<PAGE 1>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
Commission File Number: 1-12362
U.S. DRUG TESTING, INC.
(Exact name of registrant as specified in its charter)
DELAWARE #33-0539168
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
10400 Trademark Street, Rancho Cucamonga, CA 91730
(Address of Principal Executive Offices) (Zip Code)
(909) 466-8047
Registrant's Telephone Number, Including Area Code
4517 N.W. 31stst Avenue Ft. Lauderdale FL 33309
(Former name, former address and former fiscal year, if changed
since last report.)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [x] Yes [ ] No
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all
documents and reports required to be filed by Sections 12, 13 OR
15(d) of the Securities Exchange Act of 1934 subsequent to the
distribution of securities under a plan confirmed by a court.
[ ] Yes [ ] No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the last practicable date.
As of November 22, 1997 - Common Stock, $.001 Par Value, 7,297,206
<PAGE 2>
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
U.S. DRUG TESTING, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
BALANCE SHEETS
(Unaudited)
September 30 March 31
1997 1997
------------ --------
ASSETS
------
Current Assets:
Cash and Cash Equivalents $ 23,243 $ -
Prepaid Expenses and Other Current
Assets - 49,996
---------- ---------
Total Current Assets 23,243 49,996
Property and Equipment, net 687,055 505,799
Patents and other assets, net 35,371 40,152
--------- ---------
Total Assets 745,669 595,947
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Bank Overdraft $ - $ 119,514
Accounts Payable 57,561 216,687
Accrued Expenses 184,462 16,340
Current Portion of Capital Leases 12,139 25,494
Loan Payable-Parent - 1,668,179
---------- ----------
Total Current Liabilities 254,162 2,046,214
Long term Portion of Capital Lease
Obligations 59,266 123,419
---------- ---------
Total Liabilities 313,428 2,169,633
Stockholders' Equity (Deficit):
Common Stock, $.001 Par Value; 50,000,000
Shares Authorized, 7,297,206 shares and
5,221,900 shares issued and outstanding at
September 30, 1997 and March 31, 1997
respectively 7,297 5,222
Additional Paid-in Capital 10,967,320 7,542,401
Deficit Accumulated in the Development Stage (10,542,376) (9,121,309)
----------- ----------
Total Stockholders' Equity (Deficit) 432,241 (1,573,686)
----------- ----------
Total Liabilities and Stockholders'
Equity (Deficit) $ 745,669 $ 595,947
========== ==========
The accompanying notes are an integral part of the financial statements.
<PAGE 3>
U.S. DRUG TESTING, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENT OF OPERATIONS
(Unaudited)
<TABLE>
Cumulative
From
For the For the October 8, 1992
Three Months Ended Six Months Ended (Inception)
September 30 September 30 September 30,
----------------- ------------------
1997 1996 1997 1996 1997
--------- --------- ------ -------- ------------
<S> <C> <C> <C> <C> <C>
Revenues $ - $ - $ - $ - $ -
Costs and Expenses:
General and Administrative
Expenses 33,256 55,816 170,534 128,592 1,983,613
Research and Development 170,832 539,635 700,674 702,413 5,466,013
Depreciation and
Amortization 88,761 52,189 105,491 72,032 665,149
Interest Expense-Parent - 1,847 34,530 1,847 95,790
Management Fees-Parent - 105,000 409,838 210,000 2,089,838
Interest Expense - 1,114 - 1,503 118,344
------- ------- -------- --------- ----------
Total Costs and Expenses 292,849 755,601 1,421,067 1,116,387 10,418,747
------- ------- --------- --------- ----------
Loss from Operations (292,049) (755,601) (1,421,067)(1,116,387) (10,418,747)
Other Income/(Expense) - 710 - 5,526 123,629
--------- --------- --------- ---------- -----------
Net Loss $(292,849) $(754,891) $(1,421,067)$(1,110,861)$(10,542,376)
========== ========== =========== ========== ===========
Weighted Average Common
Shares Outstanding 7,297,206 5,221,900 6,707,502 5,221,900
========= ========= ========= =========
Net Loss Per Common Share $ (0.04) $ (0.14) $ (0.21) $ (0.21)
======== ========= ======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE 4>
U.S. DRUG TESTING, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STAEMENT OF CASH FLOWS
(Unaudited)
Cumulative
From
October 8, 1992
For the Six Months Ended (Inception) to
September 20 September 30
1997 1996 1997
---------- ----------- ---------------
Cash Flow from Operating
Activities:
Net Loss $ (1,421,067) $ (1,110,861) $ (10,542,376)
Adjustments to Reconcile
Net Loss to Net Cash
Used by Operating Activities:
Depreciation and
Amortization 105,491 72,032 665,149
Disposal of Property
and Equipment - - 59,380
Realized Gain on
Marketable Securities - - 627,512
Unrealized Loss on
Marketable Securities - - (4,855)
Changes in Operating Assets
and Liabilities:
(Increase) Decrease in
Prepaid Expenses and
Other Current Assets - 30,686 (100,599)
(Increase) Decrease in
Other Assets 4,993 - 1,174
Decrease in Bank Overdraft (119,514) - -
Increase (Decrease) in
Accounts Payable (159,126) 352,703 111,920
Increase (Decrease) in
Accrued Expenses' 168,122 (14,164) 184,482
----------- --------- ----------
Net Cash Used by Operating
Activities (1,421,101) (669,604) (8,998,233)
----------- --------- ----------
Cash Flow From Investing
Activities:
Sale of Marketable
Securities - - 3,285,625
Purchase of Marketable
Securities - - (3,908,281)
Purchase of Property
and Equipment (19,065) (120,655) (556,462)
Patent Costs (1,402) (617) (39,238)
--------- --------- ----------
Net Cash Used by Investing
Activities (20,467) (121,272) (1,218,356)
--------- --------- ----------
Cash Flow from Financing
Activities:
Sales of Common Stock - - 8,621,226
Expenses of Stock Offering - - (1,510,663)
Payment of Loan to Parent - - (1,917,057)
Repayment of Loan by Parent - 282,295 1,917,057
Proceeds of Loan Payable-Parent 1,464,811 278,892 4,715,067
Payment of Loan payable-Parent - - (1,299,782)
Proceeds of Capital Leases - - 101,572
Payments of Capital Leases - (18,883) (105,293)
Proceeds of Brokerage Loan
Payable - - 2,674,683
Payments of Brokerage Loan
Payable - - (2,674,683)
---------- --------- ---------
Net Cash Provided by Financing
Activities 1,464,811 542,304 10,239,832
---------- --------- -----------
The accompanying notes are an integral part of the financial statements.
<PAGE 5>
U.S. DRUG TESTING, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENT OF CASH FLOWS
(Unaudited)
(Continued)
Cumulative
From
October 8, 1992
For the Six Months Ended (Inception) to
September 30 September 30,
1997 1996 1997
-------- --------- --------------
Increase (Decrease) in Cash
and Cash Equivalents 23,243 (248,572) 23,243
Cash and Cash Equivalents-
Beginning of Period - 249,047 -
--------- --------- ---------
Cash and Cash Equivalents-
End of Period $ 23,243 $ 475 $ 23,243
========= ========= =========
Supplemental Disclosure of
Cash Information: Cash
paid for Interest $ - $ 1,503 $ 156,560
========= ========= ==========
Non-cash Financing Activities:
Value of Common Stock Issued
and Additional Paid In
Capital for the Transfer of
Assets from Parent $ 344,000 $ - $ 781,060
========= ========= =========
Value of Common Stock Issued
to Parent and Additional Paid
In Capital for the Forgiveness
of Debt $3,082,996 $ - $3,082,994
========== ========= ==========
<PAGE 6>
U.S. DRUG TESTING, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
(Unaudited)
NOTE 1 - Basis of Presentation
In the opinion of U.S. Drug Testing, Inc. (the "Company"),
the accompanying unaudited financial statements reflect all
adjustments (which include only normal recurring adjustments
except as disclosed below) necessary to present fairly the
financial position, results of operations and cash flows for the
periods presented. Results of operations for interim periods are
not necessarily indicative of the results of operations for a
full year due to external factors which are beyond the control of
the Company. This Report should be read in conjunction with the
Company's Annual Report on Form 10-K for the fiscal year ended
March 31, 1997.
NOTE 2. - Continuing Operations
The Company has incurred recurring operating losses and, at
September 30, 1997, has a deficiency in working capital of
approximately $231,000. To increase working capital, in May 1997
and July 1997, the Company converted outstanding indebtedness to
Substance Abuse Technologies, Inc. ("SAT"), the Company's former
parent, into shares of the Company's common stock, $.001 par
value (the "Common Stock"), and additional paid in capital.
However, the Company will require additional capital to continue
the research, development and ultimate manufacture and marketing
of its product and to fund its working capital requirements for
the next 12 months.
Additionally, on September 10, 1997, SAT filed a voluntary
petition for reorganization under Chapter 11 of the Bankruptcy
Code and, on September 19, 1997, the Company announced the
temporary suspension of the development of the saliva based drugs
of abuse and alcohol testing device. Subsequently, on October
29, 1997 SAT sold its majority shares of the Common Stock to an
unaffiliated investor for $250,000. The purchaser of the Common
Stock also loaned money to the Company to allow the Company to
recommence product development.
NOTE 3 - Property and Equipment
Property and equipment is summarized as follows:
September 30, March 31,
1997 1997
------------- ---------
Furniture and Fixtures $ 306,973 $ 363,229
Test Equipment 736,849 400,798
Leasehold Improvements 214,569 208,822
---------- ----------
1,258,391 972,849
Less: Accumulated
Depreciation 571,336 467,050
---------- ---------
$ 687,055 $ 505,799
========== =========
<PAGE 7>
U.S. DRUG TESTING, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
(Unaudited)
(Continued)
NOTE 4 - Loan Conversion and Fixed Asset Purchase
On May 26, 1997, the Board of Directors of the Company
authorized the issuance of additional shares of the Common Stock
to SAT on the basis of a share of Common Stock for each $1.25 of
indebtedness of the Company to SAT. As a result of SAT's
inability to obtain its own financing, SAT ceased advances to the
Company in July 1997. Based on SAT's advice that the amount of
the indebtedness owed by the Company to SAT was $2,594,133, all
of which SAT agreed to treat as a capital contribution, the
Company authorized the issuance to SAT of 2,075,306 shares of
the Common Stock, which were issued as of June 30, 1997 and prior
to the sale of the Common Stock held by SAT to an outside third
party. Subsequent to the sale, SAT advised the Company that the
amount of the indebtedness was $3,426,994. As such, the
forgiveness of the remaining indebtedness to SAT of $832,861 was
reflected as additional paid in capital as of September 30, 1997.
Included in the indebtedness, which was converted to
additional paid in capital as noted above, was $344,000 related
to the purchase of various fixed assets from SAT at the Rancho
Cucamonga, California premises.
NOTE 5 - Commitments and Contingencies
In June 1995, the License Agreement with the Department of
the Navy then held by SAT was renegotiated and amended to provide
for minimum annual royalties of $100,000 per year commencing
October 1, 1995 and terminating September 30, 2005. Additional
royalties will be paid pursuant to a schedule based upon sales of
products. Through March 31, 1997, the Company sub-licensed this
Agreement from its parent and, accordingly, had obligations to
its parent for the royalty payments required by the License
Agreement. This license was transferred from SAT to the Company
effective with the sale of SAT's majority ownership of the Common
Stock and all past liability for the license was forgiven.
NOTE 6 - Registration Statement
During May 1996, SAT filed a Registration Statement on
Form S-4, File No. 333-4790, under the Securities Act of 1993, as
amended (the "Securities Act"), in an attempt, through a consent
solicitation, to acquire the Common Stock owned by the minority
stockholders and thereby own 100% of the Common Stock. As
discussed in Note 2, SAT sold its majority interest in the
Company to an unaffiliated investor; therefore, the consent
solicitation will not occur.
<PAGE 8>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
General.
From its incorporation on October 8, 1992 until October 31,
1997, when a sale of the controlling stock interest in the
Company was consummated (see Part II, Item 5 of this Report), the
Company was a subsidiary of SAT, a publicly-owned company which
filed a petition under Chapter 11 of the Federal Bankruptcy Code
on September 10, 1997. Because SAT had ceased advances to the
Company in July 1997 as a result of its inability to secure
financing for its own programs, the Company temporarily suspended
its product development activities on September 19, 1997 and did
not resume until October 27, 1997.
The Company is a development stage enterprise, currently
seeking to develop a product to detect drugs of abuse and alcohol
using saliva as a test specimen, and has no earnings history.
On May 6, 1996, SAT had filed Registration Statement on Form
S-4, File No. 333-4790, under the Securities Act to make an offer
of shares of SAT's Common Stock, $.001 par value, to the holders
of the 1,721,900 shares of the Common Stock not owned by SAT,
said shares to be issued as consideration if a proposed merger of
the Company with and into a wholly-owned subsidiary of SAT was
approved by such minority stockholders. As a result of SAT's
bankruptcy and its sale of the controlling interest as described
in Part II, Item 5, of this Report, this proposed merger
transaction to take the Company private has been abandoned by
SAT.
Liquidity and Capital Resources.
Until July 1997 when SAT's inability to secure its own
financing caused SAT to cease advances to the Company, SAT had
been the sole source of financing to the Company since the
Company's public offering of 1,721,900 shares of the Common Stock
in October and November 1993. This initial public offering
netted the Company approximately $7,099,000.
As a result of two loans made to the Company in September
and October 1997 totaling $310,000 ($10,000 from an officer and
$300,000 from an unaffiliated source), both loans secured by a
lien in the assets of the Company, the Company recommenced its
product development on October 27, 1997. The Company has
subsequently repaid the loans from the net proceeds of a private
placement currently being conducted pursuant to Regulation D
under the Securities Act offering up to 3,200,000 shares of the
Common Stock at $.50 per share or an aggregate purchase price of
$1,600,000. As of December 8, 1997, the Company had accepted
subscriptions for all 3,200,000 shares of the Common Stock for
gross proceeds of $1,600,000.
An independent technology and market assessment firm engaged
by SAT concluded in June 1997 that the Company's immunosensor
technology will have the capability to deliver performance with
the analytical sensitivity for the targeted products in drug and
alcohol testing, but estimated that the product launch date may
be August 1999 at the earliest and the incremental cost may be as
high as $18,400,000. The report assumed that the Company's
development program would be adequately financed and brought to a
successful conclusion, as to neither of which assumptions can
there be any assurance. Although management believed that the
product launch date could be earlier than the consulting firm
projected and the incremental cost could also be lower,
management is currently studying the effect of the suspension and
reduction of the research and development program during the
period July to October 1997 and continuing at a reduced rate
until long-term funding is secured, on both the projected product
launch date and on the incremental costs. The Company believes
that it is premature for making a definitive conclusion as to
whether the Company should effect any change in either or both
estimates.
Management continues to search for a venture capital
investor to fund the balance of the development program,
believing that such an investor or investors would be the most
likely source of financing. Management has identified companies
which are likely candidates for such an investment based on an
analysis of their investment
<PAGE 9>
history and has conducted preliminary discussions with one or two
of the potential candidates, but this search remains in its
preliminary stages. Management recognizes that many prospective
venture capital investors prefer to invest in a privately-owned
company with an initial public offering as the investor's exist
strategy, rather than in a publicly-owned company such as the
Company; however, the initial responses to the Company's
solicitation, preliminary as they are, have suggested to
management that this potential problem may be overcome.
Management also intends to explore the possibility of an
underwritten public offering or another private placement as a
means of raising the capital necessary to complete the
development program; however, market conditions and other
considerations may make these methods of financing not feasible.
These efforts are being conducted simultaneous to discussions
with venture capital sources.
Lastly, the Company has not abandoned the possibility of
obtaining a major pharmaceutical or medical company to assist in
the product development. Management believes that the
consultant's report may encourage such a company to proceed where
normally such a company would, in management's opinion, be
waiting for a working prototype to be developed, which working
prototype, even on the original estimate timetable, was not to be
available until April 1998.
The Company believes that, if the currently pending private
placement described above is consummated for its maximum gross
proceeds of $1,600,000, it will have sufficient capital to keep
the Company operating for a period of up to 10 months while it
seeks the long-term financing. Unless such long-term financing
is obtained, the Company will have to abandon the product
development program and, accordingly, have no product or service
in order to become an operating entity. There can be no
assurance that such long-term financing will be obtained or, if
available, as to when or that management's estimate as to the
period of not requiring additional short-term financing will be
correct.
Results of Operations
Three Months Ended September 30, 1997 vs. September 30, 1996
During the quarter ended September 30, 1997, the Company
spent $170,832 on research and development and an additional
$33,256 on general and administrative expenses, as compared with
$539,635 and $55,816, respectively, during the three months ended
September 30, 1996. The lower expenditures in the 1997 period
were due to the fact that SAT advanced no funds to the Company
after July 1997 and, accordingly, the Company's operations were
suspended. There was no management fee paid to SAT in the
quarter ended September 30, 1997, while the Company paid SAT
$105,000 in management fees during the quarter ended September
30, 1996, because no management services were being provided by
SAT in the 1997 quarter.
Six Months Ended September 30, 1997 vs. September 30, 1996
During the six months ended September 30, 1997, the Company
spent $700,674 on research and development and an additional
$170,534 on general and administrative expenses, as compared with
$702,413 and $128,592, respectively, during the six months ended
September 30, 1996. Although the Company had been incurring
expenditures with the accelerated effort in the R & D program,
the overall expenditures were significantly lower in the 1997
period due to the fact that SAT advanced no funds to the Company
after July 1997 and, accordingly, the Company's product
development activities were suspended. The management fees paid
to SAT in the six months ended September 30, 1997 aggregated
$409,838 as compared to $210,000 in the same period in 1996 due
to increased expenses for corporate overhead.
From inception on October 8, 1992 to September 30, 1997, the
Company has spent $5,466,013 on research and development and
$1,983,613 on general and administrative expenses. Management
fees paid to SAT aggregated $2,089,838 during such period.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
Not applicable.
<PAGE 10>
PART II
OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 2. Changes in Securities and Use of Proceeds.
(a) Not applicable.
(b) Not applicable.
(c) On May 26, 1997, the Board of Directors of the Company
authorized the issuance to SAT, the owner of 3,500,000 shares of
the Common Stock or 67.0% of the outstanding shares, of
additional shares of the Common Stock on the basis of a share of
the Common Stock for each $1.25 of indebtedness of the Company to
SAT as to which SAT had agreed (on May 23, 1997) or would agree
to capitalize. As a result of SAT's inability to obtain its own
financing, SAT ceased advances to the Company in July 1997.
Based on SAT's advice that the amount of the indebtedness owed by
the Company to SAT was $2,594,133, all of which SAT agreed to
capitalize, the Company authorized the issuance to SAT of
2,075,306 shares of the Common Stock. Subsequent to the sale
described in Item 5 of this Report, SAT advised the Company that
the amount of the indebtedness was $3,426,994. The remaining
666,289 shares were not issued and the related amounts of
indebtedness of $832,861 which were forgiven by SAT was deemed a
contribution to paid in capital. None of the 2,075,306 shares
for issuance to SAT were registered under the Securities Act
pursuant to the exemption of Section 4(2) of the Securities Act
in that it was a transaction not involving a public offering,
i.e., an offer to capitalized indebtedness owed by the Company to
the lender in exchange for shares of the Common Stock.
(d) Not applicable.
Item 5. Other Information.
On July 17, 1997, SAT sold to the Company SAT's furniture,
fixtures, inventory, and other assets at the Rancho Cucamonga,
California premises for $344,000, and payment was to be made with
275,722 shares of the Common Stock, which indebtedness and shares
were included in those described in Item 2(c) of Part II to this
Report. The fixed assets included laboratory furniture and
scientific equipment, a networked computer system, telephone
system, and other electronic equipment, office furniture,
electronic test and production benches, and other furniture and
vehicles (including an automobile and forklift). The Company
subsequently contracted Remarketing Associates, Inc. of Woodland
Hills, California, a licensed certified appraiser, to conduct a
full appraisal of all assets at the Rancho Cucamonga location.
Remarketing Associates estimated that the forced liquidation
value of the assets was approximately $767,698.
On October 29, 1997, the United States Bankruptcy Court for
the Southern District of Florida (Ft. Lauderdale Division)
approved the sale by SAT, the debtor in possession, to Meadow
Lane Associates, Inc. ("Meadow Lane") of the 5,575,306 shares of
the Common Stock owned by SAT, which shares constituted 76.4% of
the 7,297,206 shares of the Common Stock then outstanding, and,
on October 31, 1997, the sale was consummated, thus terminating
the relationship of the Company as a subsidiary of SAT, which
relationship had existed since the Company was incorporated on
October 8, 1992.
In addition, the Bankruptcy Court approved the assignment by
SAT to the Company of the License Agreement dated January 24,
1992 between SAT and the United States Navy, granting SAT a
partial exclusive patent license to the "Flow Immunosensor Method
and Apparatus," Patent Application Serial Number 07486024 (the
"License"), and the rejection of the Sublicense Agreement dated
September 23, 1993 between SAT and the
<PAGE 11>
Company (the "Sublicense") and the lease between SAT and The
Realty Trust (the "Landlord") of the premises located at 10410
Trademark Street, Rancho Cucamonga, California (the "Lease").
The transfer of the License permits the Company to use the
technology directly rather than relying on the Sublicense. A
copy of the agreement effecting such transfer is filed as an
exhibit to this Report and is incorporated herein by this
reference. The rejection of the Lease has permitted the Company
to enter into its own leasing arrangements with the Landlord for
half of the premises formerly leased by SAT, but used by the
Company, at the same rental rate. A copy of the lease is filed
as an exhibit to this Report and incorporated herein by this
reference.
As a result of the sale by SAT to Meadow Lane of the
controlling stockholder interest in SAT and their relationship to
SAT, on October 31, 1997, Robert M. Stutman and Michael S. McCord
resigned as directors of the
Company, with Mr. Stutman also resigning as the Company's
Chairman of the Board. Messrs. Stutman and McCord are directors
of SAT, with Mr. Stutman also serving as SAT's Chairman of the
Board and Chief Executive Officer. At the same meeting, Jonathan
J. Pallin who, through Meadow Lane, is the beneficial owner of
4,227,381 shares of the Common Stock or 40.3% of the outstanding
shares of the Company, was elected as Chairman of the Board and a
director of the Company. Since October 16, 1997, Mr. Pallin had
been serving as a financial consultant to the Company. In
addition, Robert Muccini resigned as the Vice President of
Finance, the Treasurer, the Chief Financial Officer and the Chief
Accounting Officer of the Company because he held comparable
positions with SAT. No person has been appointed as yet to
replace Mr. Muccini. Linda H. Masterson, the President, the
Chief Executive Officer and a director of the Company,
subsequently resigned as a director of SAT, thereby severing the
final interlocking relationship between the Company and SAT. For
the first time in its corporate existence, the Company has sole
responsibility for its administrative and financial operations,
with independent directors and executive officers and no
management services arrangements with SAT.
As a result of SAT ceasing to advance funds to the Company
in July (see Item 2(c) of Part II to this Report), the Company
temporarily suspended its product development activities on
September 19, 1997. As a result of loans to the Company by
unaffiliated parties, product development was resumed on October
27, 1997, with Vice President, Operations William B. Benken, and
10 other employees resuming their prior employment with the
Company. Because Vice President, Research and Development Steven
J. Kline resigned, a search for his replacement has been
instituted.
Item 6. Exhibits and Report on Form 8-K.
(a) Exhibits
All of the following exhibits designated with a footnote
reference are incorporated herein by reference to a prior
registration statement filed under the Securities Act or a
periodic report filed by the Company or SAT pursuant to Section
13 of the Securities Exchange Act of 1934, as amended. If no
footnote reference is made, the exhibit is filed with this
Report.
Number Exhibit
A Copy of License Agreement dated January 24, 1992
by and between United States Navy (the "USN") and
SAT. (Confidential Treatment Request for
Exhibit.) (1)
A(1) Copy of Amended Sublease Agreement dated September
23, 1993 between SAT and the Company. (2)
A(2) Copy of Fifth Modification dated November 12, 1997
to License Agreement filed as Exhibit A hereto by
and between the USN and the Company.
B Copy of Management Agreement dated April 1, 1993
by and between the Company and SAT. (1)
B(1) Copy of Amendment dated July 20, 1993 to Agreement
filed as Exhibit B. (1)
<PAGE 12>
C Copy of Lease dated March 18, 1991 by and between
Rancho Cucamonga Business Park (now The Realty
Trust) as landlord and SAT as tenant. (3)
C(1) Copy of Lease Modification Agreement to Lease
filed as Exhibit C hereto. (3)
C(2) Copy of Sub-Lease Agreement dated as of January 1,
1993 by and between SAT as sublandlord and the
Company as subtenant. (1)
C(3) Copy of Third Amendment dated January 2, 1997 to
Lease filed as Exhibit C hereto. (4)
C(4) Copy of Fourth Amendment dated November 3, 1997 to
Lease filed as Exhibit C hereto by and between The
Realty Trust as landlord and the Company as tenant.
- ------------------
(1) Filed as an exhibit to the Company's Registration Statement
on Form SB-2, File No. 33-61786, and incorporated herein by
this reference.
(2) Filed as an exhibit to the Company's Annual Report on Form
10-K for the fiscal year ended March 31, 1996 and
incorporated herein by this reference.
(3) Filed as an exhibit to SAT's Annual Report on Form 10-K for
the fiscal year ended March 31, 1996 and incorporated herein
by this reference.
(4) Filed as an exhibit to SAT's Annual Report on Form 10-K for
the fiscal year ended March 31, 1997 and incorporated herein
by this reference.
(b) Reports on Form 8-K.
There were no Reports on Form 8-K filed during the quarter
for which this Report is filed.
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act
of 1934, the registrant has duly caused this Report to be signed
on its behalf by the undersigned therein to be duly authorized.
U.S. DRUG TESTING, INC.
(Registrant)
Date: December 9, 1997 By /s/ Linda H. Masterson
-----------------------------
Linda H. Masterson
President and Chief Executive Officer
<PAGE E-1>
U.S. DRUG TESTING, INC.
Quarterly Report on Form 10-Q for the
Quarter Ended September 30, 1997
EXHIBIT INDEX
The following exhibits are filed with this Report:
Number Exhibit Page
A(2) Copy of Fifth Modification dated November
12, 1997 to License Agreement filed as
Exhibit A hereto by and between the USN and the
Company................................................... E-2
C(4) Copy of Fourth Amendment dated November 3,
1997 to Lease filed as Exhibit C hereto by and
between The Realty Trust as landlord and the
Company as tenant......................................... E-4
<PAGE E-2>
Exhibit A(2)
DEPARTMENT OF THE NAVY
NAVAL RESEARCH LABORATORY
4555 OVERLOOK AVENUE SW
WASHINGTON, D.C. 20375-5320
In reply refer to:
1004/1011G
12 November 1997
Ms. Linda H. Masterson
U.S. Drug Testing, Inc.
10410 Trademark Street
Rancho Cucamonga, CA 91730
Dear Ms. Masterson:
In reference to your letter of October 28, 1997, proposed
below are modifications to the Partially Exclusive License
between U.S. Drug Testing, Inc. (formerly Substance Abuse
Technologies, Inc., and U.S. Alcohol Testing of America, Inc.)
and the U.S. Navy dated January 24, 1992, as follows:
1. The fourth paragraph under Article III Licensee's
Performance, is to be amended as follows:
LICENSEE shall pay to the LICENSOR a non-refundable
licensing fee in the amount of one hundred ten thousand
dollars ($110,000). Fifteen thousand dollars ($15,000)
shall be payable on December 1, 1997. A second payment
in the amount of fifteen thousand dollars ($15,000)
shall be payable on January 1, 1998. A third payment
of forty thousand dollars ($40,000) shall be payable on
April 1, 1998. A fourth payment of forty thousand
dollars ($40,000) shall be payable on July 1, 1998.
LICENSEE agrees to pay to LICENSOR one half of any
licensing fee collected from any sublicensee. Payment
will be made in the manner prescribed in Article IV.
2. The fifth paragraph under Article IV Royalties, is to
be amended as follows:
All payments due LICENSOR under this LICENSE shall be made
payable to DFAS-CH DSSN 8347 and mailed to:
Deputy Counsel (Intellectual Property)
Office of Naval Research
Code 00CC1P, Room 207
800 North Quincy Street
Arlington, Virginia 22217-5660
<PAGE E-3>
Your consent to the modifications of this License may be
evidenced by affixing your signature in the space provided below.
A duplicate of the original will be provided to you.
Sincerely,
/s/ Richard H. Rein
--------------------------------
Richard H. Rein
Head, Technology Transfer Office
UNITED STATES OF AMERICA FOR U.S. DRUG TESTING, INC.
THE SECRETARY OF THE NAVY
BY: /s/ B.W. BUCKELY BY: /s/ Linda H. Masterson
---------------- -----------------------
B.W. BUCKLEY Linda H. Masterson
Captain, U.S. Navy
Commanding Officer
DATE: 11/21/97 DATE: 11/14/97
<PAGE E-4>
Exhibit C(4)
FOURTH AMENDMENT TO INDUSTRIAL LEASE
10400 Trademark Street, Rancho Cucamonga, CA 91730
The terms of the industrial lease dated March 18, 1991
originally between Rancho Cucamonga Business Park as Lessor and
U.S. Alcohol Testing of America as Lessee and currently by and
between Substance Abuse Technologies, Inc. (formerly U.S. Alcohol
Testing of America) as Lessee and The Realty Trust (TRT) as
Lessor is amended as follows:
Substance Abuse Technologies (SAT) has rejected the existing
lease under authority of bankruptcy proceedings.
U.S. Drug Testing, Inc. (USDT) has been occupying the
premises at 10400 and 10401 Trademark Street as a subsidiary of
SAT. USDT wishes to continue occupancy of that 1/2 of the premises
at 10400 Trademark Street as Lessee for a period of one year.
Commencing on October 1, 1997 and terminating on September
31, 1998, the monthly rental for 10400 Trademark Street shall be
$5,500.00 per month. At least 90 days before the lease
termination date USDT shall give TRT notice of its intention to
terminate. In the event of a holdover by USDT, agreed to by TRT
in writing, the lease shall continue from month to month and
either party may terminate the lease by giving the other party a
60 day notice of termination. The terms and conditions of the
original lease dated March 18,1991 and its addendum and
amendments shall remain in full force and effect except that USDT
shall occupy only the premises at 10400 Trademark Street and
shall pay only 1/2 of the total real estate taxes, insurance,
landscaping and exterior maintenance charges levied against the
entire building.
This Fourth Amendment is executed in two (2) originals. One
original shall be held by the Lessor, The Realty Trust, and one
original shall be held by the Lessee, U.S. Drug Testing, Inc.
Date: 11/3/97
U.S. Drug Testing, Inc.
By: /s/ Linda H. Masterson
-----------------------------
Linda H. Masterson, President
Date: 11/5/97
The Realty Trust
By: /s/ Simi Dabah
-------------------
Simi Dabah, Trustee
