<PAGE i>
SCHEDULE 14A
(Rule 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934
Filed by the registrant [X]
Filed by a party other than the registrant [ ]
Check the appropriate box:
[X] Preliminary proxy statement [ ] Confidential, for Use of the
Commission Only (as permitted
by Rule 14a-6(e)(2))
[ ] Definitive proxy statement
[ ] Definitive additional materials
[ ] Soliciting material pursuant to Rule 14a-11(c) or Rule 14a-12
SUBSTANCE ABUSE TECHNOLOGIES, INC.
- -----------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
SUBSTANCE ABUSE TECHNOLOGIES, INC.
- -----------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement)
Payment of filing fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which transactions applies:
(3) Per unit price or other underlying value of
transaction computed pursuant to Exchange Act Rule 0-11:1
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by
Exchange Act Rule 0-11(a)(2) and identify the filing for
which the offsetting fee was paid previously. Identify the
previous filing by registration statement number, or the form
or schedule and the date of its filing.
(1) Amount previously paid:
(2) Form, schedule or registration statement no.:
(3) Filing party:
(4) Date filed
- ----------------------------
1 Set forth the amount on which the filing fee is calculated and state how
it is determined.
<PAGE 1>
SUBSTANCE ABUSE TECHNOLOGIES, INC.
4517 N.W. 31st Avenue
Ft. Lauderdale, Florida 33309
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
To the Stockholders of
SUBSTANCE ABUSE TECHNOLOGIES, INC.
A Special Meeting of Stockholders of Substance Abuse
Technologies, Inc. (the "Company") will be held at the Westin
Hotel, 400 Corporate Drive, Fort Lauderdale, Florida 33334, on
August 27, 1997, at 10:00 a.m., Eastern Standard Time (the
"Special Meeting"), for the following purposes:
1. To approve an Amendment to the Certificate of
Incorporation of the Company to increase the number of
authorized shares of the Company's Common Stock, $.01
par value, from 50,000,000 shares to 100,000,000
shares.
2. To approve an Amendment to the Certificate of
Incorporation to authorize a new class of 3,000,000
shares of a Class "C" Preferred Stock, $.01 par value,
with such voting rights, full or limited, or no voting
powers, and such designations, preferences and
relative, participating, optional or other special
rights, and qualifications, or restrictions thereof as
shall be stated and expressed in a resolution or
resolutions providing for the issue of such stock
adopted by the Board of Directors of the Company.
Only stockholders of record at the close of business on August 5,
1997 are entitled to notice of, and to vote at, the Special
Meeting or any adjournment thereof.
By Order of the Board of Directors
/s/Robert W. Berend
--------------------------
Robert W. Berend
Secretary
August 6, 1997
WHETHER OR NOT YOU EXPECT TO BE PRESENT AT THE SPECIAL MEETING,
PLEASE DATE AND SIGN THE ENCLOSED PROXY AND RETURN IT IN THE
ENCLOSED ENVELOPE. THE PROXY MAY BE REVOKED IN WRITING PRIOR TO
THE SPECIAL MEETING OR, IF YOU ATTEND THE SPECIAL MEETING, YOU MAY
REVOKE THE PROXY AND VOTE YOUR SHARES IN PERSON.
<PAGE 3>
SUBSTANCE ABUSE TECHNOLOGIES, INC.
4517 N.W. 31st Avenue
Ft. Lauderdale, Florida 33309
PROXY STATEMENT
SPECIAL MEETING OF STOCKHOLDERS
August 27, 1997
This Proxy Statement is furnished in connection with the
solicitation by the Board of Directors of Substance Abuse
Technologies, Inc. (hereinafter referred to as either the
"Company" or "the Company") of proxies to be voted at the
Special Meeting of Stockholders (the "Special Meeting") to be held
on August 27, 1997, or at any adjournment thereof. The purposes
for which the Special Meeting is to be held are set forth in the
preceding Notice of Special Meeting. This Proxy Statement and the
enclosed form of proxy are first being mailed on or about August
6, 1997 to holders of record of the Company's Common Stock, $.01
par value (the "Common Stock"), as of the close of business on
August 5, 1997 (the "Record Date"), which has been fixed as the
record date for the determination of the stockholders entitled to
notice of, and to vote at, the Special Meeting.
VOTING SECURITIES
On the Record Date, 36,030,591 shares of the Common Stock,
which is the only class entitled to vote at the Special Meeting,
were issued and outstanding. Each stockholder of record is
entitled to cast, in person or by proxy, one vote for each share
of the Common Stock held by such stockholder as of the close of
business on the Record Date. The affirmative vote of a majority
of the outstanding shares of the Common Stock entitled to vote
shall be necessary to approve both proposed Amendments to the
Company's Certificate of Incorporation: (1) the increase in the
number of authorized shares of the Common Stock and (2) the
authorization of a new class of Preferred Stock.
Proxies will be voted as indicated in this Proxy Statement
and the enclosed proxy. Shares represented by properly executed
proxies, if received in time, will be voted in accordance with any
specifications made therein. A proxy may be revoked by delivering
a written notice of revocation to the Company (Attention: Robert
Muccini, Treasurer) at its principal executive office or in person
at the Special Meeting, or by a subsequently dated proxy, at any
time prior to the voting thereof. The principal executive office
of the Company is located at the above address and its telephone
number is (954) 739-9600.
Rule 577 of the American Stock Exchange, Inc. permits a
member firm to vote for both proposals to approve Amendments to
the Company's Certificate of Incorporation if the member firm
holds the shares of the Common Stock for a beneficial owner and
receives no instructions to the contrary within ten days after
receipt by the beneficial owner of a copy of this Proxy Statement.
The Company, accordingly, urges each beneficial owner to instruct
the member firm which holds
<PAGE 3>
of record the stockholder's shares of the Common Stock to vote in
favor of the proposals submitted to the stockholders for a vote.
A stockholder shall have no right to receive payment for his,
her or its shares as a result of stockholder approval of either
proposal in the Notice of Special Meeting.
PROPOSAL ONE: APPROVAL OF THE INCREASE IN THE NUMBER OF
AUTHORIZED SHARES OF THE COMMON STOCK
General
The Board of Directors of the Company has approved, and
recommends to the stockholders for approval, an Amendment to
Article IV of the Certificate of Incorporation of the Company to
increase the number of authorized shares of the Common Stock from
50,000,000 to 100,000,000. There will be no change effected in
the par value of the Common Stock, which will remain as par value
$.01 per share. The failure to adopt this proposal will put the
Company in the position of potentially being unable to fulfill its
obligations to issue shares upon the exercise of outstanding
Common Stock purchase warrants, convertible notes, convertible
debentures and convertible preferred stock and also constitute a
default under certain agreements, possibly giving rise to
penalties, as described in the succeeding paragraph. The concern
that the Company will not have sufficient shares of the Common
Stock to issue has made certain prospective investors reluctant to
proceed. In May 1997, the purchaser of $750,000 in principal
amount of the Company's 14% Convertible Debentures due May 8, 2000
(the "Convertible Debentures") and 62,500 shares of the
Company's Class "B" Cumulative Convertible Preferred Stock, $.01
par value (the "Class B Preferred Stock"), reduced its proposed
purchase from $1,500,000 to $1,000,000 pending effectiveness of
this proposed Amendment and agreed to proceed only when two
officers (Robert M. Stutman, Chairman of the Board, Chief
Executive Officer and a director, and Brian Stutman, Vice
President, Sales and Marketing) and a director (Lee S. Rosen)
agreed not to exercise their Common Stock purchase warrants until
the proposed Amendment was effective. The Company also had to
agree to change its reserve (to the extent of the shares of the
Common Stock subject to such warrants) to ensure conversion or
exchange of the investor's securities. These concerns have
continued despite the Company noting the fact that certain of its
outstanding securities are not currently convertible or
exercisable, as well as the fact that many of the Common Stock
purchase warrants are exercisable at exercise prices well in
excess of the current market price of the Common Stock. Approval
of the proposed Amendment will help ensure that all of the uses
described in the paragraph are satisfied, as well as make shares
available for the other potential uses described in this Proxy
Statement, including the two taking private transactions described
in the second succeeding paragraph and the potential acquisitions
described in the fifth succeeding paragraph.
As of the Record Date, there were 36,030,591 shares of the
Common Stock outstanding, and there were reserved, as of such
date, an aggregate of 22,663,430 shares of the Common Stock,
<PAGE 4>
consisting of (1) 11,051,746 shares reserved for issuance upon the
exercise of Common Stock purchase warrants; (2) 4,000,000 shares
reserved for issuance upon the conversion of the Company's
Convertible Senior Promissory Notes due November 8, 1999 (the
"Convertible Notes"); (3) 2,229,501 shares reserved for issuance
upon conversion of the Convertible Debentures and the exchange for
62,500 shares of the Class B Preferred Stock held by the investor
referred to in the previous paragraph; (4) 185,207 shares reserved
for issuance upon the conversion of the Company's Class "A"
Cumulative Convertible Preferred Stock, $.01 par value (the
"Class A Preferred Stock;" the Class A Preferred Stock and the
Class B Preferred Stock being collectively referred to herein as
the "Preferred Stock"); (5) 1,532,679 shares reserved for
issuance with respect to future acquisitions; and (6) an aggregate
of 3,664,557 shares reserved for use in proposed transactions to
take private its subsidiaries Good Ideas Enterprises, Inc. ("Good
Ideas"), a Delaware corporation, and U.S. Drug Testing, Inc.
("U.S. Drug"), a Delaware corporation, as described in the
succeeding paragraph and elsewhere in this Proxy Statement. Due
to the anti-dilution provisions in certain of the Common Stock
purchase warrants and in the Convertible Notes, the Convertible
Debentures and the Class B Preferred Stock, the number of shares
of the Common Stock reserved for issuance may in the future be
further adjusted. The Company is obligated, under the respective
agreement, to the holders of the Convertible Notes, the
Convertible Debentures and the Class B Preferred Stock to amend
the Certificate of Incorporation to increase the number of
authorized shares of the Common Stock and could incur penalties to
these holders if they are unable, within specified time frames, to
convert these securities into, or exchange these securities for,
shares of the Common Stock which are freely transferable under the
Securities Act of 1933, as amended (the "Securities Act").
The Company is currently seeking to acquire the minority
stock interests in (1) U.S. Drug, which is 75.4% owned by the
Company, by an offer of (a) an aggregate of 2,789,478 shares of
the Common Stock to the minority stockholders of U.S. Drug (the
"U.S. Drug Minority Stockholders") in exchange for the 1,721,900
shares of the U.S. Drug common stock, par value $.001 per share
(the "U.S. Drug Common Stock"), held by the U.S. Drug Minority
Stockholders (the "Minority U.S. Drug Common Stock") at an
exchange ratio of 1.62 of a share of the Common Stock for each
share of the U.S. Drug Common Stock and (b) an aggregate of
243,000 shares issuable upon the exercise of Common Stock purchase
warrants (the "U.S. Drug Merger Warrants") in exchange for U.S.
Drug's outstanding common stock purchase warrants (the "U.S. Drug
Warrants"); and (2) Good Ideas, which is 60.8% owned by the
Company, by an offer of (a) an aggregate of 557,524 shares of the
Common Stock to the minority stockholders of Good Ideas (the
"Good Ideas Minority Stockholders") in exchange for the
1,548,680 shares of the Good Ideas Common Stock, par value $.001
per share (the "Good Ideas Common Stock"), held by the Good
Ideas Minority Stockholders (the "Minority Good Ideas Common
Stock") at an exchange ratio of .36 of a share of the Common
Stock for each share of the Good Ideas Common Stock and (b) an
aggregate of 74,285 shares issuable upon the exercise of Common
Stock purchase warrants (the "Good Ideas Merger Warrants") in
exchange for Good Idea's outstanding common stock purchase
warrants (the "Good Ideas Warrants"). Although there can be no
assurance that these acquisitions will be consummated, if they
are, the Company will be required to issue an aggregate of
3,347,002 shares and reserve an aggregate of 317,285 shares for
the exercise of the U.S. Drug Merger Warrants and the Good Ideas
Merger Warrants. For additional information as to these prospective
acquisitions of the minority
<PAGE 5>
interests in these two subsidiaries, see "Acquisition
of the Minority Stock Interests in U.S. Drug Testing, Inc." and
"Acquisition of the Minority Stock Interests in Good Ideas
Enterprises, Inc." elsewhere in this Proxy Statement.
An aggregate of 58,694,021 shares of the Common Stock would
be outstanding if all of the shares reserved as of the Record Date
were issued. Accordingly, the authorization of shares would be
exceeded by 8,694,021 shares. In addition, because of the
Company's financing requirements, primarily to (1) meet the
anticipated short fall in the Company's cash flow from operations
during the fiscal year ending March 31, 1998 ("fiscal 1998") and
to finance acquisitions of third party administration ("TPA")
companies in the human resource provider business (see the second
succeeding paragraph), additional shares of the Common Stock will
likely be issued, whether subject to additional Common Stock
purchase warrants or issued directly. The Board of Directors of
the Company had been advised that, as of July 1, 1997, U.S. Drug
would require approximately $16,000,000 (estimate by U.S. Drug's
management) to $18,400,000 (estimate by an unaffiliated consulting
company) to complete the development of a saliva based drug
testing product and then bring the same to market, with the
product launch not being anticipated until possibly August 1999 at
the earliest, instead of December 1998 as previously announced, if
the outside consulting firm's estimate is correct. Because of the
increase in the estimated costs to complete the development
project and the delay in launching the product, as well as the
limited funds currently available, the Company's Board of
Directors has limited the funds available to U.S. Drug and has
requested that the subsidiary seek financing without using the
Company's securities. U.S. Drug has, as a result, reduced its
current expenditure level while seeking financing, which may
further delay the prospective product launch date. Because of the
currently known potential benefits of the saliva based alcohol and
drug testing product, if successfully developed, as to which there
can be no assurance, the Company's Board would have to consider
the feasibility of financing the balance of the development
program if U.S. Drug is unsuccessful in its financing attempts;
however, there can be no assurance that the Company will have
available to it at the time the necessary funds or will deem the
project still appropriate for the Company, especially if it takes
six months for U.S. Drug to explore the feasibility of obtaining
its own financing. Management believes that the additional funds
required to meet the cash flow short fall, even with the reduction
of the prior cash drain caused by U.S. Drug, and to effect the
acquisitions will be raised through additional financings and/or
the exercise of outstanding Common Stock purchase warrants.
However, there can be no assurance that additional financing will
be available and, if available, be on acceptable terms or that the
outstanding Common Stock purchase warrants will be exercised,
especially because, as noted above, many are currently "under
water." For information as to recent and contemplated
financings, see "Financings" elsewhere in this Proxy Statement.
The Board has in the past granted stock options and issued
Common Stock purchase warrants to employees as additional
compensation and deems it advisable to be in a position to grant
stock options and warrants in the future as an incentive for
attracting and retaining qualified and competent employees by
providing them with the ability to acquire a proprietary interest
in the Company through ownership of the Common Stock. The Board
deems it advisable to have shares of the Common Stock available
for such purposes in the future. The Company currently has no such
stock option plan.
<PAGE 6>
Although the Board has under consideration no specific
company, other than U.S. Drug and Good Ideas, as to which its
stock or assets would be acquired for shares of the Common Stock,
the Board believes that, should appropriate opportunities to
acquire TPA companies present themselves in the future, the
Company should have the flexibility to use shares of the Common
Stock instead of, or in addition to, cash to effect such an
acquisition. The Board recognizes that one method to expand the
revenues of the Employer Services Division of the Company, which
provides single source services to assist corporations in their
hiring practices ranging from substance abuse testing and
background screening to total program management, is to acquire
TPA companies furnishing certain of these services on a regional
or local basis and that these acquisitions could be one use of the
additional shares if authorized. The Company has entered into a
letter of agreement dated July 3, 1997 with National Medical
Review Offices, Inc. ("NMRO") to acquire certain assets of
DataMed International, a division of Global Med Technologies,
Inc., for $1,600,000. The Company is seeking financing to close
on this acquisition of a TPA company, having already made a
$600,000 down payment, which financing may involve a sale of
shares of the Common Stock or a convertible security. Other
acquisitions for cash may similarly require financing. See
"Financings" elsewhere in this Proxy Statement. If the proposed
increase in authorized shares is approved by stockholders, the
Board of Directors intends to reserve an additional 5,000,000
shares for acquisitions (in addition to the 1,532,679 shares
already reserved).
Except as described in the preceding five paragraphs, there
are no other proposed uses of the Common Stock which have been
approved or which are currently under consideration by the Board
of Directors. There can be, of course, no assurance that, even if
the additional shares are authorized, the Company will effect the
acquisitions or the financings described above..
Effect on Stockholders
Holders of the Common Stock have no preemptive, subscription
or conversion rights or sinking fund rights, are entitled to
dividends when and if declared by the Board of Directors after
payment of all accrued and unpaid dividends on the Preferred Stock
(see the third succeeding paragraph) and are entitled to share in
all assets available for distribution to stockholders upon
liquidation, dissolution and winding up of the Company's affairs
after payment of all preferences on the Preferred Stock. Each
holder of the Common Stock has one vote per share on all matters
submitted to stockholders for a vote. The proposed Amendment to
the Certificate of Incorporation to increase the authorized shares
of the Common Stock would create no material differences between
the shares of the Common Stock prior to the Amendment and the
shares of the Common Stock after the Amendment.
The Company's directors are elected by the holders of the
Common Stock on a classified basis - one third is elected each
year for a three-year term. With a classified Board of
<PAGE 7>
Directors, at least two annual meetings of stockholders, instead of one,
will generally be required to effect a change in the majority of the
Company's Board. As a result, a classified Board may discourage
proxy contests for the election of directors or a purchase of a
substantial block of the Common Stock because its provisions could
operate to prevent obtaining control of the Company's Board of
Directors in a relatively short period of time. The
classification provisions could also have the effect of
discouraging a third party from making a tender offer or otherwise
attempting to obtain control of the Company. There are no other
provisions in the Company's Certificate of Incorporation or By-
Laws that may have the effect of delaying, deferring or preventing
a change in control of the Company and that would operate with
respect to an extraordinary transaction involving the Company or
any of its subsidiaries, such as a merger, reorganization, tender
offer, sale or transfer of substantially all of its assets, or
liquidation.
Authorization of the additional shares of the Common Stock
will have no effect on the rights of the existing holders of the
Common Stock and their rights will continue as described in the
second preceding paragraph, unless and until such shares are
issued, in which event the only effect will be a dilution of the
voting rights of such holders as a result of the increased number
of outstanding shares of the Common Stock.
Although the issuance of additional shares of the Common
Stock would theoretically increase the amount necessary to pay
dividends, because of the Company's cash requirements and
continuing losses and the provisions in the Convertible Notes, the
Convertible Debentures and the Preferred Stock, management does
not anticipate that cash dividends will be paid on the Common
Stock in the foreseeable future.
The fact that the Company may issue so many additional
shares may, in the opinion of management, have a depressive effect
on the market price for the Common Stock.
The number of the additional shares which may be issued and
the extent of dilution of voting rights cannot be predicted
because the Board does not know for what number of shares, if any,
whether part or all of the outstanding Common Stock purchase
warrants will be exercised or that the Convertible Notes, the
Convertible Debentures or the Preferred Stock will be converted.
In addition, the Board does not know the number of shares, whether
of the Common Stock or securities convertible or exercisable into
shares of the Common Stock, that may be issued in future private
placements or public offerings, or which may be used to effectuate
future acquisitions.
Recommendation and Required Vote
For the reasons described above, the Board of Directors
recommends that the stockholders vote FOR an increase in the
authorized number of shares of the Common Stock. Approval of the
increase in the authorized number of shares of the Common Stock
requires the affirmative vote of a majority of all of the
outstanding shares entitled to vote at the Special Meeting and
proxies not marked to the contrary will be so voted at the Special
Meeting in favor of this proposal.
PROPOSAL TWO: APPROVAL TO AUTHORIZE 3,000,000 SHARES OF A NEW
CLASS OF PREFERRED STOCK
The Board of Directors of the Company has approved, and
recommends to the stockholders for approval, an Amendment to
Article IV of the Company's Certificate of
<PAGE 8>
Incorporation to provide therein for the issuance of 3,000,000
shares of Class "C" Preferred Stock, $.01 par value (the "Class C
Preferred Stock"), with such designations, preferences, conversion rights,
cumulative, relative, participating, optional or other rights,
including voting rights, qualifications, limitations or
restrictions thereof (collectively, the "Limitations and
Restrictions") as shall be determined by the Board of Directors
of the Company.
The Board of Directors believes the authorization for the
creation of the Class C Preferred Stock is in the best interests
of the Company and its stockholders, and believe it advisable to
authorize such shares to have them available for, among other
things, possible issuance in public or private offerings of
shares for cash or acquisitions of other companies.
The Board of Directors of the Company will, in the event of
the approval of this proposal by the Company's stockholders, be
entitled to authorize the creation and issuance of 3,000,000
shares of Class C Preferred Stock in one or more series with such
Limitations and Restrictions as may be determined in the Board's
sole discretion, with no further authorization by the holders of
the Common Stock required for the creation and issuance thereof.
However, to the extent there are outstanding shares of the Class
A Preferred Stock (as of the Record Date there were 41,157 shares
outstanding) or outstanding shares of the Class B Preferred Stock
(as of the Record Date there were 62,500 shares outstanding), the
Company may not be able to issue shares of the Class C Preferred
Stock on a basis senior to, or in pari passu with such other
shares of the Preferred Stock. In addition, so long as the
Convertible Notes are outstanding, without the consent of the
holders thereof, dividends on the Class C Preferred Stock may be
limited to shares of the Common Stock and certain other
restrictions will be applicable.
Although the Company may currently issue an additional
458,843 shares of the Class A Preferred Stock and 1,437,500
shares of the Class B Preferred Stock, because the dividend,
redemption, conversion and other terms are fixed by the Company's
Certificate of Incorporation management has found the terms not
to be flexible enough in seeking financing. One example of this
inflexibility is that a recent investor (the holder of the 62,500
shares of the Class B Preferred Stock) and other prospective
investors have wanted the conversion price to vary with the then
market price of the Common Stock, while the Certificate of
Incorporation calls for a fixed conversion rate of 4.5 shares of
the Common Stock for each share of the Class B Preferred Stock.
Although the Company was able to persuade the investor to accept
a contractual exchange rate for its shares, the Company's Board
of Directors believes that such methods of resolution should not
have to be used rather than giving the Board the flexibility to
meet the Company's then financing requirements for a security.
The Board believes that in the competition for financing an
issuer must be flexible as to the forms of financing available to
a potential investor.
Effect on Stockholders
If the Class C Preferred Stock is authorized and depending
on the Limitations and Restrictions set by the Board of
Directors, this class, when issued, could have priority over the
Common Stock in the payment of dividends and upon liquidation and
could otherwise limit the rights of the holders of the Common
Stock.
<PAGE 9>
If the Class C Preferred Stock is authorized, the Board of
Directors would be required to make any determination to issue
such securities of the Company based on its judgment as to the
best interest of the stockholders and the Company. Although the
Board of Directors has no intention of doing so, it could issue
shares of the Class C Preferred Stock that could, depending on
the terms of such class, make more difficult or discourage an
attempt to obtain control of the Company by means of a merger,
tender offer, proxy contest or other means. Such shares could be
used to create voting or other impediments or to discourage
persons seeking to gain control of the Company. Such shares
could also be privately placed with purchasers favorable to the
Board of Directors in opposing any such action. In addition, the
Board of Directors could authorize holders of a series of the
Class C Preferred Stock to vote either separately as a class or
with the holders of the Company's currently outstanding Common
Stock on any merger, sale or exchange of assets by the Company or
any other extraordinary corporate transaction. The existence of
the authorized shares of the Class C Preferred Stock could have
the effect of discouraging unsolicited takeover attempts. The
issuance of new shares also could be used to dilute the stock
ownership of a person or entity seeking to obtain control of the
Company should the Board of Directors consider the action of such
entity or person not to be in the best interest of the
stockholders and the Company.
While the Company does intend to effect an equity offering
of the Class C Preferred Stock or otherwise issue such stock in
the proximate future for purposes of raising additional working
capital and acquiring related businesses, the Company, as of the
date hereof, has no agreements or understandings with any third
party to effect any such offering or acquisition, or to purchase
any shares offered in connection therewith, or to vote any such
shares, and no assurances can be given that any such offering
will in fact be effected or that an acquisition pursuant to which
such shares may be issued will be proposed and consummated.
Therefore, the terms of any Class C Preferred Stock subject to
this proposal cannot be stated or estimated with respect to any
or all of the securities authorized.
Recommendation and Required Vote
For the reasons described above, the Board of Directors
recommends that the stockholders vote FOR the creation of the
Class C Preferred Stock. Approval of the Amendment to the
Company's Certificate of Incorporation requires the affirmative
vote of a majority of all of the outstanding shares of Common
Stock which are entitled to vote at the Special Meeting and
proxies not marked to the contrary will be so voted at the
Special Meeting in favor of this Proposal.
INTEREST OF MANAGEMENT
Because Robert M. Stutman, David L. Dorff and Linda H.
Masterson, each a director and an executive officer of the
Company, Alan I. Goldman, John C. Lawn, Peter M. Mark, Michael S.
McCord and Lee S. Rosen, each a director of the Company, and three
other executive officers have
<PAGE 10>
outstanding Common Stock purchase warrants to purchase shares of the
Common Stock and each director and executive officer may in the future,
be granted warrants and/or, if the Company adopts a stock option plan
in the future for employees and directors, stock options, they have an
interest in having the proposed Amendment to increase the number of
authorized shares of the Common Stock approved by the stockholders.
They have no special interest different from other stockholders in the
adoption of the proposal to create a new class of the Preferred Stock.
Of the outstanding Common Stock purchase warrants, the
executive officers and directors of the Company hold warrants as
follows:
(1) Robert M. Stutman, Chairman of the Board, Chief
Executive Officer and a director of the Company, holds Common
Stock purchase warrants to purchase (a) 3,125 shares of the Common
Stock issuable upon the exercise at $2.00 per share of a warrant
expiring December 13, 1998 issued to him for his consulting
services while still an employee of Robert Stutman & Associates,
Inc. ("RSA"), the operations of RSA now being conducted by the
Robert Stutman & Associates Consulting Division of the Company;
(b) 105,500 shares of the Common Stock issuable upon the exercise
at $2.00 per share of a warrant expiring March 31, 1999 issued to
him when the Common Stock purchase warrant to purchase 200,000
shares issued to RSA for its services was divided among the RSA
shareholders; and (c) 474,750 shares of the Common Stock issuable
upon the exercise at $2.125 per share of a warrant expiring May
20, 1999 issued to him in exchange for his ownership interest in
RSA when the Company acquired RSA on May 21, 1996;
(2) David L. Dorff, the President and a director of the
Company, holds Common Stock purchase warrants expiring June __,
2002 to purchase (a) 700,000 shares of the Common Stock issuable
upon the exercise at $1.8125 per share; (b) 300,000 shares of the
Common Stock issuable upon the exercise at $2.3125 per share; and
(c) 300,000 shares of the Common Stock issuable upon the exercise
at $2.8125 per share, all of which warrants being issued pursuant
to Mr. Dorff's terms of employment.
(3) Linda H. Masterson, a director of the Company and the
President of U.S. Drug, holds Common Stock purchase warrants to
purchase (a) 10,000 shares of the Common Stock issuable upon the
exercise at $1.9375 per share of a warrant expiring November 15,
1998 issued to her as a director of the Company and (b) 600,000
shares of the Common Stock issuable upon the exercise at $2.125
per share of a warrant, the last installment of which expires May
12, 2003, issued pursuant to Ms. Masterson's terms of employment;
(4) Alan I. Goldman, John C. Lawn and Peter M. Mark, each a
director of the Company, each hold Common Stock purchase warrants
to purchase (a) 10,000 shares of the Common Stock issuable upon
the exercise at $1.9375 per share of a warrant expiring November
15, 1998 and (b) 10,000 shares of the Common Stock issuable upon
the exercise at $1.8125 per share of a warrant expiring November
15, 1999, both issued to the holder as a director of the Company
who is not employed by the Company or any subsidiary thereof;
<PAGE 11>
(5) Michael S. McCord, a director of the Company, holds
Common Stock purchase warrants to purchase (a) 10,000 shares of
the Common Stock issuable upon the exercise at $1.9375 per share
of a warrant expiring November 15, 1998 issued to Mr. McCord as a
consultant to the Board of Directors of the Company and (b) 10,000
shares of the Company Common Stock issuable upon the exercise at
$1.8125 per share of a warrant expiring November 15, 1999 issued
to him as a director of the Company who is not employed by the
Company or any subsidiary thereof;
(6) Lee S. Rosen, a director of the Company, holds Common
Stock purchase warrants to purchase (a) 10,000 shares of the
Common Stock issuable upon the exercise at $1.9375 per share of a
warrant expiring November 15, 1998 issued to Mr. Rosen as a
director of the Company who is not employed by the Company or any
subsidiary thereof; (b) 10,000 shares of the Common Stock issuable
upon the exercise at $1.8125 per share of a warrant expiring
November 15, 1999 issued to Mr. Rosen as a director of the Company
who is not employed by the Company or any subsidiary thereof; (c)
200,000 shares of the Common Stock issuable upon the exercise at
$1.9375 per share of a warrant expiring November 15, 1998; (d)
150,000 shares of the Common Stock issuable upon the exercise at
$3.00 per share of a warrant expiring November 15, 2000; (e)
150,000 shares of the Common Stock issuable upon the exercise at
$2.00 per share of a warrant expiring November 15, 2000; (f)
300,000 shares of the Common Stock issuable upon the exercise at
$2.125 per share of a warrant expiring April 17, 1999; (g) 200,000
shares of the Common Stock issuable upon the exercise at $2.00 per
share of a warrant expiring December 2, 1999; and (h) 250,000
shares of the Common Stock issuable upon the exercise at $2.00 per
share of a warrant expiring December 17, 1999 acquired from his
father who was a purchaser in the private placement hereinafter
mentioned; the warrants described in (c), (d) and (e) were issued
to Mr. Rosen as consideration for his services, not as a director
of the Company, including those related to the private placement
consummated in February 1996, and 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;
(7) Robert Muccini, the Vice President, Finance, the
Treasurer, the Chief Financial Officer and the Chief Accounting
Officer of the Company, holds a Common Stock purchase warrant, the
last installment of which expires December 15, 2003, to purchase
40,000 shares of the Common Stock at $2.125 per share; and
(8) Brian Stutman, the Vice President, Sales and Marketing
of the Company, holds Common Stock purchase warrants to purchase
(a) 59,876 shares of the Common Stock issuable upon the exercise
at $2.00 per share of a warrant expiring March 31, 1999 issued to
him when the Common Stock purchase warrant to purchase 200,000
issued to RSA for its services was divided among the RSA
shareholders; (b) 317,250 shares of the Common Stock issuable upon
the exercise at $2.125 per share of a warrant expiring May 20,
1999 issued to him in exchange for his ownership interest in RSA;
and (c) 15,000 shares of the Common Stock issuable upon the
exercise at $2.125 per share of a warrant, the last installment of
which expires June 23, 2004.
<PAGE 11>
Robert M. Stutman, Lee S. Rosen and Brian Stutman were
required by the purchaser of the Convertible Debentures and shares
of the Class B Preferred Stock (see the section "General" under
the caption "Proposal One: Approval of the Increase in the Number
of Authorized Shares of the Common Stock") to agree not to
exercise any of the above warrants until the proposed Amendment to
the Certificate of Incorporation authorizing the increase in
authorized shares of the Common Stock is filed. The Company
agreed not to reserve such shares during the same period.
FINANCINGS
On November 8, 1996, the Company entered into a Convertible
Loan and Warrant Agreement (the "Loan Agreement") with Steven A.
Cohen and S.A.C. Capital Associates, LLC, an Anguilla limited
liability company (collectively the "Lenders"), pursuant to
which the Company borrowed $5,000,000 from the Lenders (the
"Loan"). Based on the Schedule 13D filed by the Lenders (the
"Cohen Schedule 13D"), the Lenders owned beneficially an
aggregate of 2,246,200 shares of the Common Stock prior thereto.
For information as to their joint beneficial ownership as of June
30, 1997, see Note 2 to the table under "Security Ownership of
Certain Beneficial Holders and Management." 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 the Company. The Convertible Notes were initially convertible
into shares of the Common Stock at any time after July 1, 1997 at
a conversion price (the "Conversion Price") of $2.00 per share.
The Conversion Price is subject to a downward adjustment (the
"Market Price Adjustment") during the period from May 1, 1997
through May 1, 1998 based on the average market price for shares
of the Common Stock over the preceding 65 trading days excluding
the date that either Lender sold shares of the Common Stock in an
Open Market Transaction (as defined in the Loan Agreement) 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 the Company sells
shares of the Common Stock at less than the Conversion Price or
issues options or convertible securities which can be exercised or
converted at a price less than the Conversion Price. As a result
of these provisions, the Conversion Price became $1.25 per share
and the Convertible Notes are convertible into an aggregate of
4,000,000 shares of the Common Stock because of the transaction
described in the third succeeding paragraph.
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 the Company for election to the Company's Board
of Directors or may exercise observer rights at meetings of the
Board of Directors. The Agreement also imposes certain negative
and affirmative covenants on the Company as long as any balance
remains outstanding under the Convertible Notes. These covenants,
among other matters, restrict the Company's ability to engage in
acquisitions (other than the proposed acquisitions of U.S. Drug
and
<PAGE 13>
Good Ideas) 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 the Company'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 Company (with the exception of Good Ideas), to
engage in other transactions with a value in excess of $1,000,000,
and to amend the Company's Certificate of Incorporation or By-Laws
or enter into any agreement that would adversely affect the rights
and priorities of the Lenders. Assuming that the anti-dilution
provisions described above are not applicable, the Lenders also
have the right to purchase additional shares of the Common Stock
in capital raising transactions through any public or private sale
of shares of the Common Stock effected by the Company 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 Common Stock at an initial exercise price
of $2.00 per share. The June 30 Warrants were not exercisable
before July 1, 1997 and thereafter are exercisable only to the
extent that, when added together with any other shares
beneficially owned by the Lenders, would not result in the Lenders
being deemed to be greater than ten percent stockholders subject
to Section 16 of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"). As indicated in Notes (3) and (4) to the
table under "Security Ownership of Certain Beneficial Holders and
Management," neither of the June 30 Warrants was currently
exercisable as of the Record Date because of the then aggregate
beneficial ownership of the Lenders of shares of the Common Stock.
The number of shares of the 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 because of the Market
Price Adjustment, 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 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 the Company sells
shares at less than the exercise price. As a result of these
provisions, the exercise price of the June 30 Warrants has been
reduced to $1.25 per share and the holders may receive upon
exercise an aggregate of 4,000,000 shares of the Common Stock.
The June 30 Warrants are transferable subject to compliance with
the Securities Act.
On May 8, 1997, the Company sold to Southbrook International
Investments, Ltd, a corporation incorporated under the laws of the
British Virgin Islands ("Southbrook"), for $1,000,000, the
Convertible Debentures in the principal amount of $750,000 and
62,500 shares of the Class B Preferred Stock. Southbrook has
agreed to purchase for $500,000 an additional 125,000 shares of
the Class B Preferred Stock when the Amendment to the Company's
Certificate of Incorporation increasing the authorized number of
shares of the Common Stock is filed. Interest on the Convertible
Debentures at the rate of 14% per year is payable when the
Convertible
<PAGE 14>
Debenture is converted or at its maturity date (i.e.,
May 8, 1999). The conversion price of the Convertible Debentures
is the lesser of $1.25 or 85% of the average Per Share Market
Value (as hereinafter defined) for the five trading days preceding
the conversion. Per Share Market Value means on a particular day
the closing bid price per share of the Common Stock on such date
on the American Stock Exchange (or such other exchange or
quotation system on which the Common Stock is then listed) or, if
there is no price on such date, the closing bid price on the date
nearest preceding such date. The shares of the Class B Preferred
Stock are exchangeable for shares of the Common Stock on the basis
of an exchange price equal to the lesser of the average Per Share
Market Value for the five trading dates preceding the date of
issuance or 85% of the average Per Share Market Value for the five
trading days preceding the date of exchange. Both the conversion
price of the Convertible Debentures and the exchange price for the
Class B Preferred Stock are subject to reduction, pursuant to
certain anti-dilution provisions, if the Company sells shares of
the Common Stock for less than either of those two prices, or
issues options or convertible securities which can be exercised at
a price less than either of those two prices. The Company is
required initially to reserve an aggregate of 2,229,501 shares of
the Common Stock for issuance upon conversion of the Convertible
Debentures or exchange of the Class B Preferred Stock. The
Convertible Notes are senior to the Convertible Debentures and the
Class A Preferred Stock is senior to the Class B Preferred Stock.
As indicated under "Approval of the Increase in the Number
of Authorized Shares of Common Stock-General," the Company
anticipates additional shares of the Common Stock will be issued
in other financings, whether directly or upon the conversion,
exchange or exercise of other securities sold in said financings.
The Company's management anticipates a negative cash flow from
operations, even without giving effect to the operations of U.S.
Drug, during a major part, if not all, of fiscal 1998. Depending
on the customer's requirements, it takes three to six months after
a customer signs an agreement with the Employer Services Division
of the Company for the Division to implement procedures at the
customer's site or sites so that fees can be charged for the
Division's services. Accordingly, there is a delay in the Company
receiving revenues from the Employer Services Division, which is
currently the main focus of the Company's operations together with
the related Robert Stutman & Associates Consulting Division (the
"RSA Division") which designs policies and programs on substance
abuse. On July 17, 1997, the Company's Board approved the closure
of the Alcohol Products and Biochemical Toxicology Laboratories
("BioTox") Divisions and authorized a drastically reduced budget
for U.S. Drug, both actions being taken in an effort to reduce the
cash drain on the Company. As a result of all of these actions,
as well as the contemplated acquisitions, management expects the
Company to have a positive cash flow from operations by the fourth
quarter of fiscal 1998 on an ongoing basis; however, financing
will be required to attain this goal. There can be no assurance
that the Company will achieve the positive cash flow from
operations when expected, if at all, the required financing or the
contemplated acquisitions. The Company has been seeking interim
or bridge financing of up to $5,000,000, speaking to a fund about
a possible $10,000,000 investment and working with its two
investment bankers on long-term financing. There can be no
assurance that any of these financings will be consummated. Any
such financing, depending on its terms, could require the consent
of the Lenders pursuant to the Convertible Notes, as to which
consent, if required, there can be no assurance. Because many of
the contemplated acquisitions of TPA companies by the Employer
<PAGE 15>
Service Division of the Company will require the use of cash,
failure to consummate these financings will severely impact this
potential growth for this Division. As also indicated under
"Approval of the Increase in the Number of Authorized Shares of
Common Stock-General," the Company's management prefers that U.S.
Drug will be able to raise the necessary funds for its product
development program without the use of the Company's securities,
but the latter always remains as a possibility rather than letting
the project fail for lack of funding.
ACQUISITION OF THE MINORITY
STOCK INTERESTS IN U.S. DRUG TESTING, INC.
The Company will seek to acquire the minority stock
interests in U.S. Drug by an offer of shares of the Common Stock
to the U.S. Drug Minority Stockholders as consideration for their
consent to a merger (the U.S. Drug Merger") of U.S. Drug with and
into U.S. Drug Acquisition Corp. ("U.S. Drug Acquisition"), a
Delaware corporation and wholly-owned subsidiary of the Company
pursuant to an Agreement and Plan of Merger dated as of February
17, 1997 (the "U.S. Drug Merger Agreement") among the Company,
U.S. Drug and U.S. Drug Acquisition. Such consent will be sought
from the holders of the Minority U.S. Drug Common Stock pursuant
to Section 228 of the General Corporation Law of the State of
Delaware (the "GCL") in lieu of holding a meeting of
stockholders of U.S. Drug.
The Company has filed with the Securities and Exchange
Commission (the "Commission") a Registration Statement on Form
S-4, File No. 333-4790 (the "U.S. Drug Registration Statement"),
under the Securities Act with respect to seeking the consents of
the U.S. Drug Minority Stockholders and with respect to the
shares of the Common Stock to be issued upon consummation of the
U.S. Drug Merger and thereafter upon the exercise of the U.S.
Drug Merger Warrants. The U.S. Drug Registration Statement has
not been declared effective under the Securities Act and,
accordingly, the Company's offer to the U.S. Drug Minority
Stockholders has not commenced as yet.
U.S. Drug, which is 75.4% owned by the Company and whose
U.S. Drug Common Stock until May 13, 1997 traded on the Pacific
Exchange (see "Information with Respect to the Company, U.S. Drug
and Good Ideas-U.S. Drug Exchange Listing"), is developing
proprietary systems that will test for drug use under a sublicense
from the Company to use technology licensed to the Company by the
United States Navy. As a result of additional investments by the
Company in U.S. Drug since May 1, 1997, the Company's ownership
percentage is expected to grow in U.S. Drug to exceed 80% prior to
the latter's financing efforts and the U.S. Drug Merger.
U.S. Drug maintains its principal executive offices at 10410
Trademark Street, Rancho Cucamonga, CA 91730 and its telephone
number is (909) 466-8378.
U. S. Drug Acquisition was incorporated on December 18, 1995
under the laws of Delaware as a wholly-owned subsidiary of the
Company for the sole purpose of acquiring U.S. Drug and will
engage in no business operations until after consummation of the
U.S. Drug Merger.
<PAGE 16>
U. S. Drug Acquisition maintains its principal executive offices at
4517 NW 31st Avenue, Ft. Lauderdale, Florida 33309 and its telephone
number is (954) 739-9600.
Summary of the Material Terms of the U.S. Drug Merger Agreement
(a) Conversion of Shares
Pursuant to the U.S. Drug Merger Agreement, on the U.S. Drug
Effective Date (as hereinafter defined), U.S. Drug Acquisition
will be merged with and into U.S. Drug Acquisition; each
outstanding share of the Minority U.S. Drug Common Stock will be
converted into 1.62 shares of the Common Stock and .64 of a right
to receive a proportionate share of the Special Payment (as
hereinafter defined); and each outstanding share of the U.S. Drug
Common Stock owned by the Company will be canceled. An aggregate
of 2,789,478 shares of the Common Stock will be issued to the
U.S. Drug Minority Stockholders, subject to adjustment for
fractional shares. Assuming that the Good Ideas Merger is not
consummated and there are no exercises of outstanding Common
Stock purchase warrants or any conversions of the Convertible
Notes, the Convertible Debentures or the Preferred Stock between
the date of this Proxy Statement and the effective date of the
U.S. Drug Merger, the Company's existing stockholders will own
92.8% of the outstanding shares of the Common Stock and the U.S.
Drug Minority Stockholders will own 7.2%. If the Good Ideas
Merger is also consummated, the U.S. Drug Minority Stockholders
will own 7.1% of the outstanding shares of the Common Stock. The
shares of the Common Stock to be exchanged for each share of the
Minority U.S. Drug Common Stock was determined on the basis of an
assumed value of $1.625 for each share of the Common Stock with
the intent that the U.S. Drug Minority Stockholders would receive
shares of the Common Stock having a value of $2.625 for each
share of the Minority U.S. Drug Common Stock.
On the U.S. Drug Effective Date, the U.S. Drug Warrants to
purchase an aggregate of 150,000 shares of the U.S. Drug Common
Stock will be converted into the U.S. Drug Merger Warrants to
purchase 243,000 shares of the Common Stock at $4.63 per share.
No fractional shares of the Common Stock will be issued.
Holders of the Minority U.S. Drug Common Stock entitled to
receive fractional shares of the Common Stock upon the
consummation of the U.S. Drug Merger will receive a cash payment
in lieu thereof calculated on the basis of the closing sales
price for a share of the Common Stock on the U.S. Drug Effective
Date (as defined in subsection (c) below) or on the first day
thereafter as such price is available.
<PAGE 17>
(b) Effective Date
The U.S. Drug Merger will become effective on the date and
at the time of the filing of a copy of the Certificate of Merger
with the Secretary of State of Delaware (the "U.S. Drug
Effective Date"). This filing will occur as soon as practicable
following the receipt of consents from the holders of more than
50% of the outstanding shares of the Minority U.S. Drug Common
Stock and a consent from the Company, and the satisfaction of
other conditions.
(c) Special Payment
The Company has agreed in the U.S. Drug Merger Agreement
that, if a definitive agreement (the "Development and Marketing
Agreement") with a development and/or marketing partner is
executed and, if such a partner makes a cash payment or payments
upon the execution of the Development and Marketing Agreement
(the "Special Payment") to U.S. Drug Acquisition or the
Company, then the Company will calculate the percentage (to the
nearest tenth) (the "Special Payment Percentage") that the
outstanding shares of the Minority U.S. Drug Common Stock on the
U.S. Drug Effective Date constitute of the outstanding shares of
the U.S. Drug Common Stock on the U.S. Drug Effective Date,
multiply the Special Payment Percentage by the amount of the
Special Payment (the "Minority Stockholders' Special Payment
Interest") and (1) if the Development and Marketing Agreement is
entered into on or prior to September 30, 1997, the Company will
pay to each of the former U.S. Drug Minority Stockholders as of
the U.S. Drug Effective Date his, her or its pro rata share of
one-third of the Minority Stockholders' Special Payment Interest;
(2) if the Development and Marketing Agreement is entered into
during the period from October 1, 1997 to March 31, 1998, the
Company will pay to each of the former U.S. Drug Minority
Stockholders as of the U.S. Drug Effective Date his, her or its
pro rata share of one-sixth of the Minority Stockholders' Special
Payment Interest; and (3) if the Development and Marketing
Agreement is entered into on or after April 1, 1998, the former
U.S. Drug Minority Stockholders will receive none of the Special
Payment. In determining the amount of the Special Payment, there
will be deducted from the proceeds received from the development
and/or marketing partner one-third of the amount which the
Company loaned to, or invested in, U.S. Drug to complete the
development project in order to compensate the Company for being
the sole financing source for U.S. Drug.
If a cash payment is received from the partner after
execution, but on or prior to March 31, 1998, then the Company
will treat any such payments as if received on the execution of
the Development and Marketing Agreement (i.e., to be an
installment of the Special Payment). As discussed in the last
paragraph of this subsection, any such payments would reduce the
revenues of the Company. Loans made by the development partner
will not be deemed to be part of the Special Payment, as would
equity infusions for which the development partner receives
shares of the Common Stock or some other security from the
Company, U.S. Drug or U.S. Drug Acquisition. In determining the
amount of the Special Payment, any finder's fee or other costs
will be deducted so that the Special Payment represents a
percentage of the net proceeds to the Company or U.S. Drug
Acquisition.
<PAGE 18>
The following are examples of how the formula would work in
each period: Assuming that there is no change from the shares
currently outstanding, the 1,721,900 shares of the Minority U.S.
Drug Common Stock constitute approximately 24.6% (i.e., the
Special Payment Percentage) of the 6,990,103 shares of the U.S.
Drug Common Stock and assuming that net proceeds (without giving
effect to the Company's loans or investments) of $10,000,000 are
received by U.S. Drug Acquisition from the development partner,
then (1) if the Development and Marketing Agreement is entered
into during the period April 1 to September 30, 1997, the U.S.
Drug Minority Stockholders would receive an aggregate of
approximately one-third of 24.6% of $10,000,000 or an aggregate
of approximately $820,000 (i.e., 8.2% of $10,000,000 or $.48 per
share); (2) if the Development and Marketing Agreement is entered
into during the period October 1, 1997 to March 31, 1998, the
U.S. Drug Minority Stockholders would receive an aggregate of
approximately one-sixth of 24.6% of $10,000,000 or an aggregate
of approximately $410,000 (i.e., 4.1% of $10,000,000 or $.24 per
share); and (3) if the Development and Marketing Agreement is
entered into thereafter, U.S. Drug Acquisition will retain the
entire $10,000,000. If, at the time the net proceeds are
received by U.S. Drug Acquisition from the partner, the Company
has loaned to, or invested in, U.S. Drug $6,000,000, then the
Special Payment in the foregoing example would become $8,000,000
instead of $10,000,000. As of this date, U.S. Drug has executed
no Development and Marketing Agreement and no negotiations are
currently pending to secure such an Agreement.
The right to share in the Special Payment is not
transferable. A transferee of the shares of the Common Stock
received as a result of the U.S. Drug Merger is not eligible to
receive a proportionate share of the Special Payment and the
Company will make such payments only to the U.S. Drug Minority
Stockholders as reflected on the stock books of U.S. Drug on the
U.S. Drug Effective Date or, in the event of the death of the
U.S. Drug Minority Stockholder, his or her heirs or legal
representatives, in the case of the dissolution of a partnership,
to its partners or, in the case of a corporation, to its
successor by merger or other operation of law. Further, the
right to share in the Special Payment cannot be pledged.
In providing for the Special Payment on February 26, 1996,
the Company's Board sought to respond to comments of certain U.S.
Drug Minority Stockholders that the U.S. Drug Merger would
deprive them of the benefits of what they anticipated could be a
large initial payment from a development partner. However, the
Company's Board believed that both the amount and timing should
be limited because (1) even if the U.S. Drug Merger were not
consummated and the Special Payment were received, the U.S. Drug
Board would not be authorizing a cash dividend to the U.S. Drug
stockholders of the Special Payment, but would use the Special
Payment instead for operations, and (2) because the Company's
post-U.S. Drug Merger level of investment in U.S. Drug
Acquisition would probably increase, with the passing of each
month following the U.S. Drug Effective Date, the Company's
stockholders would increasingly anticipate that any distributions
attributable to U.S. Drug Acquisition's operations should benefit
all of the Company's stockholders, not just the former U.S. Drug
Minority Stockholders, many of whom may have sold their shares of
the Common Stock at the time of the Special Payment. The
Company's Board took note of the fact that, if there were no U.S.
Drug Merger, the public announcement of the addition of a
development partner for U.S. Drug would possibly give rise to
<PAGE 19>
an increase in the market price of the U.S. Drug Common Stock, so
that a U.S. Drug Minority Stockholder might benefit by a sale of
his, her or its shares of the Minority U.S. Drug Common Stock at
such higher price. However, the Company's Board concluded on
February 26, 1996 that it was too speculative to make its
decision on the basis of speculation as to what might be the
future market value of the U.S. Drug Common Stock in view of the
possibilities that no drug test product may be developed, that no
development partner may be obtained during the next year, that,
even if such a partner was obtained, it may not make a
significant advance payment and that competitors may introduce a
saliva based drug testing product in the interim period.
The latest estimates prior to the July 17th reduction in
U.S. Drug's operating budget, both external (by an unaffiliated
consulting form) and internal (by U.S. Drug's management), which
the Company's management has are that, to complete the
development of a saliva based drug testing product, will require
incremental costs ranging from $15,000,000 (internal estimate) to
$18,400,000 (external estimate) 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 the Company'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. The consulting
firm's report in June 1997 confirmed U.S. Drug's management's
opinion that the product was developable and had market
potential, especially with an added feature of the device also
testing for alcohol. U.S. Drug's management believes that the
interim slow-down caused by the necessity to conserve cash until
financing may be obtained may ultimately delay the product launch
date and increase the costs, but no realistic estimate can
currently be made as to the effects until the length of period of
the slow-down is ascertained.
The Company's management until now believed that the best
"partner" for U.S. Drug was the Company, 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 the Company
appeared to be the best source for funding. The increase in
estimated costs and the further delay in the probable launch date
required the Company's management May and in June 1997 to re-
evaluate the methods of financing and request the U.S. Drug
management to seek financing in which the Company's securities
are not offered. The further delays in obtaining financing
required the Company's Board of Directors in July 1997 to reduce
the advances to U.S. Drug and the U.S. Drug management to
accelerate efforts to obtain financing. A probable source of
such funding for a development stage company such as U.S. Drug is
investments by venture capital investors which would result in a
substantial dilution of the Company'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,
the Company'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.
U.S. Drug's management has also been requested to explore
the possibility of obtaining a strategic partner for U.S. Drug
other than the Company. Current Company and U.S. Drug management
have been of the opinion that obtaining one of the major
pharmaceutical or medical
<PAGE 20>
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 (assuming the
R&D operation is proceeding at full speed) 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 currently available and that U.S. Drug may have to
assume the risks of disclosing confidential data in order to
facilitate the securing of 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 the Company would seek the
additional funds through sales of its own securities or U.S. Drug
will have to suspend its development program until funds became
available, as to which there can be no assurance. The Company's
new investment bankers, L.H. Friend, Weinress, Frankson &
Presson, Inc. and Sutro & Co., Inc., have advised the Company's
management that it would be difficult to finance both the
proposed acquisition for the Employer Service Division and the
research and development program of U.S. Drug.
To facilitate the possibility of U.S. Drug obtaining
financing, the Company's Board had requested in May 1997 that
U.S. Drug study the feasibility of terminating certain of the
interlocking relationships between the Company and U.S. Drug and
consider such actions as (1) U.S. Drug building up a separate
management team (Linda H. Masterson resigned as the President of
the Company to become the Chief Executive Officer of U.S. Drug
(she was already its President)) and (2) seeking independent
directors. As a result of the decision in July 1997 to focus the
Company's management's attention on the operations of the
Employer Services and RSA Divisions, the first action has been
implemented in U.S. Drug. There can be no assurance that the
objective of an independent Board will be achieved or, if
achieved, that these actions will facilitate financing for U.S.
Drug.
(d) Conditions to the Merger
The obligations of the Company, U.S. Drug and U.S. Drug
Acquisition under the U.S. Drug Merger Agreement are subject to
the satisfaction of certain conditions, including, without
limitation, (1) receipt of all consents from all governmental
agencies and third parties which are required to effect the U.S.
Drug Merger, including, without limitation, (a) that the U.S.
Drug Registration Statement has been declared effective by the
Commission, (b) that no stop order
<PAGE 21>
shall have been issued or proceedings for such purpose shall have
been instituted and (c) that the issuance of the Common Stock shall
have all requisite authorizations under state securities or "blue sky"
laws for issuance; (2) that the holders of more than 50% of the
outstanding shares of the Minority U.S. Drug Common Stock consent
to the adoption of the U.S. Drug Merger Agreement; and (3) the
obtaining of an independent opinion as to the fairness of the
U.S. Drug Merger to the U.S. Drug Minority Stockholders from a
financial point of view.
Whale Securities Co., L.P. ("Whale Securities"), an
investment banking firm specializing in the small cap market, has
been engaged to deliver the fairness opinion referred to in the
preceding paragraph, has delivered an opinion to the U.S. Drug
Board in draft form that, considered as a whole, the U.S. Drug
exchange ratio is fair to the U.S. Drug Minority Stockholders
from a financial point of view and will finalize such opinion
when the U.S. Drug Registration Statement is declared effective
under the Securities Act. Whale Securities has also been engaged
to deliver a fairness opinion with respect to the Good Ideas
Merger.
(e) Amendment and Termination Rights
The U.S. Drug Merger Agreement may be amended in writing by
the Boards of Directors of the parties thereto at any time before
or after its adoption by the U.S. Drug Minority Stockholders,
provided that after such adoption no amendment may be made which
changes either the amount or the form of the consideration to be
received by the holders of the Minority U.S. Drug Common Stock
without further approval by the U.S. Drug Minority Stockholders.
The U.S. Drug Merger Agreement may be terminated and the
U.S. Drug Merger abandoned, whether before or after approval by
the U.S. Drug Minority Stockholders, at any time prior to the
U.S. Drug Effective Date (1) by mutual written consent of the
Boards of Directors of the Company and U.S. Drug, (2) by either
the Company or U.S. Drug if their respective Board of Directors,
based on the opinion of its outside counsel, determines that
making a recommendation to the U.S. Drug Minority Stockholders to
adopt the U.S. Drug Merger Agreement could reasonably be deemed
to cause the members of such Board of Directors to breach their
fiduciary duties under applicable law to their respective
stockholders or (3) by either the Company or U.S. Drug if there
is any statute, rule or regulation which makes consummation of
the U.S. Drug Merger illegal or otherwise prohibited or any
order, decree, injunction or judgment enjoining U.S. Drug
Acquisition, the Company or U.S. Drug from consummating the U.S.
Drug Merger, and such order, decree, injunction or judgment has
become final and non-appealable. The obligations automatically
terminate if the U.S. Drug Merger has not been consummated by
December 31, 1997.
Reasons for the U.S. Drug Merger
The reasons the Board of Directors of the Company had for
proposing in February 1996 to take U.S. Drug private are set
forth below. The Company's Board structured the transaction
<PAGE 22>
as a merger because it believed that a merger was a faster and less
expensive method than was a tender offer to achieve its then
primary objective of having a drug testing product in the
Company. The Board believed that not only could such a product
produce revenues through direct sales to users for the purpose of
their performing drug testing, but also that the Company's
Employer Service Division could, by using the Company's own
product, reduce its costs by eliminating the Division's
dependence on third party laboratories to furnish the drug
testing as part of the Division's employment services, which
dependence created the risk that the laboratories would increase
their charges to the Division, thereby reducing its profit
margins. The Company's recent agreement with NMRO (see the
section "General" under the caption "Proposal One: Approval of
the Increase in the Number of Authorized Shares of the Common
Stock") provides for NMRO to provide on an exclusive basis
medical review officer ("MRO") services such as receipt of all
drug test results, processing, medical review and reporting of
drug test results to the Company so that the Division's former
dependence on the laboratories may be eliminated. The Board
concluded that such a product could be developed at an estimated
cost (as of April 1, 1997) of approximately $12,000,000, which
would probably require the Company to provide the necessary
financing directly and that revenues therefrom, assuming the
product development program was successful, as to which there
could be no assurance, would not be derived until the first
quarter of 1999 at the earliest. See the section "Summary of
the Material Terms of the U.S. Drug Merger Agreement-Special
Payment" under this caption "Acquisition of the Minority Stock
Interests in U.S. Drug Testing, Inc." for information as to the
increased estimated costs and the estimated additional delay in
launching the product. The Board believed that, as a result of
the U.S. Drug Merger, the Company would be a public company
having only synergistic operations (assuming, as hereinafter
indicated, Good Ideas is sold or liquidated), having one set of
stockholders who could benefit from such operations as a group,
not just individual aspects thereof, and having the best chance
of survival in a highly competitive industry. Moreover, the
Company selected a consent solicitation over a proxy solicitation
in order to save the time and expense of holding a meeting. The
reasons for the approval by the Company's Board of Directors were
as follows:
(a) The U.S. Drug Merger would eliminate for the Company's
Board of Directors certain conflicts of interest that could
affect future operations, primarily where the Company's funds
should be invested - in U.S. Drug which it then owned 67.0%
thereof (now 75.4%) or in its other operations which it owns
100%.
(b) Eliminating the Company's two public subsidiaries could
lead to additional cost savings, estimated at $50,000 to $75,000
per year;
(c) A one-product company, assuming the drug testing
product is developed, as to which there can be no assurance, has
less of a chance in what is considered to be a highly-competitive
industry;
<PAGE 23>
(d) The Company, because of its other revenue sources, has
a greater opportunity than U.S. Drug, which was not expected to
have revenues until the first quarter of 1999 at the earliest, at
obtaining financing to complete the development program;
(e) The Company, because of the potential exercises of
outstanding Common Stock purchase warrants, had an alternative
method of financing that would avoid creating new dilution of
stockholders;
(f) The Company and U.S. Drug might compete for financing
if the operations were kept separate;
(g) U.S. Drug would default if it did not obtain financing,
whether from the Company or otherwise, and the licensing rights
to the drug testing technology would revert to the Company;
(h) The Common Stock would have greater investment value to
the U.S. Drug Minority Stockholders than the U.S. Drug Common
Stock;
(i) U.S. Drug's liquidation value was not deemed
significant because its main asset (i.e., the U.S. Navy
technology) would revert to the Company on liquidation;
(j) U.S. Drug's "going concern value" was considered to
be speculative because of the requirement for an infusion of
approximately $12,000,000 (as of April 1, 1997), the lack of
certainty that the products will be available on a timely basis
and, when available, the possibility that other companies may
have developed a competing saliva based drug testing product in
the interim period; and
(k) U.S. Drug was not likely to attract a purchaser in view
of the Company's then ownership of 67.0% (now 75.4%) of U.S. Drug
and the then stage of product development.
The U.S. Drug Board considered all but the first two reasons
above in approving the U.S. Drug Merger, adding to the third
reason that, from the prospective of a U.S. Drug Minority
Stockholder, it may be better to be a stockholder in a company
with five synergistic operations, four of which were already
producing revenues. The U.S. Drug Board also considered as
reasons that the U.S. Drug Common Stock may be delisted and that
obtaining a major company to finance the U.S. Drug operations did
not appear to be a realistic approach.
During the 15-month period which elapsed between the initial
authorization by the Company's Board of Directors certain
developments which occurred required both Boards to make a review
of the prior reasons for favoring the U.S. Drug Merger. The
significant increase in estimated costs to complete the
development program, as well as the estimated further delay in
launching the product to market, made both Boards reconsider the
feasibility of U.S. Drug
<PAGE 24>
obtaining financing without the use of the Company's securities.
Accordingly, to the extent U.S. Drug proceeds on its own to seek
financing, the conflict described in reason (a) does not arise. On
the other hand, because both Boards deem an investment by a venture
capital investor to be the most likely source of financing for U.S.
Drug, which type of investment is, in their opinion, more likely to
be made by such type of investor in a private company where the
venture capital investor has an exit strategy of an initial public
offering, but also eliminates the potential conflict referred to in
reason (f). In addition, the availability of revenues as described
in reason (d) is not generally the basis for a venture capital investor
making the investment. See also the section "Summary of the
Material Terms of the U.S. Drug Merger Agreement-Special
Payment" under this caption "Acquisition of the Minority Stock
Interests in U.S. Drug Testing, Inc." for information as to why
both Boards believe now another effort must be made to secure a
major company to finance the U.S. Drug operations, although
neither is optimistic as to U.S. Drug's chances.
Conflict of Interest
All three of the U.S. Drug directors are directors of the
Company. As a result of the interlocking historical
relationships among the directors of U.S. Drug with the Company,
the U.S. Drug Board of Directors has never been independent of
the Company and all of the directors have owned fiduciary duties
to both the Company and U.S. Drug, creating a conflict of
interest, which has existed since the Company incorporated U.S.
Drug in October 1992. However, specifically with respect to the
U.S. Drug Merger, the U.S. Drug Board approved certain safeguards
in an effort to assure fairness to the U.S. Drug Minority
Stockholders. First, the Merger Agreement must be adopted by the
holders of at least 50% of the outstanding shares of the Minority
U.S. Drug Common Stock (excluding from such calculation the
78,400 shares in the aggregate held by current and former
directors of U.S. Drug and the affiliates of one director), even
though the consent of the Company alone is sufficient to adopt
the U.S. Drug Merger Agreement in accordance with the GCL.
Second, Rosenman & Colin LLP was engaged as independent counsel
for U.S. Drug. Such independent counsel reviewed the U.S. Drug
Registration Statement and the U.S. Drug Merger Agreement,
advised the U.S. Drug Board as to the foregoing documents and as
to their fiduciary duties and prepared an opinion as to certain
tax consequences of the U.S. Drug Merger. Lastly, the Board of
Directors of U.S. Drug will receive an opinion from Whale
Securities as to the fairness of the U.S. Drug Merger to the U.S.
Drug Minority Stockholders from a financial point of view as of
the date of the opinion. The U.S. Drug Merger Agreement provides
that the first and second protection for the U.S. Drug Minority
Stockholders cannot be waived by any party.
Differences in Stockholders' Rights
As a result of the U.S. Drug Merger, there will be no change
in the statutory rights of the stockholders of the Company. The
U.S. Drug Minority Stockholders will become holders of the Common
Stock. Because both U.S. Drug and the Company are incorporated
under the laws of
<PAGE 25>
Delaware, there will be no change in the statutory rights as stockholders
of the U.S. Drug Minority Stockholders when they become stockholders of
the Company.
The U.S. Drug Minority Stockholders will be entitled to
appraisal rights under the GCL if the U.S. Drug Merger is
consummated and at that time the U.S. Drug Common Stock is not
listed on the Pacific Exchange.
Accounting Treatment
The U.S. Drug Merger will be accounted for as a "purchase"
as such term is used under generally accepted accounting
principles.
Federal Income Tax Consequences
If the U.S. Drug Merger is consummated, there will be no
federal income tax consequences to the Company, U.S. Drug
Acquisition or the stockholders of the Company or of U.S. Drug
until a stockholder thereafter seeks to sell his, her or its
shares of the Common Stock. Additionally, U.S. Drug Minority
Stockholders receiving cash in lieu of fractional shares may
recognize income as to such cash payment and U.S. Drug Minority
Stockholders realizing cash upon receipt of the Special Payment
may recognize income in the amount of such payment or payments.
Regulatory Approvals
As of the date hereof, the U.S. Drug Merger requires no
approval by any federal or state governmental agency, except for
compliance with the Securities Act, the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), and possibly with
certain state "blue sky" or securities laws. Without limiting
the foregoing, no compliance is necessary under the Hart-Scott-
Rodino Antitrust Improvement Act of 1976, as amended ("Hart-
Scott-Rodino"), and the rules and regulations thereunder.
ACQUISITION OF THE MINORITY STOCK INTERESTS IN
GOOD IDEAS ENTERPRISES, INC.
The Company will seek to acquire the minority stock
interests in Good Ideas by an offer of shares of the Common Stock
to the Good Ideas Minority Stockholders as consideration for their
consent to a merger (the "Good Ideas Merger") of Good Ideas
Acquisition Corp. ("Good Ideas Acquisition"), a Delaware
corporation and a wholly-owned subsidiary of the Company, with and
into Good Ideas pursuant to an Agreement and Plan of Merger dated
as of February 17, 1997 (the "Good Ideas Merger Agreement")
among the Company, Good Ideas and Good Ideas Acquisition. Such
consent will be sought from the holders of the Minority Good Ideas
Common Stock pursuant to Section 228 of the GCL in lieu of holding
a meeting of stockholders of Good Ideas.
The Company has filed with the Commission a Registration
Statement on Form S-4, File No. 333-3734 (the "Good Ideas
Registration Statement"), under the Securities Act with respect
to the shares of the Common Stock to be issued upon consummation
of the Good Ideas Merger and thereafter upon the exercise of the
Good Ideas Merger Warrants. The Good Ideas Registration
Statement has not been declared effective under the Securities
Act and, accordingly, the Company's offer to the Good Ideas
Minority Stockholders has not commenced as yet.
Good Ideas, which is 60.8% owned by the Company and whose
Good Ideas Common Stock trades in the over-the-counter market,
designed, marketed and distributed a variety of traditional toy
products for children of various ages. All operations of Good
Ideas have been terminated and, since March 31, 1996, Good Ideas
has been reported as a discontinued operation in the Company's
consolidated financial statements. It is the current intention
of the Company's Board that, whether or not the Good Ideas Merger
is consummated, to sell or liquidate Good Ideas as soon after the
results of the consent solicitation for the Good Ideas Merger are
known. Good Ideas has an offer to sell its remaining inventory
for $225,000 (less the $112,870 already paid by the prospective
purchaser for inventory) which sale Good Ideas is attempting to
close. Good Ideas maintains its principal executive offices at
4517 N.W. 31st Avenue, Fort Lauderdale, Florida 33309, and its
telephone number is (954) 739-9600, the same as those of the
Company.
Good Ideas Acquisition was incorporated for the sole purpose
of acquiring or being acquired by Good Ideas and, under the terms
of the Good Ideas Merger Agreement, will engage in no business
operations. Good Ideas Acquisition maintains its principal
executive offices at 4517 N.W. 31st Avenue, Ft. Lauderdale,
Florida 33309, and its telephone number is (954) 739-9600, the
same as Good Ideas and the Company.
Summary of the Material Terms of the Good Ideas Agreement
(a) Conversion of Shares
Pursuant to the Good Ideas Merger Agreement, on the Good
Ideas Effective Date (as hereinafter defined), Good Ideas
Acquisition will be merged with and into Good Ideas; each
outstanding share of the Minority Good Ideas Common Stock will be
converted into .36 share of the Common Stock; and each
outstanding share of the Good Ideas Common Stock owned by the
Company, except for 10 shares, will be canceled. The shares of
Good Ideas Acquisition owned by the Company will be canceled upon
the Good Ideas Merger becoming effective. An aggregate of
557,524 shares of the Common Stock will be issued to the Good
Ideas Minority Stockholders, subject to adjustment for fractional
shares. Assuming that the U.S. Drug Merger is not consummated
and there are no exercises of outstanding Common Stock purchase
warrants or any conversions of the Convertible Notes, the
Convertible Debentures or the Preferred Stock between the date of
this Proxy Statement and the effective date of the Good Ideas
Merger, the Company's existing stockholders will own 98.5% of the
outstanding shares of the Common Stock and the Good Ideas
Minority Stockholders will own 1.5%. If the U.S. Drug Merger is
also
<PAGE 27>
consummated, the Good Ideas Minority Stockholders will own
1.4% of the outstanding shares of the Common Stock. The shares
of the Common Stock to be exchanged for each share of the
Minority Good Ideas Common Stock was determined on the basis of
an assumed value of $1.625 for each share of the Common Stock.
The Good Ideas Warrants to purchase an aggregate of 120,000
shares of the Good Ideas Common Stock will be converted into the
Good Ideas Merger Warrants to purchase 74,285 shares of the
Common Stock at $12.115 per share.
No fractional shares of the Common Stock will be issued.
Holders of the Good Ideas Common Stock entitled to receive
fractional shares of the Common Stock upon the consummation of
the Good Ideas Merger will receive a cash payment in lieu thereof
calculated on the basis of the closing sales price for a share of
the Common Stock on the Good Ideas Effective Date (as defined
below) or on the first day thereafter as such price is available.
(b) Effective Date
The Good Ideas Merger will become effective on the date and
at the time of the filing of a copy of the Certificate of Merger
with the Secretary of State of Delaware (the "Good Ideas
Effective Date"). This filing will occur as soon as practicable
following the receipt of consents from the holders of more than
50% of the outstanding shares of the Minority Good Ideas Common
Stock and a consent from the Company, and the satisfaction of
other conditions.
(c) Conditions to the Merger
The obligations of the Company, Good Ideas and Good Ideas
Acquisition under the Good Ideas Merger Agreement are subject to
the satisfaction of certain conditions, including, without
limitation, (1) receipt of all consents from all governmental
agencies and third parties which are required to effect the Good
Ideas Merger, including, without limitation, (a) that the Good
Ideas Registration Statement has been declared effective by the
Commission, (b) that no stop order shall have been issued or
proceedings for such purpose shall have been instituted and (c)
that the issuance of the Common Stock shall have all requisite
authorizations under state securities or "blue sky" laws for
issuance; (2) that the holders of more than 50% of the
outstanding shares of the Minority Good Ideas Common Stock
consent to the adoption of the Good Ideas Merger Agreement, and
(3) the obtaining of an independent opinion as to the fairness of
the Good Ideas Merger to the Good Ideas Minority Stockholders
from a financial point of view.
Whale Securities, an investment banking firm specializing in
the small cap market, has been engaged to deliver the fairness
opinion referred to in the preceding paragraph, has delivered an
opinion to the Good Ideas Board in draft form that, considered as
a whole, the Good Ideas exchange ratio is fair to the Good Ideas
Minority Stockholders from a financial point of view and will
finalize such opinion when the Good Ideas Registration Statement
is declared effective
<PAGE 28>
under the Securities Act. Whale Securities has also been engaged to
deliver a fairness opinion with respect to the U.S. Drug Merger.
(d) Amendment and Termination Rights
The Good Ideas Merger Agreement may be amended in writing by
the Boards of Directors of the parties thereto at any time before
or after its adoption by the Good Ideas Minority Stockholders,
provided that after such adoption no amendment may be made which
changes either the amount or the form of the consideration to be
received by the holders of the Minority Good Ideas Common Stock
without further approval by the Good Ideas Minority Stockholders.
The Good Ideas Merger Agreement may be terminated and the
Good Ideas Merger abandoned, whether before or after approval by
the Good Ideas Minority Stockholders, at any time prior to the
Good Ideas Effective Date (1) by mutual written consent of the
Boards of Directors of the Company and Good Ideas, (2) by either
the Company or Good Ideas if their respective Board of Directors,
based on the opinion of its outside counsel, determines that
making a recommendation to the Good Ideas Minority Stockholders
to adopt the Good Ideas Merger Agreement could reasonably be
deemed to cause the members of such Board of Directors to breach
their fiduciary duties under applicable law to their respective
stockholders or (3) by either the Company or Good Ideas if there
is any statute, rule or regulation which makes consummation of
the Good Ideas Merger illegal or otherwise prohibited or any
order, decree, injunction or judgment enjoining Good Ideas
Acquisition, the Company or Good Ideas from consummating the Good
Ideas Merger, and such order, decree, injunction or judgment has
become final and non-appealable. The obligations automatically
terminate if the Good Ideas Merger has not been consummated by
December 31, 1997.
Reasons for the Good Ideas Merger
The reasons the Board of Directors of the Company had in
February 1996 for taking Good Ideas private are set forth below.
The Company's Board structured the transaction as a merger
because it believed that a merger was faster and less expensive
method than was a tender offer to achieve its primary objective
of selling or liquidating Good Ideas in a manner which would
result in the greatest return to the Good Ideas Minority
Stockholders. Moreover, the Company selected a consent
solicitation over a proxy solicitation in order to save the time
and expense of holding a meeting. The Board of Directors of Good
Ideas' reasons for approving the Good Ideas Merger are set forth
in paragraphs (b), (d), (e) and (f) below. The reasons for the
approval by the Company's Board of Directors were as follows:
(a) The Company's best opportunity at obtaining
profitability required synergistic operations and Good Ideas' toy
business was unrelated to those of the Employer Services
Division, the RSA Division and the then Alcohol Products and
BioTox Divisions;
<PAGE 29>
(b) Good Ideas' revenues had been declining and Good Ideas
would have required entirely new toy products to effect a
turnaround as to which there could be no assurance of success;
(c) The Company's offer of shares of the Common Stock had
greater value to the Good Ideas Minority Stockholders than Good
Ideas' liquidation value, book value or market value so that the
Good Ideas Minority Stockholders would have a better chance of
realizing a return on their investment;
(d) The Good Ideas Common Stock was in jeopardy of being
delisted from the Pacific Exchange because it did not meet the
listing maintenance requirements. The Good Ideas Common Stock
was delisted effective January 1, 1997 and is now traded in the
over-the-counter market;
(e) The going concern value of Good Ideas was not
considered significant because Good Ideas had no viable
operations;
(f) Waiting for an upturn in the toy industry was not
considered economically justified;
(g) The Company's loan indebtedness to Good Ideas
($1,972,000 as of December 1996) would be cancelled upon
consummation of the Merger; and
(h) Eliminating the Company's public subsidiaries (i.e.,
Good Ideas and U.S. Drug) could lead to additional cost savings
estimated at $50,000 to $75,000.
The Company's Board of Directors has concluded that nothing
has occurred during the ensuing 15-month period to cause the
directors to change the initially approved strategy.
Conflict of Interest
Three of the four Good Ideas directors are directors of the
Company and the fourth is a stockholder of the Company. As a
result of the interlocking historical relationships among the
directors of Good Ideas with the Company, the Good Ideas Board
has never been independent of the Company and at least a majority
of the directors have owned fiduciary duties to both the Company
and Good Ideas, creating a conflict of interest, which has
existed since the Company, through a subsidiary, acquired a
majority interest in Good Ideas in June 1992. However,
specifically with respect to the Good Ideas Merger, the Good
Ideas Board approved certain safeguards in an effort to assure
fairness to the Good Ideas Minority Stockholders. First, the
Good Ideas Merger Agreement must be adopted by the holders of
more than 50% of the outstanding shares of the Minority Good
Ideas Common Stock (excluding from such calculation
<PAGE 30>
the 210,000 shares in the aggregate held by two directors of Good Ideas),
even though the consent of the Company alone is sufficient to
adopt the Good Ideas Merger Agreement in accordance with the GCL.
Second, Rosenman & Colin LLP, a major law firm, was engaged as
independent counsel for Good Ideas. Such independent counsel
reviewed the Good Ideas Registration Statement and the Good Ideas
Merger Agreement, advised the Good Ideas Board as to the
foregoing documents and as to their fiduciary duties and prepared
an opinion as to certain tax consequences of the Good Ideas
Merger. Lastly, the Board of Directors of Good Ideas will
receive an opinion from Whale Securities as to the fairness of
the Good Ideas Merger to the Good Ideas Minority Stockholders
from a financial point of view as of the date of the opinion.
The Good Ideas Merger Agreement provides that the first and third
protection for the Good Ideas Minority Stockholders cannot be
waived by any party.
Differences in Stockholders' Rights
As a result of the Good Ideas Merger, there will be no
change in the statutory rights of the stockholders of the
Company. The Good Ideas Minority Stockholders will become
holders of the Common Stock. Because both Good Ideas and the
Company are incorporated under the laws of Delaware and both have
classified boards of directors, there will be no change in the
statutory rights as stockholders of the Good Ideas Minority
Stockholders when they become stockholders of the Company.
The Good Ideas Minority Stockholders who comply with Section
262 of the GCL will be entitled to appraisal rights if the Good
Ideas Merger is consummated.
Accounting Treatment
The Good Ideas Merger will be accounted for as a "purchase"
as such term is used under generally accepted accounting
principles.
Federal Income Tax Consequences
If the Good Ideas Merger is consummated, there will be no
federal income tax consequences to the Company, Good Ideas
Acquisition or the stockholders of the Company. Gain or loss
will be recognized by the Good Ideas Minority Stockholders upon
the receipt of the Common Stock to the extent of the difference
between the Stockholder's tax basis for the Good Ideas Common
Stock and the fair market value of the Common Stock received in
the exchange. Additionally, Good Ideas Minority Stockholders
receiving cash in lieu of fractional shares may recognize income
as to such cash payment.
<PAGE 31>
Regulatory Approvals
As of the date hereof, the Good Ideas Merger requires no
approval by any federal or state governmental agency, except for
compliance with the Securities Act, the Exchange Act and possibly
with certain state "blue sky" or securities laws. Without
limiting the foregoing, no compliance is necessary under Hart-
Scott-Rodino and the rules and regulations thereunder.
INFORMATION WITH RESPECT TO THE COMPANY,
U.S. DRUG AND GOOD IDEAS
General
Copies of the Company's Annual Report on Form 10-K for the
fiscal year ended March 31, 1997, as amended, (the "Company
Annual Report"), U.S. Drug's Annual Report on Form 10-K for the
fiscal year ended March 31, 1997 (the "U.S. Drug Annual Report")
and Good Ideas' Annual Report on Form 10-K for the fiscal year
ended March 31, 1997 (the "Good Ideas Annual Report") accompany
this Proxy Statement.
Information Relating to the Company
The following information with respect to the Company: (a) a
description of its business; (b) a description of its property;
(c) selected financial data; (d) management's discussion and
analysis of financial condition and results of operations; and (e)
changes in, and disagreements with (there were none), accountants
on accounting and financial disclosure may be found in (a) Item 1
of the Company Annual Report; (b) Item 2 of the Company Annual
Report; (c) Item 6 of the Company Annual Report; (d) Item 7 of the
Company Annual Report and (e) Item 9 of the Company Annual Report,
respectively, all of which Items are incorporated herein by this
reference. There is no material litigation pending against the
Company of the nature required to be reported by Item 103 of
Regulation S-K. For the Company's financial statements, see the
index under "Financial Statements" elsewhere in this Proxy
Statement.
Market Data Relating to the Company
Between January 2, 1992 and October 23, 1996, the Common
Stock has traded on the American Stock Exchange ("AMEX") under
the symbol "AAA." Effective October 26, 1996, the Common Stock
began trading under the symbol "SAU." The following table sets
forth the high and low sales prices for the shares of the Common
Stock during the periods indicated:
<PAGE 32>
Fiscal 1996 High Low
- ----------- ---- ---
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
- -----------
High Low
---- ---
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
On August __, 1997, the closing sales price of the SAT
Common Stock was $____ per share.
Certain Comparable Market Information
The following table sets forth the closing sales prices per
share for the Common Stock, the Good Ideas Common Stock and the U.
S. Drug Common Stock, as reported by the American Stock Exchange
for the Common Stock and the Pacific Exchange for the Good Ideas
Common Stock and the U.S. Drug Common Stock on February 5, 1996,
the last full day on which these stocks were traded prior to the
initial public announcement of the principal terms of the Good
Ideas Merger and the U.S. Drug Merger, and as of a recent day.
The Company Good Ideas U.S. Drug
Common Stock Common Stock Common Stock
------------ ------------ ------------
February 5, 1996 $2.375 $.375 $3.75
August __, 1997 $ $ $
Holders of the Company
The holders of record of the Common Stock on June 30, 1997
were 982 and the Company 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.
<PAGE 33>
Dividends of the Company
No dividends on the Common Stock have been declared by the
Company's Board of Directors through the date hereof and, in view
of the Company's cash requirements and history of operational
losses and the provisions in the Convertible Notes, the
Convertible Debentures and the Preferred Stock, the Company's
Board of Directors has no current intention to declare or pay
dividends on the Common Stock in the foreseeable future.
Dividends on the Class A Preferred Stock are payable semi-
annually cumulative from December 17, 1990 and all dividends have
been paid timely.
Information Relating to U.S. Drug
The following information with respect to U.S. Drug: (a) a
description of its business; (b) a description of its property;
(c) selected financial data; (d) management's discussion and
analysis of financial condition and results of operations; and
(e) changes in, and disagreements with (there were none),
accountants and accounting and financial data may be found in (a)
Item 1 of the U.S. Drug Annual Report and the Company Annual
Report; (b) Item 2 of the U.S. Drug Annual Report; (c) Item 6 of
the U.S. Drug Annual Report; (d) Item 7 of the U.S. Drug Annual
Report and the Company Annual Report; and (e) Item 9 of the U.S.
Drug Annual Report, respectively, all of which Items are
incorporated herein by this reference. There is no material
litigation pending against U.S. Drug of the nature required to be
reported by Item 103 of Regulation S-K. For U.S. Drug's
financial statements, see the index under "Financial
Statements" elsewhere in this Proxy Statement.
Market Data Relating to U.S. Drug
The U.S. Drug Common Stock was traded on the Pacific
Exchange under the symbol "U.S.D.P." until May 13, 1997, when
trading was suspended. See the section "Exchange Listing"
under this caption "Information with respect to the Company,
U.S. Drug and Good Ideas." The quarterly high and low sales
prices since U.S. Drug's initial public offering on October 12,
1993 as reported by the Pacific Stock Exchange are set forth
below for the periods indicated:
Fiscal 1996
- -----------
High Low
---- ---
Quarter Ended
-------------
June 30, 1995 $5.50 $2.50
September 30, 1995 $4.75 $2.50
December 31, 1995 $4.50 $2.625
March 31, 1996 $4.50 $3.00
<PAGE 34>
Fiscal 1997
- -----------
Quarter Ended
-------------
June 30, 1996 $4.25 $3.50
September 30, 1996 $3.75 $2.375
December 31, 1996 $2.875 $.75
March 31, 1997 $ * $ *
_____________________
* According to the National Quotation Bureau, Inc., there were
no sales reported during the quarter ended March 31, 1997
and the high bid and low asked prices of the U.S. Drug
Common Stock were $1.875 and $2.00, respectively, per share.
These quotations reflect inter-dealer prices, without retail
mark-up, mark-down or commission, and may not represent
actual transactions.
On May 12, 1997, the last day, according to the National
Quotation Bureau, Inc., on which there was a reported market
price, the closing sales price of the U.S. Drug Common Stock was
$1.6875 per share.
Exchange Listing of U.S. Drug
By letter dated February 3, 1997, the Pacific Exchange
advised U.S. Drug that the Equity Listing Committee of the
Exchange would meet on March 4, 1997 to review U.S. Drug's
listing status and decide if continued listing on the Exchange is
appropriate. Among the Exchange's Tier II Securities maintenance
requirements for continued listing is that a company have
tangible net assets of at least $500,000 or a net worth of at
least $2,000,000. As of December 31, 1996, U.S. Drug met neither
criteria - its liabilities exceeded tangible assets by $815,617
and it had a stockholders' deficit of $775,000. In response to
U.S. Drug's request on February 7, 1997, the Equity Listing
Committee granted a compliance extension until May 6, 1997
(later postponed to May 12, 1997) in order to permit the consent
solicitation for the U.S. Drug Merger to proceed or, if the U.S.
Drug Merger is not approved, for the U.S. Drug Board of Directors
to consider what action is appropriate with respect to
continuance of the listing. On May 12, 1997, the Equity Listing
Committee rejected U.S. Drug's request and the U.S. Drug Common
Stock has been suspended from trading on the Pacific Exchange
pending U.S. Drug's appeal of such rejection. The appeal is
currently expected to be heard during July 1997.
The U.S. Drug Board recognizes that, if delisting occurred,
the U.S. Drug Common Stock would not meet the requirements for
listing on the American Stock Exchange or reporting on the Nasdaq
System and that, if the U.S. Drug Common Stock was reported in
the OTC Bulletin Board or in the "pink sheets," it was unlikely
that the U.S. Drug Common Stock would rise in market value in
such over-the-counter market until the saliva based testing
product was
<PAGE 35>
developed or close to completion. On the other hand,
the U.S. Drug Board recognizes that, if the U.S. Drug Merger is
consummated, the U.S. Drug Minority Stockholders will be able to
trade the Common Stock on the American Stock Exchange.
If the U.S. Drug Common Stock is delisted and, if at that
time the bid price is below $5.00 per share (which it has
consistently been since the quarter ended June 30, 1995), the
security would 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 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 U.S. Drug Common Stock.
U.S. Drug management intends that, if the U.S. Drug Merger
is consummated, U.S. Drug will deregister the U.S. Drug Common
Stock under Section 12(b) of the Exchange Act and trading in the
U.S. Drug Common Stock will cease on the U.S. Drug Effective
Date. In such event, the U.S. Drug Minority Stockholders will
thereafter be able to trade their shares of the Common Stock on
the American Stock Exchange.
Holders of U.S. Drug
As of June 30, 1997, there were 87 holders of record
(including the Company) and, based on prior requests for Annual
Reports, management believed there were approximately 1,100
beneficial holders of the U.S. Drug Common Stock.
Dividends of U.S. Drug
U.S. Drug's Board of Directors has not declared any
dividends on the U.S. Drug Common Stock through the date hereof
and, in view of the continuing losses of U.S. Drug and its cash
requirements, the Board has no current intention to pay any such
dividends.
Information Relating to Good Ideas
The following information with respect to Good Ideas: (a) a
description of its former business; (b) a description of its
current and former property; (c) selected financial data; (d)
management's discussion and analysis of financial condition and
results of operations; and (e) changes in, and disagreements with
(there were none), accountants and accounting and financial data
<PAGE 36>
may be found in (a) Item 1 of the Good Ideas Annual Report and
the Company Annual Report; (b) Item 2 of the Good Ideas Annual
Report and the Company Annual Report; (c) Item 6 of the Good
Ideas Annual Report; (d) Item 7 of the Good Ideas Annual Report
and the Company Annual Report; and (e) Item 9 of the U.S. Drug
Annual Report, respectively, all of which Items are incorporated
herein by this reference. There is no material litigation
pending against Good Ideas of the nature required to be reported
by Item 103 of Regulation S-K. For Good Idea's financial
statements, see the index under "Financial Statements"
elsewhere in this Proxy Statement.
Market Data Relating to Good Ideas
The Good Ideas Common Stock was traded on the Pacific
Exchange under the symbol "KID" through December 31, 1996 and
thereafter has been traded in the over-the-counter market also
under the symbol "KID." The quarterly high and low sales
prices since Good Ideas' initial public offering on February 17,
1994 as reported by the Pacific Stock Exchange are set forth
below for the periods indicated:
Fiscal 1996
- -----------
High Low
---- ---
Quarter Ended
-------------
June 30, 1995 $ 1.25 $.625
September 30, 1995 $ .75 $ .50
December 31, 1995 $ .75 $.125
March 31, 1996 $ .6875 $ .25
Fiscal 1997
- -----------
High Low
---- ---
Quarter Ended
-------------
June 30, 1996 $.8125 $ .125
September 30, 1996 $.6875 $ .125
December 31, 1996 $ .50 $.015625
March 31, 1997 $ * $ *
____________________
* According to the National Quotation Bureau, Inc., there
were no sales reported during the quarter ended March 31,
1997 and there were no high bid and low asked prices
available.
<PAGE 37>
On December 31, 1996, the last day, accordingly to the
National Quotation Bureau, Inc. on which there was a
reported market price, the closing sales price of the Good Ideas
Common Stock was $.01625 per share.
Exchange Listing of Good Ideas
On November 18, 1995, the Pacific Exchange advised Good
Ideas that the share bid price of the Good Ideas Common Stock was
below $1.00 per share, which did not meet the minimum Tier II
listing maintenance requirement of the Pacific Exchange, which
requirement had become effective January 23, 1995. Good Ideas had
been granted an extended compliance period, not to exceed six
months from May 9, 1996, to demonstrate that the Good Ideas
Common Stock was in compliance. By letter dated November 11,
1996, the Pacific Stock Exchange advised Good Ideas that, should
the Good Ideas Merger not be consummated by December 31, 1996
and/or the Good Ideas Common Stock remained in noncompliance with
the Pacific Exchange's maintenance requirements, the Good Ideas
Common Stock would be delisted effective January 1, 1997. Such
delisting has occurred. As a result, the Good Ideas Common Stock
now trades in the over-the-counter market.
Good Ideas management intends that, if the Good Ideas
Merger is consummated, Good Ideas will deregister the Good Ideas
Common Stock under Section 12(b) of the Exchange Act and trading
in the Good Ideas Common Stock will cease on the Good Ideas
Effective Date. In such event, the Good Ideas Minority
Stockholders will thereafter be able to trade their shares of the
Common Stock on the American Stock Exchange.
As an alternative to the Good Ideas Merger, the Good Ideas
Board of Directors had reconsidered in February 1996 the
possibility of effecting a reverse stock split of the Good Ideas
Common Stock in an amount sufficient to increase the market value
of the Good Ideas Common Stock to a level above the minimum
requirement of the Pacific Exchange. This approach has been
previously rejected because the Board recognized that, unless
Good Ideas reversed its adverse operational trends of declining
revenues and increasing losses, as to which there could be no
assurance, it was likely that, after the split, the market price
would begin to decline and again reach a level not complying with
the Pacific Exchange's maintenance requirement. The Board also
recognized that, if delisting occurred, the Good Ideas Common
Stock would not meet the market price requirement for listing on
the American Stock Exchange or reporting on the Nasdaq System and
that, if the Good Ideas Common Stock was reported in the OTC
Bulletin Board or in the "pink sheets," it was unlikely that
the Good Ideas Common Stock would rise in market value in such
over-the-counter market in view of its operational problems.
Because the bid price of the Good Ideas Common Stock was
below $5.00 when it was delisted, the security became subject to
Rule 15g-9 promulgated under the Exchange Act, which Rule imposes
additional sales practices requirements on a broker-dealer which
sells Rule 15g-9 securities to persons other than the broker-
dealer's established customers and institutional
<PAGE 38>
accredited investors (as such term is defined in Rule 501(a) under
the Securities Act). For transactions covered under Rule 15g-9, the
broker-dealer must make a suitability determination of the
purchaser and receive the purchaser's written agreement to the
transaction prior to the sale. In addition, broker-dealers,
particularly if they are market makers in the Common Stock, have
to comply with the disclosure requirements of Rules 15g-2, 15g-3,
15g-4, 15g-5 and 15g-6 under the Exchange Act unless the
transaction is exempt under Rule 15g-1. Consequently, Rule 15g-9
and these other Rules may adversely affect the ability of broker-
dealers to sell or to make markets in the Good Ideas Common
Stock.
Holders of Good Ideas
As of June 30, 1997, there were 180 holders of record
(including the Company) and, based on prior requests for Annual
Reports, management believed that there were approximately 1,100
beneficial holders of the Good Ideas Common Stock.
Dividends of Good Ideas
Good Ideas' Board of Directors has not declared any
dividends on the Good Ideas Common Stock through the date hereof
and, in view of the financial condition of Good Ideas and the
intention to sell or liquidate Good Ideas, the Board has no
current intention to pay any such dividends.
Certain Financial Data
Book Value Per Share
-------------------------------------
As of The Company U.S. Drug Good Ideas
- ----- ----------- --------- ----------
March 31, 1995 $ .30 $ .52 $.92
March 31, 1996 $ .14 $ .20 $.55
March 31, 1997 $(.02) $(.30) N/A(1)
Income (Loss) Per Share from Continuing Operations
--------------------------------------------------
Period Ended The Company U.S. Drug Good Ideas
- ------------ ----------- --------- ----------
March 31, 1995 $(.26) $(.45) $(.20)
March 31, 1996 $(.27) $(.31) $(.39)
March 31, 1997 $(.43) $(.50) N/A(1)
_____________________
(1) Good Ideas' operations were discontinued as of March 31, 1996
<PAGE 39>
As indicated above, no dividends have ever been paid by the
Company, U.S. Drug or Good Ideas.
FINANCIAL STATEMENTS
The Company
The following financial statements, management's discussion
and analysis and market information, all of which appear in the
Company Annual Report, a copy of which accompanies this Proxy
Statement, are incorporated herein by this reference:
Page in
Company
Annual
Item Report
---- ------
1. Report of Independent Certified Public Accountants F-1
2. Report of Independent Certified Public Accountants F-2
3. Consolidated Balance Sheets at March 31, 1997 and 1996 F-3
4. Consolidated Statements of Operations for the
Years Ended March 31, 1997, 1996 and 1995 F-4
5. Consolidated Statements of Stockholders' (Deficit)
Equity for the Years Ended March 31, 1997, 1996 and 1995 F-5
6. Consolidated Statements of Cash Flows for the Years
Ended Years Ended March 31, 1997, 1996 and 1995 F-7
7. Notes to Consolidated Financial Statements F-9
A representative of Ernst & Young LLP, the Company's
independent public accountants for the fiscal years ended March
31, 1996 and 1997, will not be present at the meeting.
U.S. Drug (A Development Stage Enterprise)
The following financial statements, management's discussion
and analysis and market information, all of which appear in the
U.S. Drug Annual Report, a copy of which accompanies this Proxy
Statement, are incorporated herein by this reference:
<PAGE 40>
Page in
U.S.Drug
Annual
Item Report
---- ------
1. Report of Independent Certified Public Accountants F-2
2. Report of Independent Certified Public Accountants F-3
3. Balance Sheets at March 31, 1997 and 1996 F-4
4. Statements of Operations for the Years Ended March 31,
1997, 1996 and 1995 and Cumulative from October 8, 1992
(Inception) to March 31, 1997 F-5
5. Statements of Stockholders' (Deficit) Equity for the
period October 8, 1992 (Inception) to March 31, 1997 F-6
6. Statements of Cash Flows for the Years Ended March 31,
1997, 1996 and 1995 and Cumulative from October 8, 1992
(Inception) to March 31, 1996 F-7
7. Notes to Financial Statements F-8
Good Ideas
The following financial statements, management's discussion
and analysis and market information, all of which appear in the
Good Ideas Annual Report, a copy of which accompanies this Proxy
Statement, are incorporated herein by this reference:
Page in
Good Ideas
Annual
Item Report
---- --------
1. Report of Independent Certified Public Accountants F-1
2. Report of Independent Certified Public Accountants F-2
3. Statements of Net Assets in Liquidation at March 31,
1997 and 1996 F-3
4. Statement of Changes in Net Assets (Liabilities) in
Liquidation - Year Ended March 31, 1997 F-4
<PAGE 41>
Page in
Good Ideas
Annual
Item Report
---- ---------
5. Statements of Operations for the Years Ended March 31,
1996 and 1995 F-5
6. Statements of Stockholders' Equity for the Years Ended
March 31, 1996 and 1995 F-6
7. Statements of Cash Flows for the Years Ended March 31,
1996 and 1995 F-7
8. Notes to Financial Statements F-8
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
HOLDERS AND MANAGEMENT
The following table sets forth certain information, as of the
Record Date, with respect to (1) any person who owned beneficially
more than 5% of the Common Stock; (2) each director of the
Company; (3) the Chief Executive Officer of the Company; (4) each
other executive officer of the Company who was paid more than
$100,000 in fiscal 1997, whether or not he was still an executive
officer on the Record Date; and (5) all directors and executive
officers as a group. Each beneficial owner has advised the
Company that he or she has sole voting and investment power as to
the shares of the 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.
Number of Shares
Name and Address Beneficially Owned Percentage
- ---------------- ------------------ ----------
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
Ft. Lauderdale, FL 33309
<PAGE 42>
Number of Shares
Name and Address Beneficially Owned Percentage
- ---------------- ------------------ ----------
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) 226,455(13) nil
Suite 701
2001 Kirby Drive
Houston, TX 77019
Lee S. Rosen (14) 1,485,125(14) 4.0%
17332 Saint James Court
Boca Raton, FL 33496
Brian Stutman (15) 553,376(16) 1.5%
4517 N.W. 31st Avenue
Fort Lauderdale, FL 33309
<PAGE 43>
Number of Shares
Name and Address Beneficially Owned Percentage
- ---------------- ------------------ ----------
Steven J. Kline (17) 30,500(18) nil
10410 Trademark Street
Rancho Cucamonga, CA 91730
All directors and 4,093,556(19) 10.6%
executive officers as a
group (eight persons)
______________________
1. The percentages computed in this column of the table are
based upon [36,030,591] shares of the Common Stock
outstanding on the Record Date 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 exercisable or
exercisable within 60 days of the Record Date and to the
Convertible Notes which are currently convertible.
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, even though at the time
their individual beneficial ownership was under 5% of the
then outstanding shares of the Common Stock. 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 on June 30, 1997.
3. The shares reported in the table as being beneficially owned
reflect (a) 1,463,300 shares of the Common Stock; (b) 5,000
shares of the Common Stock issuable at $1.8125 per share
upon the exercise of a warrant expiring November 15, 1999;
and (c) 2,000,000 shares of the Common Stock issuable upon
the conversion of a Convertible Note at $1.25 per share.
The shares do not include 2,000,000 shares of the Common
Stock issuable at $1.25 per share upon the exercise of a
June 30 Warrant because the Warrant is not currently
exercisable or exercisable within 60 days of the Record Date
as a result of the total shares beneficially owned by the
"group" exceeding 10% of the outstanding shares of the
Common Stock.
4. The shares reported in the table as being beneficially owned
reflect (a) 429,400 shares of the Common Stock; (b) 5,000
shares of the Common Stock issuable at $1.8125 per share
upon the exercise of a warrant expiring November 15, 1999;
and (c) 2,000,000 shares of
<PAGE 44>
the Common Stock issuable upon the conversion of a Convertible Note
at $1.25 per share. The shares do not include 2,000,000 shares of
the Common Stock issuable at $1.25 per share upon the exercise of a
June 30 Warrant because the Warrant is not currently
exercisable or exercisable within 60 days of the Record Date
as a result of the total shares being beneficially owned by
the "group" exceeding 10% of the outstanding shares of the
Common Stock. 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 as Chairman of the Board and a
director of the Company 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 Common Stock issuable upon the exercise at $2.00 per
share of a Common Stock purchase warrant expiring December
13, 1998 issued to Robert M. Stutman for his consulting
services while still an employee of Robert Stutman &
Associates, Inc. ("RSA"); (b) 105,500 shares of the 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 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 the Company 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 exercisable or exercisable within 60 days of the
Record Date.
9. Ms. Masterson, a director of the Company, 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
<PAGE 45>
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 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 the Company
on the same basis as described in Note 12 to the table and
(b) 200,000 shares of the 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
warrant to purchase an aggregate of 600,000 shares is
currently exercisable or exercisable within 60 days of the
Record Date.
11. A director of the Company.
12. The shares reported in this table include or reflect (a)
10,000 shares of the 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
Common Stock issuable upon the exercise at $1.825 per share
of a warrant expiring November 15, 1999, both issued to the
holder as a director of the Company who is not employed by
the Company or any subsidiary thereof.
13. The shares reported in the table include (a) 10,000 shares
of the 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 the Company and (b) 10,000 shares
of the Common Stock issuable upon the exercise at $1.825 per
share of a warrant expiring November 15, 1999 issued to him
as a director of the Company on the same basis as those
described in Note 12 to this table. The shares reported in
the table do not include 5,000 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 Common Stock issuable upon the exercise at $1.9375
per share of a Common Stock purchase warrant expiring
November 15, 1998 issued to Mr. Rosen on the same basis as
those described in Note 12 to this table; (b) 10,000 shares
of the Common Stock issuable upon the exercise at $1.825 per
share of a Common Stock purchase warrant expiring November
15, 1999 issued to Mr. Rosen on the same basis as those
described in Note 12 to this table; (c) 200,000 shares of
the 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 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 Common Stock
<PAGE 46>
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 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 Common Stock issuable upon the exercise at
$2.00 per share of a warrant expiring December 2, 1999; and
(h) 250,000 shares of the 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 the Company 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
exercisable or exercisable within 60 days of the Record
Date.
17. Mr. Kline served as Vice President, Research and
Development of the Company from March 25, 1997 to May 23,
1997, when he resigned as part of the program and study the
feasibility of separating the interlocking relationships
between the Company 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
<PAGE 47>
May 2, 2003, which are the only shares of a total of 50,000 shares
subject to that warrant which are currently exercisable or
exercisable within 60 days of the Record Date.
19. The shares reported in the table reflect the shares of the
Common Stock reported elsewhere in the table (see the text
relating to Notes 6, 8, 10, 12, 13, 14, 16 and 18 to the
table) and do not reflect 40,000 shares of the Common Stock
issuable upon the exercise at $2.125 per share by an
executive officer of a Common Stock purchase warrant, the
last installment of which expires December 15, 2003, because
the warrant is not currently exercisable or exercisable
within 60 days of the Record Date.
MISCELLANEOUS
The solicitation of proxies on the enclosed form of proxy is
made by and on behalf of the Board of Directors of the Company and
the cost of this solicitation is being paid by the Company. In
addition to the use of the mails, proxies may be solicited
personally, or by telephone or telegraph, by the officers or
directors of the Company.
By Order of the Board of Directors
/s/Robert W. Berend
-----------------------------------
Robert W. Berend
Secretary
August 6, 1997
<PAGE I>
- ------------------------------ -----------------------------------
- ------------------------------ -----------------------------------
Substance Abuse Technologies, Inc.
Table of Contents
Page
----
Notice of Special Meeting of
Voting Securities.................. 2 Stockholders on August 27, 1997
Proposal One: Approval of the
Increase in the Number of
Authorized Shares of the
Common Stock.......................3
Proposal Two: Approval to
Authorize 3,000,000 Shares of
a New Class of Preferred Stock.....7
Interest of Management..............9
Financings.........................12
Acquisitions of the Minority
Stock Interests in U.S. Drug
Testing, Inc......................15
Acquisition of the Minority
Stock Interests in Good Ideas
Enterprises, Inc..................25
Information with Respect to
the Company, U.S. Drug and Good
Ideas.............................31
Financial Statements...............39
Security Ownership of Certain
Beneficial Holders and
Management........................41
Miscellaneous......................47
- -------------------------------- -------------------------------
- -------------------------------- -------------------------------
<PAGE II>
PROXY
SUBSTANCE ABUSE TECHNOLOGIES, INC.
4517 N.W. 31st Avenue, Ft. Lauderdale, Florida 33309
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
SPECIAL MEETING OF STOCKHOLDERS AUGUST 27, 1997
The undersigned hereby appoints Robert M. Stutman and David L.
Dorff, or either of them, as Proxy or Proxies of the undersigned
with full power of substitution or revocation to attend and to
represent the undersigned at the Special Meeting of Stockholders
of Substance Abuse Technologies, Inc. (the "Company") to be held
on August 27, 1997, and at any adjournments thereof, and to vote
thereat the number of shares of stock of the Company the
undersigned would be entitled to vote if personally present, in
accordance with the directions indicated below.
PLEASE MARK, DATE AND SIGN THIS PROXY AND RETURN IT IN THE
ENCLOSED ENVELOPE.
Approval of the increase in the number of authorized shares of
the Common Stock:
[] FOR [] AGAINST [] ABSTAIN
Approval of the creation of a new class of Preferred Stock:
[] FOR [] AGAINST [] ABSTAIN
If no specification is made, this proxy will be voted FOR the
Proposals listed above.
Dated:_________________, 1997
Name:________________________________________
_________________________________________
Please sign exactly
as name appears
above. For joint
accounts, each joint
owner must sign.
Please give full
title if signing in
a representative
capacity.
Please check if you
plan to attend this
Special Meeting []
