they were
made, not misleading.
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<PAGE> 7
(d) Use its best efforts to avoid the issuance of, or, if
issued, obtain the withdrawal of (i) any order suspending the effectiveness of
the Registration Statement or (ii) any suspension of the qualification (or
exemption from qualification) of any of the Registrable Securities for sale in
any jurisdiction, at the earliest practicable moment.
(e) If requested by any managing underwriter or the Holders of
a majority of the Registrable Securities to be sold in connection with an
Underwritten Offering, (i) promptly incorporate in a Prospectus supplement or
post-effective amendment to the Registration Statement such information as such
managing underwriters and such Holders reasonably agree should be included
therein and (ii) make all required filings of such Prospectus supplement or such
post-effective amendment as soon as practicable after the Company has received
notification of the matters to be incorporated in such Prospectus supplement or
post-effective amendment; provided, however, that the Company shall not be
required to take any action pursuant to this Section 3(e) that would, in the
opinion of counsel for the Company, violate applicable law.
(f) Furnish to each Holder, their Special Counsel and any
managing underwriters, without charge, at least one conformed copy of each
Registration Statement and each amendment thereto, including financial
statements and schedules, all documents incorporated or deemed to be
incorporated therein by reference, and all exhibits to the extent requested by
such Person (including those previously furnished or incorporated by reference)
promptly after the filing of such documents with the Commission.
(g) Promptly deliver to each Holder, their Special Counsel,
and any underwriters, without charge, as many copies of the Prospectus or
Prospectuses (including each form of prospectus) and each amendment or
supplement thereto as such Persons may reasonably request; and the Company
hereby consents to the use of such Prospectus and each amendment or supplement
thereto by each of the selling Holders and any underwriters in connection with
the offering and sale of the Registrable Securities covered by such Prospectus
and any amendment or supplement thereto.
(h) Prior to any public offering of Registrable Securities,
use its best efforts to register or qualify or cooperate with the selling
Holders, any underwriters and their Special Counsel in connection with the
registration or qualification (or exemption from such registration or
qualification) of such Registrable Securities for offer and sale under the
securities or Blue Sky laws of such jurisdictions within the United States as
any Holder or underwriter requests in writing, to keep each such registration or
qualification (or exemption therefrom) effective during the Effectiveness Period
and to do any and all other acts or things necessary or advisable to enable the
disposition in such jurisdictions of the Registrable Securities covered by a
Registration Statement; provided, however, that the Company shall not be
required to qualify generally to do business in any jurisdiction where it is not
then so qualified or to take any action that would subject it to general service
of process in any such jurisdiction where it is not then so subject or subject
the Company to any material tax in any such jurisdiction where it is not then so
subject.
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<PAGE> 8
(i) Cooperate with the Holders and any managing underwriters
to facilitate the timely preparation and delivery of certificates representing
Registrable Securities to be sold, which certificates shall be free of all
restrictive legends, and to enable such Registrable Securities to be in such
denominations and registered in such names as any such managing underwriters or
Holders may request at least two Business Days prior to any sale of Registrable
Securities.
(j) Upon the occurrence of any event contemplated by Section
3(c)(vi), as promptly as practicable, prepare a supplement or amendment,
including a post-effective amendment, to the Registration Statement or a
supplement to the related Prospectus or any document incorporated or deemed to
be incorporated therein by reference, and file any other required document so
that, as thereafter delivered, neither the Registration Statement nor such
Prospectus will contain an untrue statement of a material fact or omit to state
a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading.
(k) Use its best efforts to cause all Registrable Securities
relating to such Registration Statement to be listed on the American Stock
Exchange and any other securities exchange, quotation system, market or
over-the-counter bulletin board, if any, on which similar securities issued by
the Company are then listed as and when required pursuant to the Purchase
Agreement.
(l) Enter into such agreements (including an underwriting
agreement in form, scope and substance as is customary in Underwritten
Offerings) and take all such other actions in connection therewith (including
those reasonably requested by any managing underwriters and the Holders of a
majority of the Registrable Securities being sold) in order to expedite or
facilitate the disposition of such Registrable Securities, and whether or not an
underwriting agreement is entered into, (i) make such representations and
warranties to such Holders and such underwriters as are customarily made by
issuers to underwriters in underwritten public offerings, and confirm the same
if and when requested; (ii) obtain and deliver copies thereof to each Holder and
the managing underwriters, if any, of opinions of counsel to the Company and
updates thereof addressed to each selling Holder and each such underwriter, in
form, scope and substance reasonably satisfactory to any such managing
underwriters and Special Counsel to the selling Holders covering the matters
customarily covered in opinions requested in Underwritten Offerings and such
other matters as may be reasonably requested by such Special Counsel and
underwriters; (iii) immediately prior to the effectiveness of the Registration
Statement, and, in the case of an Underwritten Offering, at the time of delivery
of any Registrable Securities sold pursuant thereto, obtain and deliver copies
to the Holders and the managing underwriters, if any, of "cold comfort" letters
and updates thereof from the independent certified public accountants of the
Company (and, if necessary, any other independent certified public accountants
of any subsidiary of the Company or of any business acquired by the Company for
which financial statements and financial data is, or is required to be, included
in the Registration Statement), addressed to each selling Holder and each of the
underwriters, if any, in form and substance as are
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<PAGE> 9
customary in connection with Underwritten Offerings; (iv) if an underwriting
agreement is entered into, the same shall contain indemnification provisions and
procedures no less favorable to the selling Holders and the underwriters, if
any, than those set forth in Section 6 (or such other provisions and procedures
acceptable to the managing underwriters, if any, and holders of a majority of
Registrable Securities participating in such Underwritten Offering; and (v)
deliver such documents and certificates as may be reasonably requested by the
Holders of a majority of the Registrable Securities being sold, their Special
Counsel and any managing underwriters to evidence the continued validity of the
representations and warranties made pursuant to clause 3(l)(i) above and to
evidence compliance with any customary conditions contained in the underwriting
agreement or other agreement entered into by the Company.
(m) Make available for inspection by the selling Holders, any
representative of such Holders, any underwriter participating in any disposition
of Registrable Securities, and any attorney or accountant retained by such
selling Holders or underwriters, at the offices where normally kept, during
reasonable business hours, all financial and other records, pertinent corporate
documents and properties of the Company and its subsidiaries, and cause the
officers, directors, agents and employees of the Company and its subsidiaries to
supply all information in each case requested by any such Holder,
representative, underwriter, attorney or accountant in connection with the
Registration Statement; provided, however, that any information that is
determined in good faith by the Company in writing to be of a confidential
nature at the time of delivery of such information shall be kept confidential by
such Persons, unless (i) disclosure of such information is required by court or
administrative order or is necessary to respond to inquiries of regulatory
authorities; (ii) disclosure of such information, in the opinion of counsel to
such Person, is required by law; (iii) such information becomes generally
available to the public other than as a result of a disclosure or failure to
safeguard by such Person; or (iv) such information becomes available to such
Person from a source other than the Company and such source is not known by such
Person to be bound by a confidentiality agreement with the Company.
(n) Comply with all applicable rules and regulations of the
Commission and make generally available to its security holders earning
statements satisfying the provisions of Section 11(a) of the Securities Act and
Rule 158 not later than 45 days after the end of any 12-month period (or 90 days
after the end of any 12-month period if such period is a fiscal year) (i)
commencing at the end of any fiscal quarter in which Registrable Securities are
sold to underwriters in a firm commitment or best efforts Underwritten Offering
and (ii) if not sold to underwriters in such an offering, commencing on the
first day of the first fiscal quarter of the Company after the effective date of
the Registration Statement, which statement shall cover said 12-month period, or
end shorter periods as is consistent with the requirements of Rule 158.
The Company may require each selling Holder to furnish to the
Company such information regarding the distribution of such Registrable
Securities as is required by law to be disclosed in the Registration Statement
and the Company may exclude from such
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<PAGE> 10
registration the Registrable Securities of any such Holder who unreasonably
fails to furnish such information within a reasonable time after receiving such
request.
If the Registration Statement refers to any Holder by name or
otherwise as the holder of any securities of the Company, then such Holder shall
have the right to require (i) the inclusion therein of language, in form and
substance reasonably satisfactory to such Holder, to the effect that the
ownership by such Holder of such securities is not to be construed as a
recommendation by such Holder of the investment quality of the Company's
securities covered thereby and that such ownership does not imply that such
Holder will assist in meeting any future financial requirements of the Company,
or (ii) if such reference to such Holder by name or otherwise is not required by
the Securities Act or any similar Federal statute then in force, the deletion of
the reference to such Holder in any amendment or supplement to the Registration
Statement filed or prepared subsequent to the time that such reference ceases to
be required.
The Purchaser covenants and agrees that (i) it will not offer
or sell any Registrable Securities under the Registration Statement until it has
received copies of the Prospectus as then amended or supplemented as
contemplated in Section 3(g) and notice from the Company that such Registration
Statement and any post-effective amendments thereto have become effective as
contemplated by Section 3(c) and (ii) the Purchaser and its officers, directors
or Affiliates, if any, will comply with the prospectus delivery requirements of
the Securities Act as applicable to them in connection with sales of Registrable
Securities pursuant to the Registration Statement.
Each Holder agrees by its acquisition of such Registrable
Securities that, upon receipt of a notice from the Company of the occurrence of
any event of the kind described in Section 3(c)(ii), 3(c)(iii), 3(c)(iv),
3(c)(v) or 3(c)(vi), such Holder will forthwith discontinue disposition of such
Registrable Securities until such Holder's receipt of the copies of the
supplemented Prospectus and/or amended Registration Statement contemplated by
Section 3(j), or until it is advised in writing (the "Advice") by the Company
that the use of the applicable Prospectus may be resumed, and, in either case,
has received copies of any additional or supplemental filings that are
incorporated or deemed to be incorporated by reference in such Prospectus or
Registration Statement.
4. Registration Expenses
(a) All fees and expenses incident to the performance of, or
compliance with, this Agreement by the Company shall be borne by the Company
whether or not the Registration Statement is filed or becomes effective and
whether or not any Registrable Securities are sold pursuant to the Registration
Statement. The fees and expenses referred to in the foregoing sentence shall
include, without limitation, (i) all registration and filing fees (including,
without limitation, fees and expenses (A) with respect to filings required to be
made with the American Stock Exchange and each other securities exchange or
market on which Registrable Securities are required hereunder to be listed and
(B) in compliance with
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<PAGE> 11
state securities or Blue Sky laws (including, without limitation, fees and
disbursements of counsel for the underwriters or Holders in connection with Blue
Sky qualifications of the Registrable Securities and determination of the
eligibility of the Registrable Securities for investment under the laws of such
jurisdictions as the managing underwriters, if any, or the Holders of a majority
of Registrable Securities may designate)), (ii) printing expenses (including,
without limitation, expenses of printing certificates for Registrable Securities
and of printing prospectuses if the printing of prospectuses is requested by the
managing underwriters, if any, or by the holders of a majority of the
Registrable Securities included in the Registration Statement), (iii) messenger,
telephone and delivery expenses, (iv) fees and disbursements of counsel for the
Company and Special Counsel for the Holders, (v) fees and disbursements of all
independent certified public accountants referred to in Section 3(l)(iii)
(including, without limitation, the expenses of any special audit and "cold
comfort" letters required by or incident to such performance), (vi) Securities
Act liability insurance, if the Company so desires such insurance, and (vii)
fees and expenses of all other Persons retained by the Company in connection
with the consummation of the transactions contemplated by this Agreement. In
addition, the Company shall be responsible for all of its internal expenses
incurred in connection with the consummation of the transactions contemplated by
this Agreement (including, without limitation, all salaries and expenses of its
officers and employees performing legal or accounting duties), the expense of
any annual audit, the fees and expenses incurred in connection with the listing
of the Registrable Securities on any securities exchange as required hereunder.
(b) In connection with the Registration Statement, the Company
shall reimburse the Holders for the reasonable fees and disbursements of one
firm of attorneys chosen by the Holders of a majority of the Registrable
Securities.
5. Indemnification
(a) Indemnification by the Company. The Company shall,
notwithstanding any termination of this Agreement and without limitation as to
time, indemnify and hold harmless each Holder, the officers, directors, agents
(including any underwriters retained by such Holder in connection with the offer
and sale of Registrable Securities), brokers (including brokers who offer and
sell Registrable Securities as principal as a result of a pledge or any failure
to perform under a margin call of Common Stock), investment advisors and
employees of each of them, each Person who controls any such Holder (within the
meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act)
and the officers, directors, agents and employees of each such controlling
Person, to the fullest extent permitted by applicable law, from and against any
and all losses, claims, damages, liabilities, costs (including, without
limitation, costs of preparation and attorneys' fees) and expenses
(collectively, "Losses"), as incurred, arising out of, or relating to, any
untrue or alleged untrue statement of a material fact contained in the
Registration Statement, any Prospectus or any form of prospectus or in any
amendment or supplement thereto or in any preliminary prospectus, or arising out
of, or relating to, any omission or alleged omission of a material fact required
to be stated therein or necessary to make the statements therein (in the case of
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<PAGE> 12
any Prospectus or form of prospectus or supplement thereto, in light of the
circumstances under which they were made) not misleading, except to the extent,
but only to the extent, that such untrue statements or omissions are based
solely upon information regarding such Holder furnished in writing to the
Company by or on behalf of such Holder expressly for use therein, which
information was reasonably relied on by the Company for use therein or to the
extent that such information relates to such Holder or such Holder's proposed
method of distribution of Registrable Securities and was reviewed and expressly
approved in writing by such Holder expressly for use in the Registration
Statement, such Prospectus or such form of Prospectus or in any amendment or
supplement thereto. The Company shall notify the Holders promptly of the
institution, threat or assertion of any Proceeding of which the Company is aware
in connection with the transactions contemplated by this Agreement.
(b) Indemnification by Holders. Each Holder shall, severally
and not jointly, indemnify and hold harmless the Company, the directors,
officers, agents and employees, each Person who controls the Company (within the
meaning of Section 15 of the Securities Act and Section 20 of the Exchange Act),
and the directors, officers, agents or employees of such controlling Persons, to
the fullest extent permitted by applicable law, from and against all Losses (as
determined by a court of competent jurisdiction in a final judgment not subject
to appeal or review) arising solely out of, or based solely upon, any untrue
statement of a material fact contained in the Registration Statement, any
Prospectus, or any form of prospectus, or arising solely out of, or based solely
upon, any omission of a material fact required to be stated therein or necessary
to make the statements therein not misleading to the extent, but only to the
extent, that such untrue statement or omission is contained in any information
so furnished in writing by such Holder to the Company specifically for inclusion
in the Registration Statement or such Prospectus and that such information was
reasonably relied upon by the Company for use in the Registration Statement,
such Prospectus or such form of prospectus or to the extent that such
information relates to such Holder or such Holder's proposed method of
distribution of Registrable Securities and was reviewed and expressly approved
in writing by such Holder expressly for use in the Registration Statement, such
Prospectus or such form of Prospectus. In no event shall the liability of any
selling Holder hereunder be greater in amount than the dollar amount of the net
proceeds received by such Holder upon the sale of the Registrable Securities
giving rise to such indemnification obligation.
(c) Conduct of Indemnification Proceedings. If any Proceeding
shall be brought or asserted against any Person entitled to indemnity hereunder
(an "Indemnified Party"), such Indemnified Party promptly shall notify the
Person from whom indemnity is sought (the "Indemnifying Party") in writing, and
the Indemnifying Party shall assume the defense thereof, including the
employment of counsel reasonably satisfactory to the Indemnified Party and the
payment of all fees and expenses incurred in connection with defense thereof;
provided, that the failure of any Indemnified Party to give such notice shall
not relieve the Indemnifying Party of its obligations or liabilities pursuant to
this Agreement, except (and only) to the extent that it shall be finally
determined by a court of competent
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<PAGE> 13
jurisdiction (which determination is not subject to appeal or further review)
that such failure shall have proximately and materially adversely prejudiced the
Indemnifying Party.
An Indemnified Party shall have the right to employ separate
counsel in any such Proceeding and to participate in the defense thereof, but
the fees and expenses of such counsel shall be at the expense of such
Indemnified Party or Parties unless: (1) the Indemnifying Party has agreed to
pay such fees and expenses; or (2) the Indemnifying Party shall have failed
promptly to assume the defense of such Proceeding and to employ counsel
reasonably satisfactory to such Indemnified Party in any such Proceeding; or (3)
the named parties to any such Proceeding (including any impleaded parties)
include both such Indemnified Party and the Indemnifying Party, and such
Indemnified Party shall have been advised by counsel that a conflict of interest
is likely to exist if the same counsel were to represent such Indemnified Party
and the Indemnifying Party (in which case, if such Indemnified Party notifies
the Indemnifying Party in writing that it elects to employ separate counsel at
the expense of the Indemnifying Party, the Indemnifying Party shall not have the
right to assume the defense thereof and such counsel shall be at the expense of
the Indemnifying Party). The Indemnifying Party shall not be liable for any
settlement of any such Proceeding effected without its written consent, which
consent shall not be unreasonably withheld. No Indemnifying Party shall, without
the prior written consent of the Indemnified Party, effect any settlement of any
pending Proceeding in respect of which any Indemnified Party is a party, unless
such settlement includes an unconditional release of such Indemnified Party from
all liability on claims that are the subject matter of such Proceeding.
All fees and expenses of the Indemnified Party (including
reasonable fees and expenses to the extent incurred in connection with
investigating or preparing to defend such Proceeding in a manner not
inconsistent with this Section) shall be paid to the Indemnified Party, as
incurred, within 10 Business Days of written notice thereof to the Indemnifying
Party (regardless of whether it is ultimately determined that an Indemnified
Party is not entitled to indemnification hereunder; provided, that the
Indemnifying Party may require such Indemnified Party to undertake to reimburse
all such fees and expenses to the extent it is finally judicially determined
that such Indemnified Party is not entitled to indemnification hereunder).
(d) Contribution. If a claim for indemnification under Section
5(a) or 5(b) is unavailable to an Indemnified Party because of a failure or
refusal of a governmental authority to enforce such indemnification in
accordance with its terms (by reason of public policy or otherwise), then each
Indemnifying Party, in lieu of indemnifying such Indemnified Party, shall
contribute to the amount paid or payable by such Indemnified Party as a result
of such Losses, in such proportion as is appropriate to reflect the relative
fault of the Indemnifying Party and Indemnified Party in connection with the
actions, statements or omissions that resulted in such Losses as well as any
other relevant equitable considerations. The relative fault of such Indemnifying
Party and Indemnified Party shall be determined by reference to, among other
things, whether any action in question, including any untrue or alleged untrue
statement of a material fact or omission or alleged omission of a material fact,
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<PAGE> 14
has been taken or made by, or relates to information supplied by, such
Indemnifying Party or Indemnified Party, and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
action, statement or omission. The amount paid or payable by a party as a result
of any Losses shall be deemed to include, subject to the limitations set forth
in Section 5(c), any attorneys' or other fees or expenses incurred by such party
in connection with any Proceeding to the extent such party would have been
indemnified for such fees or expenses if the indemnification provided for in
this Section was available to such party in accordance with its terms.
The parties hereto agree that it would not be just and
equitable if contribution pursuant to this Section 5(d) were determined by pro
rata allocation or by any other method of allocation that does not take into
account the equitable considerations referred to in the immediately preceding
paragraph. Notwithstanding the provisions of this Section 5(d), the Purchaser
shall not be required to contribute, in the aggregate, any amount in excess of
the amount by which the proceeds actually received by the Purchaser from the
sale of the Registrable Securities subject to the Proceeding exceeds the amount
of any damages that the Purchaser has otherwise been required to pay by reason
of such untrue or alleged untrue statement or omission or alleged omission. No
Person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Securities Act) shall be entitled to contribution from any Person
who was not guilty of such fraudulent misrepresentation.
The indemnity and contribution agreements contained in this
Section are in addition to any liability that the Indemnifying Parties may have
to the Indemnified Parties.
6. Rule 144
The Company shall file the reports required to be filed by it
under the Exchange Act in a timely manner and, if at any time the Company is not
required to file such reports, they will, upon the request of any Holder, make
publicly available other information so long as necessary to permit sales of its
securities pursuant to Rule 144. The Company further covenants that it will take
such further action as any Holder may reasonably request, all to the extent
required from time to time to enable such Holder to sell Registrable Securities
without registration under the Securities Act within the limitation of the
exemptions provided by Rule 144. Upon the request of any Holder, the Company
shall deliver to such Holder a written certification of a duly authorized
officer as to whether it has complied with such requirements.
7. Miscellaneous
(a) Remedies. In the event of a breach by the Company or by a
Holder, of any of their obligations under this Agreement, each Holder or the
Company, as the case may be, in addition to being entitled to exercise all
rights granted by law and under this Agreement, including recovery of damages,
will be entitled to specific performance of its rights under this Agreement. The
Company and each Holder agree that monetary damages
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<PAGE> 15
would not provide adequate compensation for any losses incurred by reason of a
breach by it of any of the provisions of this Agreement and hereby further
agrees that, in the event of any action for specific performance in respect of
such breach, it shall waive the defense that a remedy at law would be adequate.
(b) No Inconsistent Agreements. Except as and to the extent
specifically set forth in Schedule 7(b) attached hereto, neither the Company nor
any of its subsidiaries has, as of the date hereof, nor shall the Company or any
of its subsidiaries, on or after the date of this Agreement, enter into any
agreement with respect to its securities that is inconsistent with the rights
granted to the Holders in this Agreement or otherwise conflicts with the
provisions hereof. Except and to the extent specifically set forth on Schedule
7(b) attached hereto, neither the Company nor any of its subsidiaries has
previously entered into any agreement granting any registration rights with
respect to any of its securities to any Person. Without limiting the generality
of the foregoing, without the written consent of the Holders of a majority of
the then outstanding Registrable Securities, the Company shall not grant to any
Person the right to request the Company to register any securities of the
Company under the Securities Act unless the rights so granted are subject in all
respects to the prior rights in full of the Holders set forth herein, and are
not otherwise in conflict or inconsistent with the provisions of this Agreement.
(c) No Piggyback on Registrations. Neither the Company nor any
of its security holders (other than the Holders in such capacity pursuant
hereto) may include securities of the Company in the Registration Statement
other than the Registrable Securities, and the Company shall not enter into any
agreement providing any such right to any of its securityholders.
(d) Piggy-Back Registrations. If at any time the Company shall
determine to prepare and file with the Commission a registration statement
relating to an offering for its own account or the account of others under the
Securities Act of any of its equity securities, other than on Form S-4 or Form
S-8 (each as promulgated under the Securities Act) or their then equivalents
relating to equity securities to be issued solely in connection with any
acquisition of any entity or business or equity securities issuable in
connection with stock option or other employee benefit plans, the Company shall
send to each holder of Registrable Securities written notice of such
determination and, if within twenty (20) days after receipt of such notice, any
such holder shall so request in writing, the Company shall include in such
registration statement all or any part of the Registrable Securities such holder
requests to be registered, except that if, in connection with any Underwritten
Offering for the account of the Company the managing underwriter(s) thereof
shall impose a limitation on the number of shares of Common Stock which may be
included in the registration statement because, in such underwriter(s)'
judgment, such limitation is necessary to effect an orderly public distribution
of securities covered thereby, then the Company shall be obligated to include in
such registration statement only such limited portion of the Registrable
Securities for to which such holder has requested inclusion hereunder. Any
exclusion of Registrable Securities shall be made pro rata among the holders
seeking to include Registrable Securities,
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<PAGE> 16
in proportion to the number of Registrable Securities sought to be included by
such holders; provided, however, that the Company shall not exclude any
Registrable Securities unless the Company has first excluded all outstanding
securities the holders of which are not entitled by right to inclusion of
securities in such registration statement; and provided, further, however, that,
after giving effect to the immediately preceding proviso, any exclusion of
Registrable Securities shall be made pro rata with holders of other securities
having the right to include such securities in such registration statement. No
right to registration of Registrable Securities under this Section shall be
construed to limit any registration otherwise required hereunder.
(e) Amendments and Waivers. The provisions of this Agreement,
including the provisions of this sentence, may not be amended, modified or
supplemented, and waivers or consents to departures from the provisions hereof
may not be given, unless the same shall be in writing and signed by the Company
and the Holders of at least a majority of the then outstanding Registrable
Securities; provided, however, that, for the purposes of this sentence,
Registrable Securities that are owned, directly or indirectly, by the Company,
or an Affiliate of the Company are not deemed outstanding. Notwithstanding the
foregoing, a waiver or consent to depart from the provisions hereof with respect
to a matter that relates exclusively to the rights of Holders and that does not
directly or indirectly affect the rights of other Holders may be given by
Holders of at least a majority of the Registrable Securities to which such
waiver or consent relates; provided, however, that the provisions of this
sentence may not be amended, modified, or supplemented except in accordance with
the provisions of the immediately preceding sentence.
(f) Notices. Any and all notices or other communications or
deliveries required or permitted to be provided hereunder shall be in writing
and shall be deemed given and effective on the earliest of (i) the date of
transmission, if such notice or communication is delivered via facsimile at the
facsimile telephone number specified in this Section prior to 4:30 p.m. (New
York City time) on a Business Day, (ii) the Business Day after the date of
transmission, if such notice or communication is delivered via facsimile at the
facsimile telephone number specified in the Purchase Agreement later than 4:30
p.m. (New York City time) on any date and earlier than 11:59 p.m. (New York City
time) on such date, (iii) the Business Day following the date of mailing, if
sent by nationally recognized overnight courier service, or (iv) upon actual
receipt by the party to whom such notice is required to be given.
If to the Company: Substance Abuse Technologies, Inc.
4517 N.W. 31st Avenue
Ft. Lauderdale, FL 33309
Facsimile No.: (954) 714-5049
With copies to: Gold & Wachtel, LLP
110 East 59th Street
New York, NY 10022
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<PAGE> 17
Facsimile No.: (212) 371-0320
Attention: Robert W. Berend
If to Purchaser: Southbrook International Investments, Ltd.
c/o Trippoak Advisors, Inc.
630 Fifth Avenue, Suite 2000
New York, NY 10111
Facsimile No.: (212) 332-3256
with copies to: Robinson Silverman Pearce
Aronsohn & Berman LLP
1290 Avenue of the Americas
New York, NY 10104
Facsimile No.: (212) 541-4630
Attn: Eric L. Cohen
If to any other Person who is then the registered Holder:
To the address of such Holder as it
appears in the stock transfer books or
Debenture Register of the Company
or such other address as may be designated in writing hereafter, in the same
manner, by such Person.
(g) Successors and Assigns. This Agreement shall inure to the
benefit of, and be binding upon, the successors and permitted assigns of each of
the parties and shall inure to the benefit of each Holder. The Company may not
assign its rights or obligations hereunder without the prior written consent of
each Holder. The Purchaser may assign its rights hereunder in the manner and to
the Persons as permitted under the Purchase Agreement.
(h) Counterparts. This Agreement may be executed in any number
of counterparts, each of which when so executed shall be deemed to be an
original and, all of which taken together shall constitute one and the same
Agreement. In the event that any signature is delivered by facsimile
transmission, such signature shall create a valid binding obligation of the
party executing (or on whose behalf such signature is executed) the same with
the same force and effect as if such facsimile signature were the original
thereof.
(i) Governing Law; Submission to Jurisdiction;. This Agreement
shall be governed by and construed in accordance with the laws of the State of
New York, without regard to principles of conflicts of law. The Company hereby
irrevocably submits to the jurisdiction of any New York state court sitting in
the Borough of Manhattan in the City of
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<PAGE> 18
New York or any federal court sitting in the Borough of Manhattan in the City of
New York (collectively, the "New York") in respect of any Proceeding arising out
of or relating to this Agreement, and irrevocably accepts for itself and in
respect of its property, generally and unconditionally, jurisdiction of the New
York Courts. The Company irrevocably waives to the fullest extent it may
effectively do so under applicable law any objection that it may now or
hereafter have to the laying of the venue of any such Proceeding brought in any
New York Court and any claim that any such Proceeding brought in any New York
Court has been brought in an inconvenient forum. Nothing herein shall affect the
right of any Holder to serve process in any manner permitted by law or to
commence legal proceedings or otherwise proceed against the company in any other
jurisdiction.
(j) Cumulative Remedies. The remedies provided herein are
cumulative and not exclusive of any remedies provided by law.
(k) Severability. If any term, provision, covenant or
restriction of this Agreement is held by a court of competent jurisdiction to be
invalid, illegal, void or unenforceable, the remainder of the terms, provisions,
covenants and restrictions set forth herein shall remain in full force and
effect and shall in no way be affected, impaired or invalidated, and the parties
hereto shall use their reasonable efforts to find and employ an alternative
means to achieve the same or substantially the same result as that contemplated
by such term, provision, covenant or restriction. It is hereby stipulated and
declared to be the intention of the parties that they would have executed the
remaining terms, provisions, covenants and restrictions without including any of
such that may be hereafter declared invalid, illegal, void or unenforceable.
(l) Headings. The headings in this Agreement are for
convenience of reference only and shall not limit or otherwise affect the
meaning hereof.
(m) Shares Held by The Company and its Affiliates. Whenever
the consent or approval of Holders of a specified percentage of Registrable
Securities is required hereunder, Registrable Securities held by the Company or
its Affiliates (other than the Purchaser or transferees or successors or assigns
thereof if such Persons are deemed to be Affiliates solely by reason of their
holdings of such Registrable Securities) shall not be counted in determining
whether such consent or approval was given by the Holders of such required
percentage.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK.
SIGNATURE PAGE FOLLOWS]
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<PAGE> 19
IN WITNESS WHEREOF, the parties have executed this Agreement
as of the date first written above.
SUBSTANCE ABUSE TECHNOLOGIES, INC.
By: _____________________________
Name:
Title:
SOUTHBROOK INTERNATIONAL
INVESTMENTS, LTD.
By: _____________________________
Name:
Title:
<PAGE> 1
Exhibit 4(e)(2)
CLASS B EXCHANGE AGREEMENT
This CLASS B EXCHANGE AGREEMENT, dated as of May 8, 1997 (this
"Agreement"), is made between Substance Abuse Technologies, Inc., a Delaware
corporation (the "Company"), and Southbrook International Investments, Ltd., a
corporation organized and existing under the laws of the British Virgin Islands
(the "Purchaser").
WHEREAS, concurrently with the execution of this Agreement,
the Company and the Purchasers are entering into a Convertible Debenture and
Preferred Stock Purchase Agreement (the "Purchase Agreement"), pursuant to
which, among other things, the Company will issue and sell to the Purchaser, and
the Purchaser will buy, an aggregate principal amount of the Company's 14%
Senior Subordinated Convertible Debentures due May 8, 2000 (the "Convertible
Debentures") and shares of the Company's Class B Preferred Stock, par value $.01
per share (the "Preferred Stock"); and
WHEREAS, the Company and the Purchaser desire to provide the
Purchaser with the option to exchange shares of the Preferred Stock into shares
of the Company's Common Stock, par value $.01 per share (the "Common Stock"),
and to clarify and amplify certain terms of the Preferred Stock;
NOW, THEREFORE, for good and value consideration, the receipt
and sufficiency of which are hereby acknowledged, the Company and the Purchaser
hereby agree as follows:
Section 1. Dividends.
(a) Holders of the Preferred Stock shall be entitled to
receive, when and as declared by the Board of Directors out of funds legally
available therefor, and the Company shall pay, cumulative dividends at the rate
per share (as a percentage of the Stated Value per share) equal to 14% per
annum, payable, in cash or shares of Common Stock at the option of the Company,
semi-annually in arrears, but in no event later than the applicable Exchange
Date (as hereinafter defined). Dividends on the Preferred Stock shall be
calculated on the basis of a 360-day year, shall accrue daily commencing the
Original Issue Date (as defined in Section 6), and shall be deemed to accrue on
such date whether or not earned or declared and whether or not there are
profits, surplus or other funds of the Company legally available for the payment
of dividends. The party that holds the Preferred Stock of record on an
applicable record date for any dividend payment will be entitled to receive such
dividend payment and any other accrued and unpaid dividends which accrued prior
to such dividend payment date, without regard to any sale or disposition of such
Preferred Stock subsequent to the applicable record date but prior to the
applicable dividend payment date. Except as otherwise provided herein, if at any
time the Company pays less than the total amount of dividends then accrued on
account of the Preferred Stock, such payment shall be distributed ratably among
the holders of the Preferred Stock based upon the number of shares held by
<PAGE> 2
each holder. Payment of dividends on the Preferred Stock is further subject to
the provisions of Section 4(a)(ii).
(b) Notwithstanding anything to the contrary contained herein,
the Company may not issue shares of Common Stock in payment of dividends (and
must deliver cash in respect thereof) on the Preferred Stock if:
(i) the number of shares of Common Stock at the time
authorized, unissued and unreserved for all purposes, or held as treasury stock,
is insufficient to issue such dividends in shares of Common Stock;
(ii) such shares of Common Stock are not registered for
resale pursuant to an effective registration statement that names the recipient
of such dividend as a selling stockholder thereunder and such shares may not be
sold without volume restrictions pursuant to Rule 144 as determined by counsel
to the Company and set forth in a written opinion letter, addressed to the
recipient of such dividend, in form and substance acceptable to such recipient;
(iii) such shares of Common Stock are not listed on the
American Stock Exchange (or the Nasdaq National Market, Nasdaq SmallCap Market
or The New York Stock Exchange) and any other exchange or quotation system on
which the Common Stock is then listed for trading; or
(iv) the issuance of such shares would result in the
recipient thereof beneficially owning, as determined in accordance with Rule
13d-3 promulgated under the Securities Exchange Act of 1934, as amended, more
than 4.9% of the issued and outstanding shares of Common Stock.
(c) So long as any Preferred Stock shall remain outstanding,
neither the Company nor any subsidiary thereof shall redeem, purchase or
otherwise acquire, directly or indirectly any Junior Securities (as defined in
Section 6), nor shall the Company, directly or indirectly, pay or declare any
dividend or make any distribution (other than a dividend or distribution
described in Section 4) upon, nor shall any distribution be made in respect of,
any Junior Securities, nor shall any monies be set aside for or applied to the
purchase or redemption (through a sinking fund or otherwise) of any Junior
Securities unless all accrued and unpaid dividends on the Preferred Stock for
all past dividend periods shall have been paid.
Section 2. Voting Rights. Except as otherwise provided herein
and as otherwise required by law, the Preferred Stock shall have no voting
rights. However, so long as any shares of Preferred Stock are outstanding, the
Company shall not, without the affirmative vote of the holders of at least 80%
of the shares of the Preferred Stock then outstanding, (a) alter or change
adversely the powers, preferences or rights given to the Preferred Stock, (b)
issue any shares of the Company's Class A Preferred Stock, par value
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<PAGE> 3
$.01 per share, or (c) authorize or create any class of stock ranking as to
dividends or distribution of assets upon a Liquidation (as defined in Section 3)
senior to, prior to or pari passu with the Preferred Stock.
Section 3. Liquidation. Upon any liquidation, dissolution or
winding-up of the Company, whether voluntary or involuntary (a "Liquidation"),
the holders of Preferred Stock shall be entitled to receive out of the assets of
the Company, whether such assets are capital or surplus, for each share of
Preferred Stock an amount equal to $4.00 per share (the "Stated Value"), plus
all accrued but unpaid dividends per share, whether declared or not, before any
distribution or payment shall be made to the holders of any Junior Securities,
and if the assets of the Company shall be insufficient to pay in full such
amounts, then the entire assets to be distributed to the holders of Preferred
Stock shall be distributed among the holders of Preferred Stock ratably in
accordance with the respective amounts that would be payable on such shares if
all amounts payable thereon were paid in full. A sale, conveyance or disposition
of all or substantially all of the assets of the Company or the effectuation by
the Company of a transaction or series of related transactions in which more
than 50% of the voting power of the Company is disposed of, or a consolidation
or merger of the Company with or into any other company or companies shall not
be treated as a Liquidation, but instead shall be subject to the provisions of
Section 4(b)(vii). The Company shall mail written notice of any such
Liquidation, not less than 60 days prior to the payment date stated therein, to
each record holder of Preferred Stock.
Section 4. Exchange.
(a)(i) Each share of Preferred Stock shall be exchangeable
into shares of Common Stock (subject to reduction pursuant to Section 4(a)(ii)
below and Section 4.10 of the Purchase Agreement) at the option of the holder in
whole or in part at any time after the earlier to occur of (A) the 120th day
after the Original Issue Date and (B) the date the Securities and Exchange
Commission (the "Commission") declares effective under the Securities Act of
1933, as amended (the "Securities Act"), a registration statement (the
"Underlying Shares Registration Statement") covering the resale of the shares of
Common Stock issuable upon exchange of the Preferred Stock and dividends payable
in respect thereof to the extent paid in shares of Common Stock (collectively,
the "Underlying Shares"). The holder shall effect exchanges hereunder by
surrendering the certificates representing the shares of Preferred Stock to be
exchanged to the Company, together with the form of notice attached hereto as
Exhibit A (the "Exchange Notice"). Each Exchange Notice shall specify the number
of shares of Preferred Stock to be exchanged and the date on which such exchange
is to be effected, which date may not be prior to the date the holder delivers
such Exchange Notice by facsimile (the "Exchange Date"). If no Exchange Date is
specified in an Exchange Notice, the Exchange Date shall be the date that the
Exchange Notice is deemed delivered pursuant to Section 7(b). Subject to
Sections 4(a)(ii) and 4(b) hereof and Section 4.10 of the Purchase Agreement,
each Exchange Notice, once given, shall be irrevocable. If the holder is
exchanging less than all of the shares of Preferred Stock represented by the
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<PAGE> 4
stock certificates tendered by the holder with the Exchange Notice, or if an
exchange hereunder cannot be effected in full for any reason, the Company shall
honor such exchange to the extent permissible and shall promptly deliver to such
holder (in the manner and within the time set forth in Section 4(b)) a new stock
certificate representing the shares of Preferred Stock as have not been
exchanged.
(ii) Certain Regulatory Approval. If on the Exchange Date
applicable to any exchange under this Section 4(a), (A) the Common Stock is then
listed for trading on the American Stock Exchange or the Nasdaq National Market
or, if the rules of the Nasdaq Stock Market are hereafter amended to extend Rule
4460(i) promulgated thereby (or any successor or replacement provision thereof)
to the Nasdaq SmallCap Market and the Common Stock is then listed for trading on
such market, the Nasdaq SmallCap Market, (B) the Exchange Price then in effect
is such that the aggregate number of shares of the Common Stock that would then
be issuable upon exchange of all of the then outstanding shares of Preferred
Stock, together with any shares of the Common Stock previously issued upon
exchange of Preferred Stock and upon conversion of Convertible Debentures and in
respect of payment of dividends hereunder and interest on the Convertible
Debentures, would equal or exceed 20% of the number of shares of the Common
Stock outstanding on the Original Issue Date (the "Issuable Maximum"), and (C)
the Company has not previously obtained the Stockholder Approval (as defined
below), then the Company shall issue to the holder requesting to exchange shares
of Preferred Stock under this Agreement the Issuable Maximum and, with respect
to any shares of the Common Stock that otherwise would have been issuable to
such holder in respect of the Exchange Notice at issue or in respect of payment
of interest hereunder in excess of the Issuable Maximum, the holder shall have
the option to require the Company to either (1) as promptly as possible, but in
no event later than 90 days after such Exchange Date, convene a meeting of the
holders of the Common Stock and use its best efforts to obtain the Stockholder
Approval or (2) redeem, from funds legally available therefor at the time of
such redemption, the balance of the Preferred Stock subject to such Exchange
Notice and all other shares of Preferred Stock then held by the tendering holder
at a price per share equal to the sum of (A) the product of (i) the average Per
Share Market Value for the five (5) Trading Days immediately preceding (1) the
Exchange Date or (2) the date of payment in full by the Company of such
redemption price, whichever is greater, and (ii) the Exchange Ratio calculated
on the Exchange Date, plus (B) the aggregate of all then accrued but unpaid
dividends and all other amounts then due and payable on account of such share;
provided, however, that if the holder has requested that the Company obtain
Stockholder Approval under paragraph (1) above and the Company fails for any
reason to obtain such Stockholder Approval within the time period set forth in
(1) above, the Company shall be obligated to redeem the Preferred Stock in
accordance with the provisions of paragraph (2) above, and in such case the
interest contemplated by the immediately succeeding sentence shall be deemed to
accrue from the Exchange Date. If the holder has requested that the Company
redeem shares of Preferred Stock pursuant to this Section and the Company fails
for any reason to pay the redemption price under (2) above within seven days
after the Exchange Date, the Company will pay interest on such redemption price
at a rate of 15% per annum to the exchanging holder of Preferred Stock,
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<PAGE> 5
accruing from the Exchange Date until the redemption price plus any accrued
interest thereon is paid in full. The entire redemption price, including
interest thereon, shall be paid in cash. "Stockholder Approval" means the
approval by a majority of the total votes cast on the proposal, in person or by
proxy, at a meeting of the stockholders of the Company held in accordance with
the Company's Certificate of Incorporation and by-laws, of the issuance by the
Company of shares of the Common Stock exceeding the Issuable Maximum as a
consequence of the exchange of shares of Preferred Stock into the Common Stock
at a price less than the greater of the book or market value on the Original
Issue Date as and to the extent required pursuant to Rule 713 of the American
Stock Exchange or Rule 4460(i) of the Nasdaq Stock Market (or any successor or
replacement provision thereof), as applicable.
(b) Not later than three Trading Days after the Exchange Date,
the Company will deliver to the holder (i) a certificate or certificates which
shall be free of restrictive legends and trading restrictions (other than those
required by Section 4.1(b) of the Purchase Agreement) representing the number of
shares of the Common Stock being acquired upon the exchange of shares of
Preferred Stock (subject to reduction pursuant to Section 4(a)(ii) hereof and
Section 4.10 of the Purchase Agreement), (ii) certificates representing the
shares of Preferred Stock tendered for such exchange with the Exchange Notice
and not exchanged; (iii) a bank check in the amount of all accrued and unpaid
dividends on such shares of Preferred Stock (if the Company has elected to pay
accrued dividends in cash), together with all other amounts then due and payable
in accordance with the terms hereof, from funds legally available therefor, and
(iv) if the Company has elected to pay accrued and unpaid dividends on such
shares of Preferred Stock in shares of the Common Stock, certificates, which
shall be free of restrictive legends and trading restrictions (other than those
required by Section 4.1(b) of the Purchase Agreement), representing such number
of shares of the Common Stock as equals such dividends divided by the average
Per Share Market Value for the five trading Days immediately preceding the
Exchange Date; provided, however, that the Company shall not be obligated to
issue certificates evidencing the shares of the Common Stock issuable upon
exchange of any shares of Preferred Stock until certificates representing the
shares of Preferred Stock to exchanged are either delivered for exchange to the
Company or any transfer agent for the Preferred Stock or the Common Stock, or
the tendering holder notifies the Company that such certificates have been lost,
stolen or destroyed and provides a bond (or other adequate security) reasonably
satisfactory to the Company to indemnify the Company from any loss incurred by
it in connection therewith. The Company shall, upon request of the holder, use
its best efforts to deliver any certificate or certificates required to be
delivered by the Company under this Section electronically through the
Depository Trust Corporation or another established clearing corporation
performing similar functions. If in the case of any Exchange Notice such
certificate or certificates, including for purposes hereof, certificates
representing shares of the Common Stock to be issued on the Exchange Date on
account of accrued but unpaid dividends hereunder, are not delivered to or as
directed by the applicable holder by the third Trading Day after the Exchange
Date, the holder shall be entitled by written notice to the Company at any time
on or before its receipt of any stock certificate or certificates thereafter, to
rescind such exchange, in which event the Company shall immediately return
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<PAGE> 6
the certificates representing the shares of Preferred Stock tendered for
exchange. If the Company fails to deliver to the holder such certificate or
certificates pursuant to this Section, including for purposes hereof,
certificates representing shares of the Common Stock to be issued on the
Exchange Date on account of accrued but unpaid dividends hereunder, prior to the
fifth Trading Day after the Exchange Date, the Company shall pay to such holder
$1,500 in, at the option of the holder, cash or shares of Common Stock equal to
$1,500 divided by the average Per Share Market Value for the five trading Days
immediately preceding the Exchange Date or the date prior to the date of
delivery of such shares (whichever is less), as liquidated damages and not as a
penalty, for each day after such fifth Trading Day until such certificates are
delivered. If the Company fails to deliver to the holder any stock certificate
or certificates pursuant to this Section prior to the 20th day after the
Exchange Date, the Company shall, at the holder's option (i) redeem, from funds
legally available therefor at the time of such redemption, all of the shares of
Preferred Stock then held by the tendering holder (including the shares of
Preferred Stock tendered for and not exchanged by the Company hereunder), and
(ii) pay all accrued but unpaid dividends on account of the shares of Preferred
Stock for which the Company shall have failed to issue the Common Stock
certificates hereunder, in cash. The redemption price per share shall be equal
to the sum of (A) the product of (i) the average Per Share Market Value for the
five (5) Trading Days immediately preceding (1) the Exchange Date or (2) the
date of payment in full by the Company of such redemption price, whichever is
greater, and (ii) the Exchange Ratio calculated on the Exchange Date, plus (B)
the aggregate of all then accrued but unpaid dividends and all other amounts
then due and payable on account of such share. If the holder has requested that
the Company redeem shares of Preferred Stock pursuant to this Section and the
Company fails for any reason to pay the redemption price under (2) above within
seven days after such notice is deemed delivered pursuant to Section 7(b), the
Company will pay interest on the redemption price at a rate of 15% per annum, in
cash to such holder, accruing from such seventh day until the redemption price
and any accrued interest thereon is paid in full.
(c)(i) The exchange price (the "Exchange Price") in effect on
any Exchange Date shall be the lesser of (a) the average Per Share Market Value
for the five (5) Trading Days immediately preceding the Original Issue Date (the
"Initial Exchange Price") or (b) 85% of the average Per Share Market Value for
the five (5) Trading Days immediately preceding the Exchange Date; provided
that, (a) if the Underlying Shares Registration Statement is not filed on or
prior to July 7, 1997, or (b) the Company fails to file with the Commission a
request for acceleration in accordance with Rule 12d1-2 promulgated under the
Securities Exchange Act of 1934, as amended, within five (5) days of the date
that the Company is notified (orally or in writing, whichever is earlier) by the
Commission that an Underlying Shares Registration Statement will not be
"reviewed" or is not subject to further review or comment by the Commission, or
(c) if the Underlying Shares Registration Statement is not declared effective by
the Commission on or prior to the 120th day after the Original Issue Date (which
period shall be extended to 150 days after the Original Issued Date in the event
that the Commission notifies the Company that the Underlying Shares Registration
Statement can not be filed on Form S-3 promulgated under the Securities Act
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<PAGE> 7
solely because the shares of Preferred Stock are convertible prior to the 180th
day after the Original Issue Date), or (d) if such Underlying Shares
Registration Statement is filed with and declared effective by the Commission
but thereafter ceases to be effective as to all Registrable Securities (as such
term is defined in the Registration Rights Agreement) at any time prior to the
expiration of the "Effectiveness Period" (as such term as defined in the
Registration Rights Agreement), without being succeeded within 10 Business Days
by a subsequent Underlying Shares Registration Statement filed with and declared
effective by the Commission, or (e) if trading in the Common Stock shall be
suspended for any reason for more than three Trading Days, or (f) if the
exchange rights of the holders of shares of preferred Stock hereunder are
suspended for any reason (any such failure being referred to as an "Event," and
for purposes of clauses (a), (c) and (f) the date on which such Event occurs, or
for purposes of clause (b) the date on which such five (5) days period is
exceeded, or for purposes of clause (d) the date which such 10 Business
Day-period is exceeded, or for purposes of clause (e) the date on which such
three Trading Day period is exceeded, being referred to as "Event Date"), the
Exchange Price shall be decreased by 2.5% each month (i.e., 82.5% as of the
Event Date and 80% as of the one month anniversary of the Event Date) until the
earlier to occur of the second month anniversary after the Event Date and such
time as the applicable Event is cured. Commencing the second month anniversary
after the Event Date, at the option of each holder for each applicable monthly
period either (a) the Company shall pay to the holders of the Preferred Stock
2.5% of the aggregate Stated Value of the Preferred Stock then held by such
holder (each holder being entitled to receive such portion of such amount as
equals its pro rata portion of the shares of Preferred Stock then outstanding),
in cash or (b) the Exchange Price shall be decreased by 2.5% for each additional
such month (to be effective in full on the monthly applicable Event Date) as
liquidated damages, and not as a penalty on the first day of each monthly
anniversary of the Event Date in either case until such time as the applicable
Event is cured. Any decrease in the Exchange Price pursuant to this Section
shall remain in effect notwithstanding the fact that the Event causing such
decrease has been subsequently cured and further monthly decreases have ceased.
The provisions of this Section are not exclusive and shall in no way limit the
Company's obligations under the Registration Rights Agreement. Notwithstanding
anything to the contrary set forth herein, the Company may not, without the
prior written consent of the holders, pay liquidated damages hereunder in cash
unless it shall have received the prior written consent of all lenders, debt
holders or holders of any class of securities of the Company or its Affiliates
that have the right to require such consent or to subordinate any such cash
payment, which consent shall provide that the payment by the Company of any such
liquidated damages hereunder (and the retention of such sum by the receiving
holder) is not subject to any applicable subordination rights of such lender or
holders of such class of securities.
(ii) If the Company, at any time while any shares of Preferred
Stock are outstanding, (a) shall pay a stock dividend or otherwise make a
distribution or distributions on shares of its Junior Securities (as defined in
Section 7) payable in shares of the Common Stock, (b) subdivide outstanding
shares of the Common Stock into a larger number of shares, (c) combine
outstanding shares of the Common Stock into a smaller
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<PAGE> 8
number of shares, or (d) issue by reclassification of shares of the Common Stock
any shares of capital stock of the Company, the Initial Exchange Price shall be
multiplied by a fraction of which the numerator shall be the number of shares of
the Common Stock (excluding treasury shares, if any) outstanding before such
event and of which the denominator shall be the number of shares of the Common
Stock outstanding after such event. Any adjustment made pursuant to this Section
4(c)(ii) shall become effective immediately after the record date for the
determination of stockholders entitled to receive such dividend or distribution
and shall become effective immediately after the effective date in the case of a
subdivision, combination or re-classification.
(iii) If the Company, at any time while any shares of
Preferred Stock are outstanding, shall issue rights or warrants to all holders
of the Common Stock entitling them to subscribe for or purchase shares of the
Common Stock at a price per share less than the Per Share Market Value of the
Common Stock at the record date mentioned below, the Initial Exchange Price
shall be multiplied by a fraction, of which the denominator shall be the number
of shares of the Common Stock (excluding treasury shares, if any) outstanding on
the date of issuance of such rights or warrants plus the number of additional
shares of the Common Stock offered for subscription or purchase, and of which
the numerator shall be the number of shares of the Common Stock (excluding
treasury shares, if any) outstanding on the date of issuance of such rights or
warrants plus the number of shares which the aggregate offering price of the
total number of shares so offered would purchase at such Per Share Market Value.
Such adjustment shall be made whenever such rights or warrants are issued, and
shall become effective immediately after the record date for the determination
of stockholders entitled to receive such rights or warrants. However, upon the
expiration of any right or warrant to purchase shares of the Common Stock the
issuance of which resulted in an adjustment in the Initial Exchange Price
pursuant to this Section 4(c)(iii), if any such right or warrant shall expire
and shall not have been exercised, the Initial Exchange Price shall immediately
upon such expiration be recomputed and effective immediately upon such
expiration be increased to the price which it would have been (but reflecting
any other adjustments in the Initial Exchange Price made pursuant to the
provisions of this Section 4 after the issuance of such rights or warrants) had
the adjustment of the Initial Exchange Price made upon the issuance of such
rights or warrants been made on the basis of offering for subscription or
purchase only that number of shares of the Common Stock actually purchased upon
the exercise of such rights or warrants actually exercised.
(iv) If the Company, at any time while any shares of
Preferred Stock are outstanding, shall distribute to all holders of the Common
Stock (and not to holders of the Preferred Stock) evidences of its indebtedness
or assets or rights or warrants to subscribe for or purchase any security
(excluding those referred to in Sections 4(c)(ii) and (iii) above), then in each
such case the Initial Exchange Price at which shares of Preferred Stock shall
thereafter be exchangeable shall be determined by multiplying the Initial
Exchange Price in effect immediately prior to the record date fixed for
determination of stockholders entitled to receive such distribution by a
fraction of which the denominator shall be the Per Share Market Value of the
Common Stock determined as of the record date mentioned above, and
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<PAGE> 9
of which the numerator shall be such Per Share Market Value of the Common Stock
on such record date less the then fair market value at such record date of the
portion of such assets or evidence of indebtedness so distributed applicable to
one outstanding share of the Common Stock as determined by the Board of
Directors in good faith; provided, however, that in the event of a distribution
exceeding ten percent (10%) of the net assets of the Company, such fair market
value shall be determined by a nationally recognized or major regional
investment banking firm or firm of independent certified public accountants of
recognized standing (which may be the firm that regularly examines the financial
statements of the Company) (an "Appraiser") selected in good faith by the
holders of a majority in interest of the shares of preferred Stock then
outstanding; and provided, further, that the Company, after receipt of the
determination by such Appraiser shall have the right to select an additional
Appraiser, in good faith, in which case the fair market value shall be equal to
the average of the determinations by each such Appraiser. In either case the
adjustments shall be described in a statement provided to the holders of the
Preferred Stock of the portion of assets or evidences of indebtedness so
distributed or such subscription rights applicable to one share of the Common
Stock. Such adjustment shall be made whenever any such distribution is made and
shall become effective immediately after the record date mentioned above.
(v) All calculations under this Section 4 shall be made to
the nearest cent or the nearest 1/100th of a share, as the case may be.
(vi) Whenever the Initial Exchange Price is adjusted pursuant
to Section 4(c)(ii),(iii) or (iv), the Company shall promptly mail to each
holder of shares of Preferred Stock, a notice setting forth the Initial Exchange
Price after such adjustment and setting forth a brief statement of the facts
requiring such adjustment.
(vii) In case of any reclassification of the Common Stock, any
consolidation or merger of the Company with or into another person pursuant to
which the Company will not be the surviving entity, the sale or transfer of all
or substantially all of the assets of the Company or any compulsory share
exchange pursuant to which the Common Stock is converted into other securities,
cash or property, the holders of the Preferred Stock then outstanding shall have
the right thereafter to, at their option, (A) exchange such shares only into the
shares of stock and other securities, cash and property receivable upon or
deemed to be held by holders of the Common Stock following such
reclassification, consolidation, merger, sale, transfer or share exchange, and
the holders of the Preferred Stock shall be entitled upon such event to receive
such amount of securities, cash or property as the shares of the Common Stock of
the Company into which such shares of Preferred Stock could have been exchanged
immediately prior to such reclassification, consolidation, merger, sale,
transfer or share exchange would have been entitled or (B) require the Company
to redeem, from funds legally available therefor at the time of such redemption,
its shares of Preferred Stock at a price per share equal to the sum of (A) the
product of (i) the average Per Share Market Value for the five (5) Trading Days
immediately preceding (1) the effective date or the date of the closing, as the
case may be, of the reclassification,
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<PAGE> 10
consolidation, merger, sale, transfer or share exchange the triggering such
redemption right or (2) the date of payment in full by the Company of the
redemption price hereunder, whichever is greater, and (ii) the Exchange Ratio
calculated on the date of the closing or the effective date, as the case may be,
of the reclassification, consolidation, merger, sale, transfer or share exchange
triggering such redemption right, as the case may be, plus (B) the aggregate of
accrued but unpaid dividends and all other amounts due and payable on account of
such share. The entire redemption price shall be paid in cash, and the terms of
payment of such redemption price shall be subject to the provisions set forth in
Section 5(c). The terms of any such consolidation, merger, sale, transfer or
share exchange shall include such terms so as to continue to give to the holder
of Preferred Stock the right to receive the securities, cash or property set
forth in this Section 4(b)(vii) upon any exchange or redemption following such
consolidation, merger, sale, transfer or share exchange. This provision shall
similarly apply to successive reclassifications, consolidations, mergers, sales,
transfers or share exchanges.
(viii) If:
A. the Company shall declare a dividend (or any
other distribution) on its Common Stock; or
B. the Company shall declare a special nonrecurring
cash dividend on or a redemption of its Common
Stock; or
C. the Company shall authorize the granting to all
holders of the Common Stock rights or warrants
to subscribe for or purchase any shares of capital
stock of any class or of any rights; or
D. the approval of any stockholders of the Company
shall be required in connection with any
reclassification of the Common Stock of the
Company, any consolidation or merger to which
the Company is a party, any sale or transfer of all
or substantially all of the assets of the Company,
of any compulsory share of exchange whereby the
Common Stock is converted into other securities,
cash or property; or
E. the Company shall authorize the voluntary or
involuntary dissolution, liquidation or winding up
of the affairs of the Company;
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<PAGE> 11
then the Company shall cause to be filed at each office or agency maintained for
the purpose of exchange of the Preferred Stock, and shall cause to be mailed to
the holders of shares of Preferred Stock at their last addresses as they shall
appear upon the stock books of the Company, at least 30 calendar days prior to
the applicable record or effective date hereinafter specified, a notice stating
(x) the date on which a record is to be taken for the purpose of such dividend,
distribution, redemption, rights or warrants, or if a record is not to be taken,
the date as of which the holders of the Common Stock of record to be entitled to
such dividend, distributions, redemption, rights or warrants are to be
determined or (y) the date on which such reclassification, consolidation,
merger, sale, transfer or share exchange is expected to become effective or
close, and the date as of which it is expected that holders of the Common Stock
of record shall be entitled to exchange their shares of the Common Stock for
securities, cash or other property deliverable upon such reclassification,
consolidation, merger, sale, transfer or share exchange; provided, however, that
the failure to mail such notice or any defect therein or in the mailing thereof
shall not affect the validity of the corporate action required to be specified
in such notice. Holders are entitled to exchange shares of Preferred Stock
during the 30-day period commencing the date of such notice to the effective
date of the event triggering such notice.
(d) If at any time conditions shall arise by reason of action
taken by the Company which in the opinion of the Board of Directors are not
adequately covered by the other provisions hereof and which might materially and
adversely affect the rights of the holders of the Preferred Stock (different
than or distinguished from the effect generally on rights of holders of any
class of the Company's capital stock) or if at any time any such conditions are
expected to arise by reason of any action contemplated by the Company, the
Company shall mail a written notice briefly describing the action contemplated
and the material adverse effects of such action on the rights of the holders of
the Preferred Stock at least 30 calendar days prior to the effective date of
such action, and an Appraiser selected by the holders of majority in interest of
the shares of Preferred Stock shall give its opinion as to the adjustment, if
any (not inconsistent with the standards established in this Section 4), of the
Exchange Price (including, if necessary, any adjustment as to the securities
into which shares of Preferred Stock may thereafter be exchangeable) and any
distribution which is or would be required to preserve without diluting the
rights of the holders of the Preferred Stock; provided, however, that the
Company, after receipt of the determination by such Appraiser, shall have the
right to select an additional Appraiser, in good faith, in which case the
adjustment shall be equal to the average of the adjustments recommended by each
such Appraiser. The Board of Directors shall make the adjustment recommended
forthwith upon the receipt of such opinion or opinions or the taking of any such
action contemplated, as the case may be; provided, however, that no such
adjustment of the Exchange Price shall be made which in the opinion of the
Appraiser(s) giving the aforesaid opinion or opinions would result in an
increase of the Exchange Price to more than the Exchange Price then in effect.
(e) Upon an exchange hereunder the Company shall not be
required to issue stock certificates representing fractions of shares of Common
Stock, but may if otherwise permitted, make a cash payment in respect of any
final fraction of a share based on
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<PAGE> 12
the Per Share Market Value at such time. If the Company elects not, or is
unable, to make such a cash payment, the holder shall be entitled to receive, in
lieu of the final fraction of a share, one whole share of Common Stock.
(f) The issuance of certificates for shares of the Common
Stock on exchange of Preferred Stock shall be made without charge to the holders
thereof for any documentary stamp or similar taxes that may be payable in
respect of the issue or delivery of such certificate, provided that the Company
shall not be required to pay any tax that may be payable in respect of any
transfer involved in the issuance and delivery of any such certificate upon
exchange in a name other than that of the holder of such shares of Preferred
Stock so exchanged and the Company shall not be required to issue or deliver
such certificates unless or until the person or persons requesting the issuance
thereof shall have paid to the Company the amount of such tax or shall have
established to the satisfaction of the Company that such tax has been paid.
(g) Shares of Preferred Stock exchanged into Common Stock
shall be canceled and shall have the status of authorized but unissued shares of
Class B Preferred Stock.
(h) Any and all notices or other communications or deliveries
to be provided by the holders of the Preferred Stock hereunder, including,
without limitation, any Exchange Notice, shall be in writing and delivered
personally, by facsimile, sent by a nationally recognized overnight courier
service or sent by certified or registered mail, postage prepaid, addressed to
the attention of the Chief Executive Officer of the Company at the facsimile
telephone number or address of the principal place of business of the Company as
set forth in the Purchase Agreement. Any and all notices or other communications
or deliveries to be provided by the Company hereunder shall be in writing and
delivered personally, by facsimile, sent by a nationally recognized overnight
courier service or sent by certified or registered mail, postage prepaid,
addressed to each holder of Preferred Stock at the facsimile telephone number or
address of such holder appearing on the books of the Company, or if no such
facsimile telephone number or address appears, at the principal place of
business of the holder. Any notice or other communication or deliveries
hereunder shall be deemed given and effective on the earliest of (i) the date of
transmission, if such notice or communication is delivered via facsimile at the
facsimile telephone number specified in this Section prior to 4:30 p.m. (Eastern
Time), (ii) the date after the date of transmission, if such notice or
communication is delivered via facsimile at the facsimile telephone number
specified in this Section later than 4:30 p.m. (Eastern Time) on any date and
earlier than 11:59 p.m. (Eastern Time) on such date, (iii) four days after
deposit in the United States mails, (iv) the Business Day following the date of
mailing, if send by nationally recognized overnight courier service, or (v) upon
actual receipt by the party to whom such notice is required to be given.
Section 5. Redemption.
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<PAGE> 13
(a) The Company shall have the right, exercisable at any time
upon 20 Trading Days' notice to the holders of the Preferred Stock given at any
time after the Original Issue Date to redeem, from funds legally available
therefor at the time of such redemption, all or any portion of the shares of
Preferred Stock which have not previously been exchanged or redeemed, at a price
per share equal to the sum of (A) the product of (i) the average Per Share
Market Value for the five (5) Trading Days immediately preceding (1) the date of
the redemption notice referenced above or (2) the date of payment in full by the
Company of the redemption price hereunder, whichever is greater, and (ii) the
Exchange Ratio calculated on the date of such redemption notice, and (B) the
aggregate accrued but unpaid dividends and all other amounts due and payable in
respect of such share. The entire redemption price shall be paid in cash.
Holders of Preferred Stock may exchange any shares of Preferred Stock, including
shares subject to a redemption notice given under this Section, during the
period from the date of such redemption notice through the 19th Trading Day
thereafter. The Company shall honor all such exchanges and all exchanges
tendered prior to the date of the Company's redemption notice and shall not be
permitted to redeem the shares of Preferred Stock tendered for such exchanges
(whether occurring prior to the date of such redemption notice or during such 19
day period).
(b) If any portion of the redemption price under Section 5(a)
shall not be paid by the Company within seven (7) calendar days after the date
due, interest shall accrue thereon at the rate of 15% per annum until the
redemption price plus all such interest is paid in full (which amount shall be
paid as liquidated damages and not as a penalty). In addition, if any portion of
such redemption price remains unpaid for more than 7 calendar days after the
date due, the holder of the Preferred Stock subject to such redemption may
elect, by written notice to the Company given within 30 days after the date due,
to either (i) demand exchange in accordance with the formula and the time frame
therefor set forth in Section 4 of all of the shares of Preferred Stock for
which such redemption price, plus accrued liquidated damages thereof, has not
been paid in full (the "Unpaid Redemption Shares"), in which event the Per Share
Market Price for such shares shall be the lower of the Per Share Market Price
calculated on the date such redemption price was originally due and the Per
Share Market Price as of the holder's written demand for exchange, or (ii)
invalidate ab initio such redemption, notwithstanding anything herein contained
to the contrary. If the holder elects option (i) above, the Company shall within
three (3) Trading Days of its receipt of such election deliver to the holder the
shares of Common Stock issuable upon exchange of the Unpaid Redemption Shares
subject to such holder exchange demand and otherwise perform its obligations
hereunder with respect thereto; or, if the Holder elects option (ii) above, the
Company shall promptly, and in any event not later than three (3) Trading Days
from receipt of holder's notice of such election, return to the holder all of
the Unpaid Redemption Shares. Notwithstanding anything to the contrary contained
herein, the Company may not, without the written consent of the holder, redeem
shares of Preferred Stock unless both the payment thereof and the retention of
such paid cash by the holder is consented to in writing free of any
subordination prior thereto by all lenders or holders of any class of securities
of the Company who by agreement have the right to consent to or force the
subordination of such payment.
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<PAGE> 14
Section 6. Certain Definitions. As used in this Agreement,
unless the context requires a different meaning, the following terms shall have
the meanings indicated in this Section 6.
"Business Day" means any day except Saturday, Sunday and any
day which shall be a legal holiday or a day on which banking institutions in the
State of New York are authorized or required by law or other government action
to close.
"Common Stock" means the Company's common stock, $.01 par
value per share, of the Company and stock of any other class into which such
shares may hereafter have been reclassified or changed.
"Junior Securities" means the Common Stock and all other
equity securities of the Company other than the Class A Preferred Stock.
"Original Issue Date" shall mean the date of the first
issuance of any shares of the Preferred Stock regardless of the number of
transfers of any such shares and regardless of the number of certificates which
may be issued to evidence such shares.
"Per Share Market Value" means on any particular date (a) the
closing bid price per share of the Common Stock on such date on the American
Stock Exchange or other stock exchange or quotation system on which the Common
Stock is then listed or if there is no such price on such date, then the closing
bid price on such exchange or quotation system on the date nearest preceding
such date, or (b) if the Common Stock is not listed then on the American Stock
Exchange or any stock exchange or quotation system, the closing bid price for a
share of the Common Stock in the over-the-counter market, as reported by the
Nasdaq Stock Market or in the National Quotation Bureau Incorporated or similar
organization or agency succeeding to its functions of reporting prices) at the
close of business on such date, or (c) if the Common Stock is not then reported
by the National Quotation Bureau Incorporated (or similar organization or agency
succeeding to its functions of reporting prices), then the average of the "Pink
Sheet" quotes for the relevant exchange period, as determined in good faith by
the holder, or (d) if the Common Stock is not then publicly traded the fair
market value of a share of Common Stock as determined by an Appraiser selected
in good faith by the holders of a majority in interest of the share of Preferred
Stock; provided, however, that the Company, after receipt of the determination
by such Appraiser, shall have the right to select an additional Appraiser, in
which case, the fair market value shall be equal to the average of the
determinations by each such Appraiser.
"Person" means a corporation, an association, a partnership,
organization, a business, an individual, a government or political subdivision
thereof or a governmental agency.
"Registration Rights Agreement" means the Registration Rights
Agreement, dated as of the date hereof, between the Company and the Purchaser.
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<PAGE> 15
"Trading Day" means (a) a day on which the Common Stock is
traded on the American Stock Exchange or other stock exchange or market on which
the Common Stock has been listed, or (b) if the Common Stock is not listed on
the American Stock Exchange or any stock exchange or market, a day on which the
Common Stock is traded in the over-the-counter market, as reported by the OTC
Bulletin Board, or (c) if the Common Stock is not quoted on the OTC Bulletin
Board, a day on which the Common Stock is quoted in the over-the-counter market
as reported by the National Quotation Bureau Incorporated (or any similar
organization or agency succeeding its functions of reporting prices).
Section 7. MISCELLANEOUS
(a) This Agreement, together with the Exhibits and Schedules
hereto, the Purchase Agreement and the Registration Rights Agreement (together
with the respective Exhibits and Schedules thereto), contain the entire
understanding of the parties with respect to the subject matter hereof and
supersede all prior agreements and understandings, oral or written, with respect
to such matters.
(b) Any and all notices or other communications or deliveries
required or permitted to be provided hereunder shall be in writing and shall be
deemed given and effective on the earliest of (i) the date of transmission, if
such notice or communication is delivered via facsimile at the facsimile
telephone number specified in this Section prior to 4:30 p.m. (New York City
time) on a Business Day, (ii) the Business Day after the date of transmission,
if such notice or communication is delivered via facsimile at the facsimile
telephone number specified in the Purchase Agreement later than 4:30 p.m. (New
York City time) on any date and earlier than 11:59 p.m. (New York City time) on
such date, (iii) the Business Day following the date of mailing, if sent by
nationally recognized overnight courier service, or (iv) upon actual receipt by
the party to whom such notice is required to be given.
If to the Company: Substance Abuse Technologies, Inc.
4517 N.W. 31st Avenue
Ft. Lauderdale, FL 33309
Facsimile No.: (954) 714-5049
Attn: Chief Executive Officer
With copies to: Gold & Wachtel, LLP
110 East 59th Street
New York, New York 10022
Facsimile No.: (212) 909-9455
Attn: Robert W. Berend
If to the Purchaser: Southbrook International Investments, Ltd
c/o Trippoak Advisors, Inc.
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<PAGE> 16
630 Fifth Avenue, Suite 2000
New York, NY 10111
Facsimile No.: (212) 332-3256
Attn: Robert Miller
With copies to: Robinson Silverman Pearce Aronsohn &
Berman LLP
1290 Avenue of the Americas
New York, NY 10104
Facsimile No.: (212) 541-4630
Attn: Eric L. Cohen
or such other address as may be designated in writing hereafter, in the same
manner, by such Person.
(c) No provision of this Agreement may be waived or amended
except in a written instrument signed, in the case of an amendment, by the
Company and the Purchaser, or, in the case of a waiver, by the party against
whom enforcement of any such waiver is sought. No waiver of any default with
respect to any provision, condition or requirement of this Agreement shall be
deemed to be a continuing waiver in the future or a waiver of any other
provision, condition or requirement hereof, nor shall any delay or omission of
either party to exercise any right hereunder in any manner impair the exercise
of any such right accruing to it thereafter.
(d) The headings herein are for convenience only, do not
constitute a part of this Agreement and shall not be deemed to limit or affect
any of the provisions hereof.
(e) This Agreement shall be binding upon, and inure to the
benefit of, the parties and their successors and permitted assigns. Neither the
Company nor the Purchaser may assign this Agreement or any rights or obligations
hereunder without the prior written consent of the other, except that (i) the
Purchaser may assign its rights hereunder and under the Registration Rights
Agreement to an Affiliate thereof or to a managed account of either the
Purchaser or such Affiliate and (ii) any assignment of the Purchaser's rights
hereunder shall provide to such assignee the right to assign in accordance with
the provisions of clause (i) above. The assignment by a party of this Agreement
or any rights hereunder shall not affect the obligations of such party under
this Agreement.
(f) This Agreement is intended for the benefit of the parties
hereto and their respective permitted successors and assigns and, other than
with respect to permitted assignees under Section 5.6, is not for the benefit
of, nor may any provision hereof be enforced by, any other person.
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<PAGE> 17
(g) This Agreement shall be governed by and construed and
enforced in accordance with the internal laws of the State of Delaware without
regard to the principles of conflicts of law thereof.
(h) The obligations of the Company and the Purchaser contained
in this Agreement shall survive the closing of the transactions contemplated
hereby (or any earlier termination of this Agreement) and any exchange of shares
of Preferred Stock hereunder.
(i) This Agreement may be executed in two or more
counterparts, all of which when taken together shall be considered one and the
same agreement and shall become effective when counterparts have been signed by
each party and delivered to the other party, it being understood that both
parties need not sign the same counterpart. In the event that any signature is
delivered by facsimile transmission, such signature shall create a valid and
binding obligation of the party executing (or on whose behalf such signature is
executed) the same with the same force and effect as if such facsimile signature
page were an original thereof.
(j) The Company and the Purchaser shall consult with each
other in issuing any press releases or otherwise making public statements with
respect to the transactions contemplated hereby and neither party shall issue
any such press release or otherwise make any such public statement without the
prior written consent of the other, which consent shall not be unreasonably
withheld or delayed, except that no prior consent shall be required if such
disclosure is required by law, in which such case the disclosing party shall
provide the other party with prior notice of such public statement.
(k) In case any one or more of the provisions of this
Agreement shall be invalid or unenforceable in any respect, the validity and
enforceability of the remaining terms and provisions of this Agreement shall not
in any way be affecting or impaired thereby and the parties will attempt to
agree upon a valid and enforceable provision which shall be a reasonable
substitute therefor, and upon so agreeing, shall incorporate such substitute
provision in this Agreement.
(l) In addition to being entitled to exercise all rights
provided herein or granted by law, including recovery of damages, the Purchaser
will be entitled to specific performance of the obligations of the Company under
this Agreement and the Company will be entitled to specific performance of the
obligations of the Purchaser hereunder with respect to the subsequent transfer
of Preferred Stock and Underlying Shares. Each of the Company and the Purchaser
agree that monetary damages would not be adequate compensation for any loss
incurred by reason of any breach of its obligations described in the foregoing
sentence and hereby agrees to waive in any action for specific performance of
any such obligation the defense that a remedy at law would be adequate.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK,
SIGNATURE PAGE FOLLOWS]
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<PAGE> 18
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed as of the date first indicated above.
Company:
SUBSTANCE ABUSE TECHNOLOGIES, INC.
By:___________________________________
Name:
Title:
Purchaser:
SOUTHBROOK INTERNATIONAL
INVESTMENTS, LTD
By:___________________________________
Name:
Title:
-18-
<PAGE> 19
EXHIBIT A
NOTICE OF EXCHANGE
(To be Executed by the Registered Holder
in order to Exchange Shares of Preferred Stock)
The undersigned hereby elects to exchange the number of shares of Class B
Preferred Stock indicated below, into shares of Common Stock, par value $.01 per
share (the "Common Stock"), of Substance Abuse Technologies, Inc. (the
"Company") according to the conditions hereof, as of the date written below. If
shares are to be issued in the name of a person other than undersigned, the
undersigned will pay all transfer taxes payable with respect thereto and is
delivering herewith such certificates and opinions as reasonably requested by
the Company in accordance therewith. No fee will be charged to the holder for
any exchange, except for such transfer taxes, if any.
Exchange calculations: ________________________________________________________
Date to Effect Exchange
____________________________________________________
Number of shares of Preferred Stock to be Exchanged
____________________________________________________
Number of shares of Common Stock to be Issued
____________________________________________________
Applicable Exchange Price
____________________________________________________
Signature
____________________________________________________
Name
____________________________________________________
Address
The Company undertakes to promptly upon its receipt of this exchange notice
(and, in any case prior to the time it effects the exchange requested hereby),
notify the exchanging holder by facsimile of the number of shares of Common
Stock outstanding on such date and the number of shares of Common Stock which
would be issuable to the holder if the exchange requested in this exchange
notice were effected in full, whereupon, if the Company determines that such
exchange would result in it owning in excess of 4.9% of the outstanding shares
of Common Stock on such date, the Company shall exchange up to an amount equal
to 4.9% of the outstanding shares of Common Stock and issue to the holder one or
more certificates representing shares of Preferred Stock which have not been
exchanged as a result of this provision.
<PAGE> 1
Exhibit 4(e)(3)
NEITHER THIS DEBENTURE NOR THE SECURITIES INTO WHICH THIS DEBENTURE IS
CONVERTIBLE HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR
THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM
REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES
ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN
AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE
SECURITIES LAWS.
THIS DEBENTURE IS SUBJECT TO CERTAIN RESTRICTIONS ON TRANSFER AND
CONVERSION SET FORTH IN A CONVERTIBLE DEBENTURE AND PREFERRED STOCK PURCHASE
AGREEMENT, DATED AS OF MAY 8, 1997, BETWEEN SUBSTANCE ABUSE TECHNOLOGIES, INC.
(THE "COMPANY") AND THE ORIGINAL HOLDER HEREOF. A COPY OF THAT AGREEMENT IS ON
FILE AT THE PRINCIPAL OFFICE OF THE COMPANY.
No. 1 U.S. $50,000.00
SUBSTANCE ABUSE TECHNOLOGIES, INC.
14% CONVERTIBLE DEBENTURE DUE MAY 8, 2000
THIS DEBENTURE is one of a duly authorized issue of debentures of
Substance Abuse Technologies, Inc. a Delaware corporation, having a principal
place of business at 4517 N.W. 31st Avenue, Ft. Lauderdale, Florida 33309 (the
"Company"), designated as its 14% Convertible Debentures, due May 8, 2000 (the
"Debentures"), in an aggregate principal amount of up to $750,000.
FOR VALUE RECEIVED, the Company promises to pay to Southbrook
International Investments, Ltd., or registered assigns (the "Holder"), the
principal sum of Fifty Thousand Dollars ($50,000.00), on or prior to May 8, 2000
or such earlier date as the Debentures are required to be repaid as provided
hereunder (the "Maturity Date") and to pay interest to the Holder on the
principal sum at the rate of 14% per annum, payable upon conversion as provided
hereunder, or on the Maturity Date if not earlier converted. Interest shall
accrue daily commencing on the Original Issue Date (as defined in Section 7)
until payment in full of the principal sum, together with all accrued and unpaid
interest and other amounts which may become due hereunder, has been made.
Interest shall be calculated on the basis of a 360-day year and for the actual
number of days elapsed. Interest hereunder will be paid to the person in whose
name this Debenture (or one or more predecessor Debentures) is registered on the
records
<PAGE> 2
of the Company regarding registration and transfers of the Debentures (the
"Debenture Register") on the Conversion Date (as defined below) or the Maturity
Date, as the case may be; provided, however, that the Company's obligation to a
transferee of this Debenture arises only if such transfer, sale or other
disposition is made in accordance with the terms and conditions hereof and of
the Convertible Debenture and Preferred Stock Purchase Agreement, dated as of
May 8, 1997, as amended from time to time (the "Purchase Agreement"), executed
by the original Holder. All overdue, accrued and unpaid interest and other
amounts due hereunder shall bear interest at the rate of 15% per annum from the
day of conversion hereunder or the Maturity Date or earlier date on which this
Debenture is accelerated through and including the date of payment. The
principal of, and interest on, this Debenture are payable in such coin or
currency of the United States of America as at the time of payment is legal
tender for payment of public and private debts, at the address of the Holder
last appearing on the Debenture Register, except that interest due hereunder
may, at the Company's option, be paid in shares of the Common Stock (as defined
in Section 7) calculated based upon the average Per Share Market Value for the
five (5) Trading Days immediately preceding the Conversion Date or Maturity
Date, as the case may be. All amounts due hereunder other than interest shall be
paid in cash. Notwithstanding anything to the contrary contained herein, the
Company may not issue shares of the Common Stock in payment of interest on the
principal amount if: (i) the number of shares of Common Stock at the time
authorized, unissued and unreserved for all purposes, or held as treasury stock,
is insufficient to pay interest hereunder in shares of Common Stock; (ii) the
shares of Common Stock to be issued in respect of interest hereunder are not
registered for resale pursuant to an effective registration statement that names
the recipient of such interest shares as a selling stockholder thereunder or may
not be sold without volume restrictions pursuant to Rule 144 promulgated under
the Securities Act of 1933, as amended (the "Securities Act") as determined by
counsel to the Company pursuant to a written opinion letter, addressed to the
holder, in form and substance acceptable to the holder; (iii) the shares of
Common Stock to be issued in respect of such interest are not listed on the
American Stock Exchange (or the Nasdaq National Market, Nasdaq SmallCap Market
or The New York Stock Exchange), and any other exchange on which the Common
Stock is then listed for trading; or (iv) the issuance of such shares would
result in the recipient thereof beneficially owning more than 4.9% of the issued
and outstanding shares of Common Stock. A transfer of the right to receive
principal and interest under this Debenture shall be transferable only through
an appropriate entry in the Debenture Register as provided herein.
This Debenture is subject to the following additional provisions:
Section 1. The Debentures are issuable in denominations of
Fifty Thousand Dollars ($50,000) and integral multiples of Fifty Thousand
Dollars ($50,000) in excess thereof. The Debentures are exchangeable for an
equal aggregate principal amount of Debentures of different authorized
denominations, as requested by the Holder surrendering the same but shall not be
issuable in denominations of less than integral multiplies of Fifty Thousand
Dollars ($50,000). No service charge will be made for such registration of
transfer or exchange.
Section 2. [INTENTIONALLY DELETED]
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<PAGE> 3
Section 3. This Debenture has been issued subject to certain
investment representations of the original Holder set forth in the Purchase
Agreement and may be transferred or exchanged only in compliance with the
Securities Act. Prior to due presentment to the Company for transfer of this
Debenture, the Company and any agent of the Company may treat the person in
whose name this Debenture is duly registered on the Debenture Register as the
owner hereof for the purpose of receiving payment as herein provided and for all
other purposes, whether or not this Debenture is overdue, and neither the
Company nor any such agent shall be affected by notice to the contrary.
Section 4. Events of Default.
"Event of Default", wherever used herein, means any one of the
following events (whatever the reason and whether it shall be voluntary or
involuntary or effected by operation of law or pursuant to any judgment, decree
or order of any court, or any order, rule or regulation of any administrative or
governmental body):
(a) any default in the payment of the principal of or interest
on this Debenture as and when the same shall become due and payable on
the Conversion Date or the Maturity Date or by acceleration or
otherwise;
(b) the Company shall fail to observe or perform any other
covenant, agreement or warranty contained in, or otherwise commit any
breach of, this Debenture, the Purchase Agreement, the Class B Exchange
Agreement or the Registration Rights Agreement, dated as of May 8,
1997, between the Company and the original Holder (the "Registration
Rights Agreement"), and such failure or breach shall not have been
remedied within 30 days after the date on which notice of such failure
or breach shall have been given;
(c) the Company or any of its subsidiaries shall commence a
voluntary case under the United States Bankruptcy Code or insolvency
laws as now or hereafter in effect or any successor thereto (the
"Bankruptcy Code"); or an involuntary case is commenced against the
Company under the Bankruptcy Code and the petition is not controverted
within 30 days, or is not dismissed within 60 days, after commencement
of such involuntary case; or a "custodian" (as defined in the
Bankruptcy Code) is appointed for, or takes charge of, all or any
substantial part of the property of the Company or the Company
commences any other proceeding under any reorganization, arrangement,
adjustment of debt, relief of debtors, dissolution, insolvency or
liquidation or similar law of any jurisdiction whether now or hereafter
in effect relating to the Company or there is commenced against the
Company any such proceeding which remains undismissed for a period of
60 days; or the Company is adjudicated insolvent or bankrupt; or any
order of relief or other order approving any such case or proceeding is
entered; or the Company suffers any appointment of any custodian or the
like for it or any substantial part of its property which continues
undischarged or unstayed for a period of 60 days; or the Company makes
a general assignment for the benefit of creditors; or the Company
-3-
<PAGE> 4
shall fail to pay, or shall state that it is unable to pay, or shall be
unable to pay, its debts generally as they become due; or the Company
shall call a meeting of its creditors with a view to arranging a
composition or adjustment of its debts; or the Company shall by any act
or failure to act indicate its consent to, approval of or acquiescence
in any of the foregoing; or any corporate or other action is taken by
the Company for the purpose of effecting any of the foregoing;
(d) the Company shall default in any of its obligations under
any mortgage, credit agreement or other facility, indenture agreement
or other instrument under which there may be issued, or by which there
may be secured or evidenced any indebtedness of the Company in an
amount exceeding one hundred thousand dollars ($100,000), whether such
indebtedness now exists or shall hereafter be created and such default
shall result in such indebtedness becoming or being declared due and
payable prior to the date on which it would otherwise become due and
payable;
(e) the Common Stock shall be delisted from the American Stock
Exchange or other national securities exchange or market on which such
Common Stock is listed for trading or suspended from trading thereon
without being relisted or having such suspension lifted, as the case
may be, within five days; or
(f) the Company shall be a party to any merger or
consolidation pursuant to which the Company shall not be the surviving
entity or shall dispose of all or substantially all of its assets in
one or more transactions, or shall redeem more than 10,000 shares of
the Common Stock (other than redemptions of Underlying Shares issued
upon conversion of Debentures or exchange of Class B Preferred Stock
held by the original Holder at such time).
If during the time that any portion of this Debenture remains outstanding, any
Event of Default occurs and is continuing, and in every such case, then the
Holder may, by notice to the Company, declare the full principal amount of this
Debenture, together with all accrued but unpaid interest and other amounts owing
hereunder, to the date of acceleration, to be, plus the "Adjustment Amount" (as
defined in Section 7) whereupon the same shall become, immediately due and
payable in cash (notwithstanding anything herein contained to the contrary)
without presentment, demand, protest or other notice of any kind, all of which
are waived by the Company, notwithstanding anything herein contained to the
contrary, and the Holder may immediately and without expiration of any grace
period enforce any and all of its rights and remedies hereunder and all other
remedies available to it under applicable law. Such declaration may be rescinded
and annulled by Holder at any time prior to payment hereunder. No such
rescission or annulment shall affect any subsequent Event of Default or impair
any right consequent thereon.
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<PAGE> 5
Section 5. Conversion.
(a) (i) This Debenture shall be convertible into shares of
the Common Stock (subject to reduction pursuant to Section 5(a)(ii) below and
Section 4.10 of the Purchase Agreement at the option of the Holder in whole or
in part at any time and from time to time after the earlier to occur of (A) the
120th day after the Original Issue Date or (B) the date the Securities and
Exchange Commission (the "Commission") declares effective under the Securities
Act, the registration statement registering the resale of the shares of Common
Stock issuable upon conversion of the Debentures and payment of interest
hereunder and naming the Holder as a selling stockholder thereunder (the
"Underlying Shares Registration Statement") and prior to the close of business
on the Maturity Date. The Holder shall effect conversions by surrendering the
Debentures (or such portions thereof) to be converted to the Company, together
with the form of conversion notice attached hereto as Exhibit A (the "Conversion
Notice"). Each Conversion Notice shall specify the principal amount of
Debentures to be converted and the date on which such conversion is to be
effected, which date may not be prior to the date the Holder delivers such
Conversion Notice by facsimile (the "Conversion Date"). If no Conversion Date is
specified in a Conversion Notice, the Conversion Date shall be the date that the
Conversion Notice is deemed delivered pursuant to Section 5(h). Subject to
Sections 5(b) and 5(a)(ii) hereof and Section 4.10 of the Purchase Agreement,
each Conversion Notice, once given, shall be irrevocable. If the Holder is
converting less than all of the principal amount represented by the Debenture(s)
tendered by the Holder with the Conversion Notice, or if a conversion hereunder
cannot be effected in full for any reason, the Company shall honor such
conversion to the extent permissible hereunder and shall promptly deliver to
such Holder (in the manner and within the time set forth in Section 5(b)) a new
Debenture for such principal amount as have not been converted.
(ii) Certain Regulatory Approval. If on the Conversion
Date applicable to any conversion, (A) the Common Stock is then listed for
trading on the American Stock Exchange or the Nasdaq National Market or, if the
rules of the Nasdaq Stock Market are hereafter amended to extend Rule 4460(i)
promulgated thereby (or any successor or replacement provision thereof) to the
Nasdaq SmallCap Market and the Common Stock is then listed for trading on the
Nasdaq SmallCap Market (B) the Conversion Price then in effect is such that the
aggregate number of shares of the Common Stock that would then be issuable upon
conversion of the entire outstanding principal amount of Debentures, together
with any shares of the Common Stock previously issued upon conversion of
Debentures and in respect of payment of interest hereunder, and any shares of
Common Stock issued upon exchange of the Class B Preferred Stock and in payment
of dividends in respect thereof would equal or exceed 20% of the number of
shares of the Common Stock outstanding on the Original Issue Date (the "Issuable
Maximum"), and (C) the Company has not previously obtained the Stockholder
Approval (as defined below), then the Company shall issue to the Holder
requesting such conversion the Issuable Maximum and, with respect to any shares
of the Common Stock that otherwise would have been issuable to such holder in
respect of the Conversion Notice at issue or in respect of payment of interest
hereunder in excess of the Issuable Maximum, the Holder shall have the option to
require the Company to either (1) as promptly as possible, but in no event later
than
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<PAGE> 6
90 days after such Conversion Date, convene a meeting of the holders of the
Common Stock and use its best efforts to obtain the Stockholder Approval or (2)
repay, from funds legally available therefor at the time of such repayment, the
balance of the principal amount of the Debentures subject to such Conversion
Notice and the remaining aggregate principal amount of Debentures then
outstanding and held by such Holder at a price equal to the principal amount of
Debentures then outstanding and held by such Holder multiplied by the product of
(i) the average Per Share Market Value for the five (5) Trading Days immediately
preceding (1) the Conversion Date or (2) the date of payment in full by the
Company of such repayment price, whichever is greater, divided by (ii) the
Conversion Price calculated on the Conversion Date; provided, however, that if
the Holder has requested that the Company obtain Stockholder Approval under
paragraph (1) above and the Company fails for any reason to obtain such
Stockholder Approval within the time period set forth in (1) above, the Company
shall be obligated to repay Debentures in accordance with the provisions of
paragraph (2) above, and in such case the interest contemplated by the
immediately succeeding sentence shall be deemed to accrue from the Conversion
Date. If the Holder has requested that the Company repay Debentures pursuant to
this Section and the Company fails for any reason to pay the repayment price
under (2) above within seven days after the Conversion Date, the Company will
pay interest on such repayment price at a rate of 15% per annum to the
converting Holder, accruing from the Conversion Date until the repayment price
plus any accrued interest thereon is paid in full. The entire repayment price,
including interest thereon, shall be paid in cash. "Stockholder Approval" means
the approval by a majority of the total votes cast on the proposal, in person or
by proxy, at a meeting of the stockholders of the Company held in accordance
with the Company's Certificate of Incorporation and by-laws, of the issuance by
the Company of shares of the Common Stock exceeding the Issuable Maximum as a
consequence of the conversion of Debentures into the Common Stock at a price
less than the greater of the book or market value on the Original Issue Date as
and to the extent required pursuant to Rule 713 of the American Stock Exchange
or Rule 4460(i) of the Nasdaq Stock Market (or any successor or replacement
provision thereof), as applicable.
(b) Not later than three Trading Days after the Conversion
Date, the Company will deliver to the Holder (i) a certificate or certificates
which shall be free of restrictive legends and trading restrictions (other than
those required by Section 4.1(b) of the Purchase Agreement) representing the
number of shares of the Common Stock being acquired upon the conversion of
Debentures (subject to reduction pursuant to Section 5(a)(ii) hereof and Section
4.10 of the Purchase Agreement), (ii) Debentures in a principal amount equal to
the principal amount of Debentures not converted; (iii) a bank check in the
amount of all accrued and unpaid interest (if the Company has elected to pay
accrued interest in cash), together with all other amounts then due and payable
in accordance with the terms hereof, in respect of Debentures tendered for
conversion and (iv) if the Company has elected to pay accrued interest in shares
of the Common Stock, certificates, which shall be free of restrictive legends
and trading restrictions (other than those required by law), representing such
number of shares of the Common Stock as equals such interest divided by the
average Per Share Market Value for the five trading Days immediately preceding
the Conversion Date; provided, however, that the Company shall not be obligated
to issue certificates evidencing the shares of the Common Stock issuable upon
conversion of the principal amount of Debentures, until Debentures are either
delivered for conversion to the
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<PAGE> 7
Company or any transfer agent for the Debentures or the Common Stock, or the
Holder notifies the Company that such Debenture has been lost, stolen or
destroyed and provides a bond (or other adequate security) reasonably
satisfactory to the Company to indemnify the Company from any loss incurred by
it in connection therewith. The Company shall, upon request of the Holder, use
its best efforts to deliver any certificate or certificates required to be
delivered by the Company under this Section electronically through the
Depository Trust Corporation or another established clearing corporation
performing similar functions. If in the case of any Conversion Notice such
certificate or certificates, including for purposes hereof, any shares of the
Common Stock to be issued on the Conversion Date on account of accrued but
unpaid interest hereunder, are not delivered to or as directed by the applicable
Holder by the third Trading Day after the Conversion Date, the Holder shall be
entitled by written notice to the Company at any time on or before its receipt
of such certificate or certificates thereafter, to rescind such conversion, in
which event the Company shall immediately return the Debentures tendered for
conversion. If the Company fails to deliver to the Holder such certificate or
certificates pursuant to this Section, including for purposes hereof, any shares
of the Common Stock to be issued on the Conversion Date on account of accrued
but unpaid interest hereunder, prior to the fifth Trading Day after the
Conversion Date, the Company shall pay to such Holder, in cash, as liquidated
damages and not as a penalty, $1,500 for each day after such fifth Trading Day
until such certificates are delivered. If the Company fails to deliver to the
Holder such certificate or certificates pursuant to this Section prior to the
20th day after the Conversion Date, the Company shall, at the Holder's option
(i) repay, from funds legally available therefor at the time of such repayment,
the aggregate of the principal amount of Debentures then held by such Holder, as
requested by such Holder, and (ii) pay all accrued but unpaid interest on
account of the Debentures for which the Company shall have failed to issue the
Common Stock certificates hereunder, in cash. The repayment price shall be equal
to the sum of (A) the aggregate of all accrued but unpaid interest and other
non-principal amounts then payable in respect of all Debentures to be repaid
hereunder and for which repayment hereunder is demanded, plus (B) the aggregate
of the principal amount of Debentures then held by such Holder multiplied by (1)
the average Per Share Market Value for the five (5) Trading Days immediately
preceding (x) the Conversion Date or (y) the date of payment in full by the
Company of such repayment price, whichever is greater, divided by, (2) the
Conversion Price calculated on the Conversion Date. If the Holder has requested
that the Company repay Debentures pursuant to this Section and the Company fails
for any reason to pay the repayment price within seven days after such notice is
deemed delivered pursuant to Section 5(h), the Company will pay interest on the
repayment price at a rate of 15% per annum, in cash to such Holder, accruing
from such seventh day until the repayment price and any accrued interest thereon
is paid in full.
(c) (i) The conversion price (the "Conversion Price") in
effect on any Conversion Date shall be the lesser of (a) $1.25 (the "Initial
Conversion Price") or (b) 85% of the average Per Share Market Value for the five
(5) Trading Days immediately preceding the Conversion Date; provided that, (a)
if the Underlying Shares Registration Statement is not filed on or prior to July
7, 1997, or (b) the Company fails to file with the Commission a request for
acceleration in accordance with Rule 12d1-2 promulgated under the Securities
Exchange Act of 1934, as amended, within five (5) days of the date that the
Company is notified (orally or in
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<PAGE> 8
writing, whichever is earlier) by the Commission that an Underlying Shares
Registration Statement will not be "reviewed" or is not subject to further
review or comment, or (c) if the Underlying Shares Registration Statement is not
declared effective by the Commission on or prior to the 120th day after the
Original Issue Date (which period shall be extended to the 150 days after the
Original Issue Date in the event that the Commission notifies the Company that
the Underlying Shares Registration Statement can not be filed on Form S-3
promulgated under the Securities Act solely because the Debentures are
convertible prior to the 180th day after the Original Issue Date), or (d) if
such Underlying Shares Registration Statement is filed with and declared
effective by the Commission but thereafter ceases to be effective as to all
Registrable Securities (as such term is defined in the Registration Rights
Agreement) at any time prior to the expiration of the "Effectiveness Period" (as
such term as defined in the Registration Rights Agreement), without being
succeeded by a subsequent Underlying Shares Registration Statement filed with
and declared effective by the Commission within 10 Business Days (as defined in
Section 7), or (e) if trading in the Common Stock shall be suspended for any
reason for more than three Trading Days, or (f) if the conversion rights of the
Holders of Debentures hereunder are suspended for any reason (any such failure
being referred to as an "Event," and for purposes of clauses (a), (c) and (f)
the date on which such Event occurs, or for purposes of clause (b) the date on
which such five (5) days period is exceeded, or for purposes of clause (d) the
date which such 10 Business Day-period is exceeded, or for purposes of clause
(e) the date on which such three Trading Day period is exceeded, being referred
to as "Event Date"), the Conversion Price shall be decreased by 2.5% each month
(i.e., 82.5% as of the Event Date and 80% as of the one month anniversary of the
Event Date) until the earlier to occur of the second month anniversary after the
Event Date and such time as the applicable Event is cured. Commencing the second
month anniversary after the Event Date, at the option of each Holder for each
applicable monthly period either (a) the Company shall pay to the Holders 2.5%
of the product of the principal amount of outstanding Debentures (each Holder
being entitled to receive such portion of such amount as equals its pro rata
portion of Debentures then outstanding), in cash or (b) the Conversion Price
shall be decreased by 2.5% for each additional such month (to be effective in
full on the monthly applicable Event Date) as liquidated damages, and not as a
penalty on the first day of each monthly anniversary of the Event Date in either
case until such time as the applicable Event is cured. Any decrease in the
Conversion Price pursuant to this Section shall remain in effect notwithstanding
the fact that the Event causing such decrease has been subsequently cured and
further monthly decreases have ceased. The provisions of this Section are not
exclusive and shall in no way limit the Company's obligations under the
Registration Rights Agreement. Notwithstanding anything to the contrary set
forth herein, the Company may not, without the prior written consent of the
Holders, pay liquidated damages hereunder in cash unless it shall have received
the prior written consent of all lenders, debt holders or holders of any class
of securities of the Company or its Affiliates that have the right to require
such consent or to subordinate any such cash payment, which consent shall
provide that the payment by the Company of any such liquidated damages hereunder
(and the retention of such sum by the receiving Holder) is not subject to any
applicable subordination rights of such lender or holders of such class of
securities.
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<PAGE> 9
(ii) If the Company, at any time while any Debentures are
outstanding, (a) shall pay a stock dividend or otherwise make a distribution or
distributions on shares of its Junior Securities (as defined in Section 7)
payable in shares of the Common Stock, (b) subdivide outstanding shares of the
Common Stock into a larger number of shares, (c) combine outstanding shares of
the Common Stock into a smaller number of shares, or (d) issue by
reclassification of shares of the Common Stock any shares of capital stock of
the Company, the Initial Conversion Price shall be multiplied by a fraction of
which the numerator shall be the number of shares of the Common Stock (excluding
treasury shares, if any) outstanding before such event and of which the
denominator shall be the number of shares of the Common Stock outstanding after
such event. Any adjustment made pursuant to this Section 5(c)(ii) shall become
effective immediately after the record date for the determination of
stockholders entitled to receive such dividend or distribution and shall become
effective immediately after the effective date in the case of a subdivision,
combination or re-classification.
(iii) If the Company, at any time while any Debentures are
outstanding, shall issue rights or warrants to all holders of the Common Stock
(and not to Holders of Debentures) entitling them to subscribe for or purchase
shares of the Common Stock at a price per share less than the Per Share Market
Value of the Common Stock at the record date mentioned below, the Initial
Conversion Price shall be multiplied by a fraction, of which the denominator
shall be the number of shares of the Common Stock (excluding treasury shares, if
any) outstanding on the date of issuance of such rights or warrants plus the
number of additional shares of the Common Stock offered for subscription or
purchase, and of which the numerator shall be the number of shares of the Common
Stock (excluding treasury shares, if any) outstanding on the date of issuance of
such rights or warrants plus the number of shares which the aggregate offering
price of the total number of shares so offered would purchase at such Per Share
Market Value. Such adjustment shall be made whenever such rights or warrants are
issued, and shall become effective immediately after the record date for the
determination of stockholders entitled to receive such rights or warrants.
However, upon the expiration of any right or warrant to purchase shares of the
Common Stock the issuance of which resulted in an adjustment in the Initial
Conversion Price pursuant to this Section 5(c)(iii), if any such right or
warrant shall expire and shall not have been exercised, the Initial Conversion
Price shall immediately upon such expiration be recomputed and effective
immediately upon such expiration be increased to the price which it would have
been (but reflecting any other adjustments in the Initial Conversion Price made
pursuant to the provisions of this Section 5 after the issuance of such rights
or warrants) had the adjustment of the Initial Conversion Price made upon the
issuance of such rights or warrants been made on the basis of offering for
subscription or purchase only that number of shares of the Common Stock actually
purchased upon the exercise of such rights or warrants actually exercised.
(iv) If the Company, at any time while Debentures are
outstanding, shall distribute to all holders of the Common Stock (and not to
Holders of Debentures) evidences of its indebtedness or assets or rights or
warrants to subscribe for or purchase any security (excluding those referred to
in Sections 5(c)(ii) and (iii) above), then in each such case the Initial
Conversion Price at which Debentures shall thereafter be convertible shall be
determined by
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<PAGE> 10
multiplying the Initial Conversion Price in effect immediately prior to the
record date fixed for determination of stockholders entitled to receive such
distribution by a fraction of which the denominator shall be the Per Share
Market Value of the Common Stock determined as of the record date mentioned
above, and of which the numerator shall be such Per Share Market Value of the
Common Stock on such record date less the then fair market value at such record
date of the portion of such assets or evidence of indebtedness so distributed
applicable to one outstanding share of the Common Stock as determined by the
Board of Directors in good faith; provided, however, that in the event of a
distribution exceeding ten percent (10%) of the net assets of the Company, such
fair market value shall be determined by a nationally recognized or major
regional investment banking firm or firm of independent certified public
accountants of recognized standing (which may be the firm that regularly
examines the financial statements of the Company) (an "Appraiser") selected in
good faith by the holders of a majority in interest of Debentures then
outstanding; and provided, further, that the Company, after receipt of the
determination by such Appraiser shall have the right to select an additional
Appraiser, in good faith, in which case the fair market value shall be equal to
the average of the determinations by each such Appraiser. In either case the
adjustments shall be described in a statement provided to the holders of
Debentures of the portion of assets or evidences of indebtedness so distributed
or such subscription rights applicable to one share of the Common Stock. Such
adjustment shall be made whenever any such distribution is made and shall become
effective immediately after the record date mentioned above.
(v) All calculations under this Section 5 shall be made to
the nearest cent or the nearest 1/100th of a share, as the case may be.
(vi) Whenever the Initial Conversion Price is adjusted
pursuant to Section 5(c)(ii),(iii) or (iv), the Company shall promptly mail to
each holder of Debentures, a notice setting forth the Initial Conversion Price
after such adjustment and setting forth a brief statement of the facts requiring
such adjustment.
(vii) In case of any reclassification of the Common Stock or
any compulsory share exchange pursuant to which the Common Stock is converted
into other securities, cash or property, the Holder of this Debenture shall have
the right thereafter to, at its option, (A) convert the then outstanding
principal amount, together with all accrued but unpaid interest and any other
amounts then owing hereunder in respect of this Debenture only into the shares
of stock and other securities, cash and property receivable upon or deemed to be
held by holders of the Common Stock following such reclassification or share
exchange, and the Holders of the Debentures shall be entitled upon such event to
receive such amount of securities, cash or property as the shares of the Common
Stock of the Company into which the then outstanding principal amount, together
with all accrued but unpaid interest and any other amounts then owing hereunder
in respect of this Debenture could have been converted immediately prior to such
reclassification or share exchange would have been entitled or (B) require the
Company to repay, from funds legally available therefor at the time of such
repayment, all of its Debentures at a price equal to the sum of (i) the
aggregate of the principal amount of Debentures then held by the Holder
multiplied by (a) the average Per Share Market
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<PAGE> 11
Value for the five (5) Trading Days immediately preceding (1) the effective date
of the reclassification or share exchange triggering such repayment right or (2)
the date of payment in full by the Company of the repayment price hereunder,
whichever is greater, divided by (b) the Conversion Price calculated on such
effective date, plus (ii) the aggregate of all accrued but unpaid interest and
other amounts then payable in respect of all Debentures to be repaid hereunder.
The entire redemption price shall be paid in cash, and the terms of payment of
such redemption price shall be subject to the provisions set forth in Section
6(b). The terms of any such reclassification or share exchange shall include
such terms so as to continue to give to the Holder the right to receive the
securities, cash or property set forth in this Section 5(c)(vii) upon any
conversion following such event. This provision shall similarly apply to
successive reclassifications or share exchanges.
(viii) If:
A. the Company shall declare a dividend (or any
other distribution) on its Common Stock; or
B. the Company shall declare a special
nonrecurring cash dividend on or a
redemption of its Common Stock; or
C. the Company shall authorize the granting to
all holders of the Common Stock rights or
warrants to subscribe for or purchase any
shares of capital stock of any class or of
any rights; or
D. the approval of any stockholders of the
Company shall be required in connection with
any reclassification of the Common Stock of
the Company, any consolidation or merger to
which the Company is a party, any sale or
transfer of all or substantially all of the
assets of the Company, of any compulsory
share of exchange whereby the Common Stock
is converted into other securities, cash or
property; or
E. the Company shall authorize the voluntary or
involuntary dissolution, liquidation or
winding up of the affairs of the Company;
then the Company shall cause to be filed at each office or agency maintained for
the purpose of conversion of the Debentures, and shall cause to be mailed to the
Holders of Debentures at their last addresses as they shall appear upon the
stock books of the Company, at least 30 calendar days prior to the applicable
record or effective date hereinafter specified, a notice stating (x) the date on
which a record is to be taken for the purpose of such dividend, distribution,
redemption, rights or warrants, or if a record is not to be taken, the date as
of which the holders of the
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<PAGE> 12
Common Stock of record to be entitled to such dividend, distributions,
redemption, rights or warrants are to be determined or (y) the date on which
such reclassification, consolidation, merger, sale, transfer or share exchange
is expected to become effective or close, and the date as of which it is
expected that holders of the Common Stock of record shall be entitled to
exchange their shares of the Common Stock for securities, cash or other property
deliverable upon such reclassification, consolidation, merger, sale, transfer or
share exchange; provided, however, that the failure to mail such notice or any
defect therein or in the mailing thereof shall not affect the validity of the
corporate action required to be specified in such notice. Holders are entitled
to convert Debentures during the 30-day period commencing the date of such
notice to the effective date of the event triggering such notice.
(d) If at any time conditions shall arise by reason of action
taken by the Company which in the opinion of the Board of Directors are not
adequately covered by the other provisions hereof and which might materially and
adversely affect the rights of the Holders (different than or distinguished from
the effect generally on rights of holders of any class of the Company's capital
stock) or if at any time any such conditions are expected to arise by reason of
any action contemplated by the Company, the Company shall mail a written notice
briefly describing the action contemplated and the material adverse effects of
such action on the rights of the Holders at least 30 calendar days prior to the
effective date of such action, and an Appraiser selected by the Holders of
majority in interest of the Debentures shall give its opinion as to the
adjustment, if any (not inconsistent with the standards established in this
Section 5), of the Conversion Price (including, if necessary, any adjustment as
to the securities into which Debentures may thereafter be convertible) and any
distribution which is or would be required to preserve without diluting the
rights of the Holders; provided, however, that the Company, after receipt of the
determination by such Appraiser, shall have the right to select an additional
Appraiser, in good faith, in which case the adjustment shall be equal to the
average of the adjustments recommended by each such Appraiser. The Board of
Directors shall make the adjustment recommended forthwith upon the receipt of
such opinion or opinions or the taking of any such action contemplated, as the
case may be; provided, however, that no such adjustment of the Conversion Price
shall be made which in the opinion of the Appraiser(s) giving the aforesaid
opinion or opinions would result in an increase of the Conversion Price to more
than the Conversion Price then in effect.
(e) The Company covenants that it will at all times reserve
and keep available out of its authorized and unissued shares of the Common Stock
solely for the purpose of issuance upon conversion of the Debentures and payment
of interest on the Debentures, each as herein provided, free from preemptive
rights or any other actual contingent purchase rights of persons other than the
Holders, not less than such number of shares of the Common Stock as shall
(subject to any additional requirements of the Company as to reservation of such
shares set forth in the Purchase Agreement) be issuable (taking into account the
adjustments and restrictions of Section 5(c)) upon the conversion of the
outstanding principal amount of the Debentures and payment of interest
hereunder. The Company covenants that all shares of the Common Stock that shall
be so issuable shall, upon issue, be duly and validly authorized, issued and
fully paid,
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<PAGE> 13
nonassessable and, if the Underlying Shares Registration Statement has been
declared effective under the Securities Act, freely tradeable.
(f) Upon a conversion hereunder the Company shall not be
required to issue stock certificates representing fractions of shares of the
Common Stock, but may if otherwise permitted, make a cash payment in respect of
any final fraction of a share based on the Per Share Market Value at such time.
If the Company elects not, or is unable, to make such a cash payment, the holder
shall be entitled to receive, in lieu of the final fraction of a share, one
whole share of Common Stock.
(g) The issuance of certificates for shares of the Common
Stock on conversion of the Debentures shall be made without charge to the
Holders thereof for any documentary stamp or similar taxes that may be payable
in respect of the issue or delivery of such certificate, provided that the
Company shall not be required to pay any tax that may be payable in respect of
any transfer involved in the issuance and delivery of any such certificate upon
conversion in a name other than that of the Holder of such Debentures so
converted and the Company shall not be required to issue or deliver such
certificates unless or until the person or persons requesting the issuance
thereof shall have paid to the Company the amount of such tax or shall have
established to the satisfaction of the Company that such tax has been paid.
(h) Any and all notices or other communications or deliveries
to be provided by the Holders of the Debentures hereunder, including, without
limitation, any Conversion Notice, shall be in writing and delivered personally,
by facsimile, sent by a nationally recognized overnight courier service or sent
by certified or registered mail, postage prepaid, addressed to the Company, at
4517 N.W. 31st Avenue, Ft. Lauderdale, Florida 33309 (facsimile number (954)
714-5049), attention Chief Executive Officer, or such other address or facsimile
number as the Company may specify for such purposes by notice to the Holders
delivered in accordance with this Section. Any and all notices or other
communications or deliveries to be provided by the Company hereunder shall be in
writing and delivered personally, by facsimile, sent by a nationally recognized
overnight courier service or sent by certified or registered mail, postage
prepaid, addressed to each Holder of the Debentures at the facsimile telephone
number or address of such Holder appearing on the books of the Company, or if no
such facsimile telephone number or address appears, at the principal place of
business of the holder. Any notice or other communication or deliveries
hereunder shall be deemed given and effective on the earliest of (i) the date of
transmission, if such notice or communication is delivered via facsimile at the
facsimile telephone number specified in this Section prior to 4:30 p.m. (Eastern
Time), (ii) the date after the date of transmission, if such notice or
communication is delivered via facsimile at the facsimile telephone number
specified in this Section later than 4:30 p.m. (Eastern Time) on any date and
earlier than 11:59 p.m. (Eastern Time) on such date, (iii) four days after
deposit in the United States mails, (iv) the Business Day following the date of
mailing, if send by nationally recognized overnight courier service, or (v) upon
actual receipt by the party to whom such notice is required to be given.
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<PAGE> 14
Section 6. Repayments.
(a) The Company shall have the right, exercisable at any time
upon 20 Trading Days notice to the Holders of the Debentures given at any time
after the Original Issue Date to repay, from funds legally available therefor at
the time of such repayment, all or any portion of the outstanding principal
amount of the Debentures which have not previously been converted or repaid, at
a price equal to the sum of (A) the aggregate of the principal amount of the
Debentures to be repaid multiplied by (i) the average Per Share Market Value for
the five (5) Trading Days immediately preceding (1) the date of the repayment
notice referenced above or (2) the date of payment in full by the Company of the
repayment price hereunder, whichever is greater, divided by (ii) the Conversion
Price calculated on the date of such repayment notice and (B) the aggregate of
all accrued but unpaid interest and other amounts owing in respect of the
Debentures to be repaid. The entire repayment price shall be paid in cash.
Holders of the Debentures may convert the Debentures, including the Debentures
subject to a repayment notice given under this Section, during the period from
the date of such repayment notice through the 19th Trading Day thereafter.
(b) If any portion of the applicable repayment price under
Sections 6(a) shall not be paid by the Company within seven (7) calendar days
after the date due, interest shall accrue thereon at the rate of 15% per annum
until the repayment price plus all such interest is paid in full (which amount
shall be paid as liquidated damages and not as a penalty). In addition, if any
portion of such repayment price remains unpaid for more than 7 calendar days
after the date due, the Holder of the Debentures subject to such repayment may
elect, by written notice to the Company given within 30 days after the date due,
to either (i) demand conversion in accordance with the formula and the time
frame therefor set forth in Section 5 of all Debentures for which such repayment
price, plus accrued liquidated damages thereof, has not been paid in full (the
"Unpaid Repayment Shares"), in which event the Per Share Market Price for such
shares shall be the lower of the Per Share Market Price calculated on the date
such repayment price was originally due and the Per Share Market Price as of the
Holder's written demand for conversion, or (ii) invalidate ab initio such
repayment, notwithstanding anything herein contained to the contrary. If the
Holder elects option (i) above, the Company shall within three (3) Trading Days
of its receipt of such election deliver to the Holder the shares of the Common
Stock issuable upon conversion of the Unpaid Repayment Shares subject to such
Holder conversion demand and otherwise perform its obligations hereunder with
respect thereto; or, if the Holder elects option (ii) above, the Company shall
promptly, and in any event not later than three (3) Trading Days from receipt of
holder's notice of such election, return to the holder all of the Unpaid
Repayment Shares. Notwithstanding anything to the contrary contained herein, the
Company may not, without the written consent of the holder, repay Debentures
unless both the payment thereof and the retention of such paid cash by the
holder is consented to in writing free of any subordination prior thereto by all
lenders or holders of any indebtedness or class of securities of the Company who
have the right to consent to or force the subordination of such payment.
Section 7. Definitions. For the purposes hereof, the following
terms shall have the following meanings:
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<PAGE> 15
"Adjustment Amount" is equal to (i) the aggregate principal
amount of Debentures then outstanding multiplied by (A) the average Per Share
Market Value for the five Trading Days immediately preceding (1) the applicable
Trigger Date or (2) the date of payment of all amounts due as a result of such
Event of Default, whichever is greater, divided by (B) the Conversion Price with
respect to the aggregate principal amount of Debentures then outstanding
calculated on the applicable Trigger Date, MINUS (ii) the aggregate principal
amount of Debentures then outstanding, plus all accrued and unpaid interest
thereon, and all other amounts due, except for those referred to in (i) above
pursuant to the terms hereof.
"Business Day" means any day except Saturday, Sunday and any
day which shall be a legal holiday or a day on which banking institutions in the
State of New York are authorized or required by law or other government action
to close.
"Class B Exchange Agreement" means the Class B Exchange
Agreement, dated May 8, 1997, between the Company and the original Holder
relating to the Class B Preferred Stock.
"Class B Preferred Stock" means the Company's Class B
Preferred Stock, par value $.01 per share.
"Common Stock" means the Company's common stock, $.01 par
value per share, of the Company and stock of any other class into which such
shares may hereafter have been reclassified or changed.
"Junior Securities" means the Common Stock and all other
equity securities of the Company and all other debt that is subordinated to the
Debentures by its terms.
"Original Issue Date" shall mean the date of the first
issuance of any Debentures regardless of the number of transfers of any
Debenture and regardless of the number of instruments which may be issued to
evidence such Debenture.
"Per Share Market Value" means on any particular date (a) the
closing bid price per share of the Common Stock on such date on the American
Stock Exchange or other stock exchange or quotation system on which the Common
Stock is then listed or if there is no such price on such date, then the closing
bid price on such exchange or quotation system on the date nearest preceding
such date, or (b) if the Common Stock is not listed then on the American Stock
Exchange or any stock exchange or quotation system, the closing bid price for a
share of the Common Stock in the over-the-counter market, as reported by the
Nasdaq Stock Market or in the National Quotation Bureau Incorporated or similar
organization or agency succeeding to its functions of reporting prices) at the
close of business on such date, or (c) if the Common Stock is not then reported
by the National Quotation Bureau Incorporated (or similar organization or agency
succeeding to its functions of reporting prices), then the average of the "Pink
Sheet" quotes for the relevant conversion period, as determined in good faith by
the holder, or (d) if the Common Stock is not then publicly traded the fair
market value of a share
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<PAGE> 16
of Common Stock as determined by an Appraiser selected in good faith by the
holders of a majority in interest of the Debentures; provided, however, that the
Company, after receipt of the determination by such Appraiser, shall have the
right to select an additional Appraiser, in which case, the fair market value
shall be equal to the average of the determinations by each such Appraiser.
"Person" means a corporation, an association, a partnership,
organization, a business, an individual, a government or political subdivision
thereof or a governmental agency.
"Registration Rights Agreement" means the Registration Rights
Agreement, dated May 8, 1997, between the Company and the original holder of
Debentures.
"Trading Day" means (a) a day on which the Common Stock is
traded on the American Stock Exchange or other stock exchange or market on which
the Common Stock has been listed, or (b) if the Common Stock is not listed on
the American Stock Exchange or any stock exchange or market, a day on which the
Common Stock is traded in the over-the-counter market, as reported by the OTC
Bulletin Board, or (c) if the Common Stock is not quoted on the OTC Bulletin
Board, a day on which the Common Stock is quoted in the over-the-counter market
as reported by the National Quotation Bureau Incorporated (or any similar
organization or agency succeeding its functions of reporting prices).
"Trigger Date" shall mean, (i) with respect to an Event of
Default caused by an event described in Section 4(a), the date the payment of
principal or interest at issue was due, (ii) with respect to an Event of Default
caused by an event described in Section 4(b), the date specified in any other
provision of this Debenture, the Purchase Agreement, the Class B Exchange
Agreement or the Registration Rights Agreement that require repayment of the
outstanding principal amount of this Debenture as a result of an event so
contemplated, if not, the date such event becomes an Event of Default pursuant
to Section 4(b), and (iii) with respect to an Event of Default caused by an
event described in Section 4(c), (d), (e) and (f), the date such event becomes
an Event of Default pursuant to such Sections.
"Underlying Shares" means the number of shares of Common Stock
into which the Shares are convertible in accordance with the terms hereof and
the Purchase Agreement.
Section 8. Except as expressly provided herein, no provision
of this Debenture shall alter or impair the obligation of the Company, which is
absolute and unconditional, to pay the principal of, and interest on, this
Debenture at the time, place, and rate, and in the coin or currency, herein
prescribed. This Debenture is a direct obligation of the Company. This Debenture
ranks pari passu with all other Debentures now or hereafter issued under the
terms set forth herein; provided, however, that this Debenture is subordinate in
right of payment to the outstanding Convertible Senior Promissory Notes due
November 8, 1999 of the Company. The Company may only prepay the outstanding
principal amount on the Debentures in accordance with Section 6 hereof.
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<PAGE> 17
Section 9. This Debenture shall not entitle the Holder to any
of the rights of a stockholder of the Company, including without limitation, the
right to vote, to receive dividends and other distributions, or to receive any
notice of, or to attend, meetings of stockholders or any other proceedings of
the Company, unless and to the extent converted into shares of Common Stock in
accordance with the terms hereof.
Section 10. If this Debenture shall be mutilated, lost, stolen
or destroyed, the Company shall execute and deliver, in exchange and
substitution for and upon cancellation of a mutilated Debenture, or in lieu of
or in substitution for a lost, stolen or destroyed debenture, a new Debenture
for the principal amount of this Debenture so mutilated, lost, stolen or
destroyed but only upon receipt of evidence of such loss, theft or destruction
of such Debenture, and of the ownership hereof, and indemnity, if requested, all
reasonably satisfactory to the Company.
Section 11. This Debenture shall be governed by and construed
in accordance with the laws of the State of New York, without giving effect to
conflicts of laws thereof.
Section 12. Any waiver by the Company or the Holder of a
breach of any provision of this Debenture shall not operate as or be construed
to be a waiver of any other breach of such provision or of any breach of any
other provision of this Debenture. The failure of the Company or the Holder to
insist upon strict adherence to any term of this Debenture on one or more
occasions shall not be considered a waiver or deprive that party of the right
thereafter to insist upon strict adherence to that term or any other term of
this Debenture. Any waiver must be in writing.
Section 13. If any provision of this Debenture is invalid,
illegal or unenforceable, the balance of this Debenture shall remain in effect,
and if any provision is inapplicable to any person or circumstance, it shall
nevertheless remain applicable to all other persons and circumstances.
Section 14. Whenever any payment or other obligation hereunder
shall be due on a day other than a Business Day, such payment shall be made on
the next succeeding Business Day (or, if such next succeeding Business Day falls
in the next calendar month, the preceding Business Day in the appropriate
calendar month).
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<PAGE> 18
IN WITNESS WHEREOF, the Company has caused this instrument to
be duly executed by an officer thereunto duly authorized as of the date first
above indicated.
SUBSTANCE ABUSE TECHNOLOGIES, INC.
By:_______________________________
Name:
Title:
Attest:
By:___________________________
Name:
Title:
<PAGE> 19
EXHIBIT A
NOTICE OF CONVERSION
(To be Executed by the Registered Holder
in order to Convert the Debenture)
The undersigned hereby elects to convert Debenture No. 1 into shares of Common
Stock, par value $.01 per share (the "Common Stock"), of Substance Abuse
Technologies, Inc. (the "Company") according to the conditions hereof, as of the
date written below. If shares are to be issued in the name of a person other
than undersigned, the undersigned will pay all transfer taxes payable with
respect thereto and is delivering herewith such certificates and opinions as
reasonably requested by the Company in accordance therewith. No fee will be
charged to the holder for any conversion, except for such transfer taxes, if
any.
Conversion calculations: ________________________________________________
Date to Effect Conversion
________________________________________________
Principal Amount of Debentures to be Converted
________________________________________________
Number of shares of Common Stock to be Issued
________________________________________________
Applicable Conversion Price
________________________________________________
Signature
________________________________________________
Name
________________________________________________
Address
The Company undertakes to promptly upon its receipt of this conversion notice
(and, in any case prior to the time it effects the conversion requested hereby),
notify the converting holder by facsimile of the number of shares of Common
Stock outstanding on such date and the number of shares of Common Stock which
would be issuable to the holder if the conversion requested in this conversion
notice were effected in full, whereupon, if the Company determines that such
conversion would result in it owning in excess of 4.9% of the outstanding shares
of Common Stock on such date, the Company shall convert up to an amount equal to
4.9% of the outstanding shares of Common Stock and issue to the holder one or
more certificates representing Debentures which have not been converted as a
result of this provision.
<PAGE> 1
Exhibit 4(e)(4)
NEITHER THESE SECURITIES NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE
EXERCISABLE HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR
THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM
REGISTRATION UNDER SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"),
AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE
EXEMPTION FROM THE REGISTRATION REQUIREMENTS THEREUNDER AND IN COMPLIANCE WITH
APPLICABLE STATE SECURITIES OR BLUE SKY LAWS.
SUBSTANCE ABUSE TECHNOLOGIES, INC.
WARRANT
Dated May 8, 1997
Substance Abuse Technologies, Inc., a Delaware corporation (the
"Company"), hereby certifies that, for value received, Wharton Capital Partners,
Ltd., or its registered assigns ("Holder"), is entitled, subject to the terms
set forth below, to purchase from the Company up to a total of 75,000 shares of
Common Stock, $.01 par value per share (the "Common Stock"), of the Company
(each such share, a "Warrant Share" and all such shares, the "Warrant Shares")
at an exercise price equal to $2.00 per share (as adjusted from time to time as
provided in Section 7, the "Exercise Price"), at any time and from time to time
from and after the date hereof and through and including May 8, 2000 (the
"Expiration Date"), and subject to the following terms and conditions:
1. Registration of Warrant. The Company shall register this
Warrant, upon records to be maintained by the Company for that purpose (the
"Warrant Register"), in the name of the record Holder hereof from time to time.
The Company may deem and treat the registered Holder of this Warrant as the
absolute owner hereof for the purpose of any exercise hereof or any distribution
to the Holder, and for all other purposes, and the Company shall not be affected
by notice to the contrary.
2. Registration of Transfers and Exchanges.
(a) The Company shall register the transfer of any portion
of this Warrant in the Warrant Register, upon surrender of this Warrant, with
the Form of Assignment attached hereto duly completed and signed, to the
Transfer Agent or to the Company at the office specified in or pursuant to
Section 3(b). Upon any such registration or transfer, a new
<PAGE> 2
warrant to purchase Common Stock, in substantially the form of this Warrant (any
such new warrant, a "New Warrant"), evidencing the portion of this Warrant so
transferred shall be issued to the transferee and a New Warrant evidencing the
remaining portion of this Warrant not so transferred, if any, shall be issued to
the transferring Holder. The acceptance of the New Warrant by the transferee
thereof shall be deemed the acceptance of such transferee of all of the rights
and obligations of a holder of a Warrant.
(b) This Warrant is exchangeable, upon the surrender hereof by
the Holder to the office of the Company specified in or pursuant to Section 3(b)
for one or more New Warrants, evidencing in the aggregate the right to purchase
the number of Warrant Shares which may then be purchased hereunder. Any such New
Warrant will be dated the date of such exchange.
3. Duration and Exercise of Warrants.
(a) This Warrant shall be exercisable by the registered Holder
on any business day before 5:30 P.M., New York time, at any time and from time
to time on or after the date hereof to and including the Expiration Date. At
5:30 P.M., New York time on the Expiration Date, the portion of this Warrant not
exercised prior thereto shall be and become void and of no value.
(b) Subject to Sections 2(b), 4 and 8, upon surrender of this
Warrant, with the Form of Election to Purchase attached hereto duly completed
and signed, to the Company at its office at 4517 N.W. 31st Avenue, Ft.
Lauderdale, Florida 33309 Attention: Chief Executive Officer, or at such other
address as the Company may specify in writing to the then registered Holder, and
upon payment of the Exercise Price multiplied by the number of Warrant Shares
that the Holder intends to purchase hereunder, in lawful money of the United
States of America, in cash or by certified or official bank check or checks, all
as specified by the Holder in the Form of Election to Purchase, the Company
shall promptly (but in no event later than 3 business days after the date of
exercise) issue or cause to be issued and cause to be delivered to or upon the
written order of the Holder and in such name or names as the Holder may
designate, a certificate for the Warrant Shares issuable upon such exercise,
free of restrictive legends other than as required by applicable law. Any person
so designated by the Holder to receive Warrant Shares shall be deemed to have
become holder of record of such Warrant Shares as of the Date of Exercise of
this Warrant.
A "Date of Exercise" means the date on which the Company shall
have received (i) this Warrant (or any New Warrant, as applicable), with the
Form of Election to Purchase attached hereto (or attached to such New Warrant)
appropriately completed and duly signed, and (ii) payment of the Exercise Price
for the number of Warrant Shares so indicated by the holder hereof to be
purchased.
(c) This Warrant shall be exercisable, either in its entirety
or, from time to time, for a portion of the number of Warrant Shares. If less
than all of the Warrant
-2-
<PAGE> 3
Shares which may be purchased under this Warrant are exercised at any time, the
Company shall issue or cause to be issued, at its expense, a New Warrant
evidencing the right to purchase the remaining number of Warrant Shares for
which no exercise has been evidenced by this Warrant.
4. Payment of Taxes. The Company will pay all documentary stamp taxes
attributable to the issuance of Warrant Shares upon the exercise of this
Warrant; provided, however, that the Company shall not be required to pay any
tax which may be payable in respect of any transfer involved in the registration
of any certificates for Warrant Shares or Warrants in a name other than that of
the Holder, and the Company shall not be required to issue or cause to be issued
or deliver or cause to be delivered the certificates for Warrant Shares unless
or until the person or persons requesting the issuance thereof shall have paid
to the Company the amount of such tax or shall have established to the
satisfaction of the Company that such tax has been paid. The Holder shall be
responsible for all other tax liability that may arise as a result of holding or
transferring this Warrant or receiving Warrant Shares upon exercise hereof.
5. Replacement of Warrant. If this Warrant is mutilated, lost, stolen
or destroyed, the Company may in its discretion issue or cause to be issued in
exchange and substitution for and upon cancellation hereof, or in lieu of and
substitution for this Warrant, a New Warrant, but only upon receipt of evidence
reasonably satisfactory to the Company of such loss, theft or destruction and
indemnity, if requested, satisfactory to it. Applicants for a New Warrant under
such circumstances shall also comply with such other reasonable regulations and
procedures and pay such other reasonable charges as the Company may prescribe.
6. Reservation of Warrant Shares. The Company covenants that it will at
all times reserve and keep available out of the aggregate of its authorized but
unissued Common Stock, solely for the purpose of enabling it to issue Warrant
Shares upon exercise of this Warrant as herein provided, the number of Warrant
Shares which are then issuable and deliverable upon the exercise of this entire
Warrant, free from preemptive rights or any other actual contingent purchase
rights of persons other than the Holders (taking into account the adjustments
and restrictions of Section 7). The Company covenants that all Warrant Shares
that shall be so issuable and deliverable shall, upon issuance and the payment
of the applicable Exercise Price in accordance with the terms hereof, be duly
and validly authorized, issued and fully paid and nonassessable.
7. Certain Adjustments. The Exercise Price and number of Warrant Shares
issuable upon exercise of this Warrant are subject to adjustment from time to
time as set forth in this Section 7. Upon each such adjustment of the Exercise
Price pursuant to this Section 7, the Holder shall thereafter prior to the
Expiration Date be entitled to purchase, at the Exercise Price resulting from
such adjustment, the number of Warrant Shares obtained by multiplying the
Exercise Price in effect immediately prior to such adjustment by the number of
Warrant Shares issuable upon exercise of this Warrant immediately prior to such
adjustment and dividing the product thereof by the Exercise Price resulting from
such adjustment.
-3-
<PAGE> 4
(a) If the Company, at any time while this Warrant is
outstanding, (i) shall pay a stock dividend or otherwise make a distribution or
distributions on shares of its Common Stock (as defined below) or on any other
class of capital stock and not the Common Stock) payable in shares of the Common
Stock, (ii) subdivide outstanding shares of the Common Stock into a larger
number of shares, or (iii) combine outstanding shares of the Common Stock into a
smaller number of shares, the Exercise Price shall be multiplied by a fraction
of which the numerator shall be the number of shares of the Common Stock
(excluding treasury shares, if any) outstanding before such event and of which
the denominator shall be the number of shares of Common Stock (excluding
treasury shares, if any) outstanding after such event. Any adjustment made
pursuant to this Section shall become effective immediately after the record
date for the determination of stockholders entitled to receive such dividend or
distribution and shall become effective immediately after the effective date in
the case of a subdivision or combination, and shall apply to successive
subdivisions and combinations.
(b) In case of any reclassification of the Common Stock, any
consolidation or merger of the Company with or into another person, the sale or
transfer of all or substantially all of the assets of the Company or any
compulsory share exchange pursuant to which the Common Stock is converted into
other securities, cash or property, then the Holder shall have the right
thereafter to exercise this Warrant only into the shares of stock and other
securities and property receivable upon or deemed to be held by holders of the
Common Stock following such reclassification, consolidation, merger, sale,
transfer or share exchange, and the Holder shall be entitled upon such event to
receive such amount of securities or property equal to the amount of securities
or property that such Holder would have been entitled to had such Holder
exercised this Warrant immediately prior to such reclassification,
consolidation, merger, sale, transfer or share exchange, subject to continuing
adjustment as set forth herein (except that such adjustment, if any, should be
in regard of the new entity or reclassified securities). The terms of any such
consolidation, merger, sale, transfer or share exchange shall include such terms
so as to continue to give to the Holder the right to receive the securities or
property set forth in this Section 7(b) upon any exercise following any such
reclassification, consolidation, merger, sale, transfer or share exchange.
(c) If the Company, at any time while this Warrant is
outstanding, shall distribute to all holders of Common Stock (and not to holders
of this Warrant) evidences of its indebtedness or assets or rights or warrants
to subscribe for or purchase any security (excluding those referred to in
Sections 7(a), (b) and (d)), then in each such case the Exercise Price shall be
determined by multiplying the Exercise Price in effect immediately prior to the
record date fixed for determination of stockholders entitled to receive such
distribution by a fraction of which the denominator shall be the Exercise Price
determined as of the record date mentioned above, and of which the numerator
shall be such Exercise Price on such record date less the then fair market value
at such record date of the portion of such assets or evidence of indebtedness so
distributed applicable to one outstanding share of Common Stock as determined by
a nationally recognized or major regional investment banking firm or firm of
independent certified public accountants of recognized standing (which may be
the firm that regularly examines the
-4-
<PAGE> 5
financial statements of the Company) (an "Appraiser") selected in good faith by
the holders of a majority in interest of the Warrants then outstanding.
(d) If, at any time while this Warrant is outstanding, the
Company shall issue or cause to be issued rights or warrants to acquire or
otherwise sell or distribute shares of Common Stock to all holders of Common
Stock for a consideration per share less than the Exercise Price then in effect,
then, forthwith upon such issue or sale, the Exercise Price shall be reduced to
the price (calculated to the nearest cent) determined by dividing (i) an amount
equal to the sum of (A) the number of shares of Common Stock outstanding
immediately prior to such issue or sale multiplied by the Exercise Price, and
(B) the consideration, if any, received or receivable by the Company upon such
issue or sale by (ii) the total number of shares of Common Stock outstanding
immediately after such issue or sale.
(e) For the purposes of this Section 7, the following clauses
shall also be applicable:
(i) Record Date. In case the Company shall take a record
of the holders of its Common Stock for the purpose of entitling them (A) to
receive a dividend or other distribution payable in shares of the Common Stock
or in Convertible Securities, or (B) to subscribe for or purchase Common Stock
or Convertible Securities, then such record date shall be deemed to be the date
of the issue or sale of the shares of the Common Stock deemed to have been
issued or sold upon the declaration of such dividend or the making of such other
distribution or the date of the granting of such right of subscription or
purchase, as the case may be.
(ii) Treasury Shares. The number of shares of the Common
Stock outstanding at any given time shall not include shares owned or held by or
for the account of the Company, and the disposition of any such shares shall be
considered an issue or sale of the Common Stock.
(f) All calculations under this Section 7 shall be made to the
nearest cent or the nearest 1/100th of a share, as the case may be.
(g) Whenever the Exercise Price is adjusted pursuant to
Section 7(c) above, the Company, after receipt of the determination by the
Appraiser, shall have the right to select an additional Appraiser, in good
faith, in which case the adjustment shall be equal to the average of the
adjustments recommended by each Appraiser. The Company shall promptly mail or
cause to be mailed to each Holder, a notice setting forth the Exercise Price
after such adjustment and setting forth a brief statement of the facts requiring
such adjustment. Such adjustment shall become effective immediately after the
record date mentioned above. All determinations with respect to adjustments by
the Company hereunder shall be made by the Board of Directors in good faith.
(h) If:
-5-
<PAGE> 6
(i) the Company shall declare a dividend (or any
other distribution) on its Common Stock; or
(ii) the Company shall declare a special
nonrecurring cash dividend on or a
redemption of its Common Stock; or
(iii) the Company shall authorize the granting to
all holders of the Common Stock rights or
warrants to subscribe for or purchase any
shares of capital stock of any class or of
any rights; or
(iv) the approval of any stockholders of the
Company shall be required in connection with
any reclassification of the Common Stock of
the Company, any consolidation or merger to
which the Company is a party, any sale or
transfer of all or substantially all of the
assets of the Company, or any compulsory
share exchange whereby the Common Stock is
converted into other securities, cash or
property; or
(v) the Company shall authorize the voluntary
dissolution, liquidation or winding up of
the affairs of the Company,
then the Company shall cause to be mailed to each Holder at their last addresses
as they shall appear upon the Warrant Register, at least 30 calendar days prior
to the applicable record or effective date hereinafter specified, a notice
stating (x) the date on which a record is to be taken for the purpose of such
dividend, distribution, redemption, rights or warrants, or if a record is not to
be taken, the date as of which the holders of Common Stock of record to be
entitled to such dividend, distributions, redemption, rights or warrants are to
be determined or (y) the date on which such reclassification, consolidation,
merger, sale, transfer or share exchange is expected to become effective or
close, and the date as of which it is expected that holders of Common Stock of
record shall be entitled to exchange their shares of Common Stock for
securities, cash or other property deliverable upon such reclassification,
consolidation, merger, sale, transfer, share exchange, dissolution, liquidation
or winding up; provided, however, that the failure to mail such notice or any
defect therein or in the mailing thereof shall not affect the validity of the
corporate action required to be specified in such notice.
-6-
<PAGE> 7
8. Fractional Shares. The Company shall not be required to issue or
cause to be issued fractional Warrant Shares on the exercise of this Warrant.
The number of full Warrant Shares which shall be issuable upon the exercise of
this Warrant shall be computed on the basis of the aggregate number of Warrant
Shares purchasable on exercise of this Warrant so presented. If any fraction of
a Warrant Share would, except for the provisions of this Section 8, be issuable
on the exercise of this Warrant, the Company shall pay an amount in cash equal
to the Exercise Price multiplied by such fraction.
9. Notices. Any and all notices or other communications or deliveries
hereunder shall be in writing and shall be deemed given and effective on the
earliest of (i) the date of transmission, if such notice or communication is
delivered via facsimile at the facsimile telephone number specified in this
Section prior to 4:30 p.m. (Eastern Standard Time) on a business day, (ii) the
business day after the date of transmission, if such notice or communication is
delivered via facsimile at the facsimile telephone number specified in this
Section later than 4:30 p.m. (Eastern Standard Time) on any date and earlier
than 11:59 p.m. (Eastern Standard Time) on such date, (iii) the business day
following the date of mailing, if sent by nationally recognized overnight
courier service, or (iv) upon actual receipt by the party to whom such notice is
required to be given. The addresses for such communications shall be: (1) if to
the Company, to Substance Abuse Technologies, Inc., 4517 N.W. 31st Avenue, Ft.
Lauderdale, Florida 33309, Attention: Chief Executive Officer, or to facsimile
no. (954) 714-5049, or (ii) if to the Holder, to the Holder at the address or
facsimile number appearing on the Warrant Register or such other address or
facsimile number as the Holder may provide to the Company in accordance with
this Section 9.
10. Warrant Agent.
(a) The Company shall serve as warrant agent under this Warrant.
Upon thirty (30) days' notice to the Holder, the Company may appoint a new
warrant agent.
(b) Any corporation into which the Company or any new warrant agent
may be merged or any corporation resulting from any consolidation to which the
Company or any new warrant agent shall be a party or any corporation to which
the Company or any new warrant agent transfers substantially all of its
corporate trust or shareholders services business shall be a successor warrant
agent under this Warrant without any further act. Any such successor warrant
agent shall promptly cause notice of its succession as warrant agent to be
mailed (by first class mail, postage prepaid) to the Holder at the Holder's last
address as shown on the Warrant Register.
-7-
<PAGE> 8
11. Miscellaneous.
(a) This Warrant shall be binding on, and inure to the benefit of,
the parties hereto and their respective successors and permitted assigns. This
Warrant may be amended only in writing signed by the Company and the Holder.
(b) Subject to Section 11(a), above, nothing in this Warrant shall
be construed to give to any person or corporation other than the Company and the
Holder any legal or equitable right, remedy or cause under this Warrant; this
Warrant shall be for the sole and exclusive benefit of the Company and the
Holder.
(c) This Warrant shall be governed by and construed and enforced in
accordance with the internal laws of the State of New York without regard to the
principles of conflicts of law thereof.
(d) The headings herein are for convenience only, do not constitute
a part of this Warrant and shall not be deemed to limit or affect any of the
provisions hereof.
(e) In case any one or more of the provisions of this Warrant shall
be invalid or unenforceable in any respect, the validity and enforceability of
the remaining terms and provisions of this Warrant shall not in any way be
affected or impaired thereby and the parties will attempt in good faith to agree
upon a valid and enforceable provision which shall be a commercially reasonable
substitute therefor, and upon so agreeing, shall incorporate such substitute
provision in this Warrant.
-8-
<PAGE> 9
IN WITNESS WHEREOF, the Company has caused this Warrant to be duly
executed by its authorized officer as of the date first indicated above.
SUBSTANCE ABUSE TECHNOLOGIES,
INC.
By:_______________________________
Name:_____________________________
Title:____________________________
<PAGE> 10
FORM OF ELECTION TO PURCHASE
(To be executed by the Holder to exercise the right to purchase shares of Common
Stock under the foregoing Warrant)
To Substance Abuse Technologies, Inc.:
In accordance with the Warrant enclosed with this Form of Election to
Purchase, the undersigned hereby irrevocably elects to purchase _____________
shares of Common Stock ("Common Stock"), $.01 par value per share, of Substance
Abuse Technologies, Inc. and encloses herewith $________ in cash or certified or
official bank check or checks, which sum represents the aggregate Exercise Price
(as defined in the Warrant) for the number of shares of Common Stock to which
this Form of Election to Purchase relates, together with any applicable taxes
payable by the undersigned pursuant to the Warrant.
The undersigned requests that certificates for the shares of Common
Stock issuable upon this exercise be issued in the name of
PLEASE INSERT SOCIAL SECURITY OR
TAX IDENTIFICATION NUMBER
________________________________
________________________________________________________________________________
(Please print name and address)
________________________________________________________________________________
________________________________________________________________________________
If the number of shares of Common Stock issuable upon this exercise
shall not be all of the shares of Common Stock which the undersigned is entitled
to purchase in accordance with the enclosed Warrant, the undersigned requests
that a New Warrant (as defined in the Warrant) evidencing the right to purchase
the shares of Common Stock not issuable pursuant to the exercise evidenced
hereby be issued in the name of and delivered to:
________________________________________________________________________________
(Please print name and address)
________________________________________________________________________________
________________________________________________________________________________
Dated:_______________,_____ Name of Holder:
(Print)______________________________________
(By:)________________________________________
(Name:)
(Title:)
(Signature must conform in all respects to
name of holder as specified on the face of
the Warrant)
<PAGE> 11
[To be completed and signed only upon transfer of Warrant]
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers
unto ________________________________ the right represented by the within
Warrant to purchase ____________ shares of Common Stock of Substance Abuse
Technologies, Inc. to which the within Warrant relates and appoints
________________ attorney to transfer said right on the books of Substance Abuse
Technologies, Inc. with full power of substitution in the premises.
Dated:
______________,_____
____________________________________________
(Signature must conform in all respects to
name of holder as specified on the face of
the Warrant)
____________________________________________
Address of Transferee
____________________________________________
____________________________________________
In the presence of:
__________________________
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<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> APR-01-1996
<PERIOD-END> MAR-31-1997
<CASH> 634
<SECURITIES> 0
<RECEIVABLES> 1,123
<ALLOWANCES> 650
<INVENTORY> 17
<CURRENT-ASSETS> 1,399
<PP&E> 2,384
<DEPRECIATION> 1,137
<TOTAL-ASSETS> 8,154
<CURRENT-LIABILITIES> 2,781
<BONDS> 0
0
412
<COMMON> 360
<OTHER-SE> (957)
<TOTAL-LIABILITY-AND-EQUITY> 8,154
<SALES> 953
<TOTAL-REVENUES> 2,724
<CGS> 735
<TOTAL-COSTS> 14,033
<OTHER-EXPENSES> 306
<LOSS-PROVISION> 583
<INTEREST-EXPENSE> 331
<INCOME-PRETAX> (15,696)
<INCOME-TAX> 0
<INCOME-CONTINUING> (15,129)
<DISCONTINUED> (315)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (15,444)
<EPS-PRIMARY> (0.44)
<EPS-DILUTED> (0.44)
</TABLE>
