<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
----------
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): February 27, 1998
U.S. MEDICAL SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE
(State or other jurisdiction of incorporation)
0-22390 68-0206382
(Commission File Number) (IRS Employer Identification No.)
----------
7600 BURNET ROAD, SUITE 350
AUSTIN, TEXAS 78757
(Address of principal executive office, including zip code)
(512) 458-3335
(Registrant's telephone number, including area code)
<PAGE>
Item 7. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements of Businesses Acquired.
As previously reported in the Registrant's Current Report on Form 8-K
filed on March 5, 1998, the Registrant, U.S. Medical Systems, Inc.,
closed the Agreement and Plan of Reorganization (the "Agreement") on
February 27, 1998, whereby the Registrant acquired all of the issued
and outstanding common stock, $.01 par value ("Sharps Common Stock"),
of Sharps Compliance, Inc. ("Sharps"), in consideration for the
issuance of 1,000,000 shares of Series A 10% Voting Convertible
Preferred Stock, $.01 par value, of Registrant ("Preferred Stock")
such that each share of Sharps Common Stock outstanding on the closing
date of the Agreement was exchanged for .142868 shares of Preferred
Stock. Each share of Preferred Stock is entitled to 35.190319 votes.
Under the terms of the Agreement, the Registrant committed at its next
stockholder meeting to seek approval to effect a one-for-five or
greater reverse stock split of its common stock, $.01 par value
("Registrant Common Stock"). Immediately upon consummation of the
reverse stock split, each share of Preferred Stock will be converted
into seven shares of Registrant Common Stock, at which time the former
stockholders of Sharps will own approximately 91% of the issued and
outstanding Registrant Common Stock on a fully diluted basis.
Sharps is a Texas corporation with its principal office in Houston,
Texas. Sharps focuses on developing mail disposal service for medical
sharps, which are used (i.e., contaminated) syringes/needles and
razors in commercial, industrial and home health care industries.
The Registrant intends to treat the Agreement as a reverse acquisition
for accounting and financial reporting purposes. As such, Sharps will
be considered the acquiror for accounting and financial reporting
purposes and the net assets of the Registrant will be combined with
those of Sharps at their historical cost basis on the effective date
of the Agreement. Sharps will reflect the ongoing results of
operations of the Registrant in their financial statements from the
effective date of the Agreement.
In accordance with Rule 3-05 of Regulation S-X (17 C.F.R.
210.3-05(b)), audited financial statements for the acquired business
are filed with this Report.
(b) Pro Forma Financial Information.
In accordance with Article 11 of Regulation S-X, pro forma financial
information is filed with this Report. The pro forma financial
information consists of an unaudited pro forma balance sheet as of
December 31, 1997,
2
<PAGE>
an unaudited pro forma statement of operations for the twelve months
ended December 31, 1997 and accompanying explanation and notes.
(c) Exhibits.
The following exhibits are filed as part of this Report:
<TABLE>
Exhibit No. Description
----------- -----------
<S> <C>
99.1 Sharps Compliance, Inc. Financial Statements as of
December 31, 1997 together with auditors' report
99.2 U.S. Medical Systems, Inc. Unaudited Pro Forma
Financial Statements as of December 31, 1997
</TABLE>
3
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its
behalf by the undersigned hereunto duly authorized.
U.S. MEDICAL SYSTEMS, INC.
April 30, 1998 By: /s/ C. Lee Cooke
---------------------------------------
C. Lee Cooke, Jr.
Chairman of the Board, President
And Chief Executive Officer
4
<PAGE>
EXHIBIT INDEX
<TABLE>
Exhibit No. Description
- ----------- -----------
<S> <C>
99.1 Sharps Compliance, Inc. Financial Statements as of December 31,
1997 together with auditors' report
99.2 U.S. Medical Systems, Inc. Unaudited Pro Forma Financial
Statements as of December 31, 1997
</TABLE>
5
<PAGE>
SHARPS COMPLIANCE, INC.
FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1997
TOGETHER WITH AUDITORS' REPORT
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Sharps Compliance, Inc.:
We have audited the accompanying balance sheet of Sharps Compliance, Inc., a
Texas corporation, as of December 31, 1997, and the related statements of
operations, stockholders' deficit and cash flows for the years ended December
31, 1996 and 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Sharps Compliance, Inc., as of
December 31, 1997, and the results of its operations and its cash flows for the
years ended December 31, 1996 and 1997, in conformity with generally accepted
accounting principles.
/s/ ARTHUR ANDERSEN LLP
Houston, Texas
April 2, 1998
<PAGE>
SHARPS COMPLIANCE, INC.
BALANCE SHEET--DECEMBER 31, 1997
ASSETS
<TABLE>
<S> <C>
CURRENT ASSETS:
Cash $ 67,114
Accounts receivable 111,682
Inventory 40,316
Other current assets 2,893
---------
Total current assets 222,005
PROPERTY AND EQUIPMENT, net 38,790
OTHER ASSETS:
Note receivable from stockholder 300,000
Deferred issuance costs 158,600
---------
Total assets $ 719,395
---------
---------
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable $ 69,116
Accrued disposal costs 441,728
Current maturities of long-term debt 4,997
Note payable to stockholder 400,000
---------
Total current liabilities 915,841
LONG-TERM DEBT, net of current maturities 23,047
---------
Total liabilities 938,888
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT:
Common stock, $.01 par value per share;
10,000,000 shares authorized;
5,000,000 shares issued and outstanding 50,000
Additional paid-in capital 98,900
Accumulated deficit (368,393)
---------
Total stockholders' deficit (219,493)
---------
Total liabilities and stockholders' deficit $ 719,395
---------
---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
SHARPS COMPLIANCE, INC.
STATEMENTS OF OPERATIONS
<TABLE>
For the Year Ended
December 31
----------------------
1996 1997
-------- ---------
<S> <C> <C>
REVENUES:
Sales, net $591,353 $ 830,211
Consulting services and other 59,093 4,225
-------- ---------
Total revenues 650,446 834,436
COSTS AND EXPENSES:
Cost of revenues 340,370 625,238
Selling, general and administrative 340,692 492,126
Depreciation and amortization 8,515 7,751
-------- ---------
Operating loss (39,131) (290,679)
INTEREST EXPENSE (2,516) (7,570)
INTEREST INCOME - 2,967
-------- ---------
Net loss $(41,647) $(295,282)
-------- ---------
-------- ---------
BASIC AND DILUTED NET LOSS PER SHARE $ (.01) $ (.08)
-------- ---------
-------- ---------
SHARES USED IN COMPUTING BASIC AND DILUTED
NET LOSS PER SHARE
3,000,000 3,494,520
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
SHARPS COMPLIANCE, INC.
STATEMENTS OF STOCKHOLDERS' DEFICIT
<TABLE>
Common Stock Additional Total
---------------------- Paid-In Accumulated Stockholders'
Shares Amount Capital Deficit Deficit
---------- --------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1995 3,000,000 $ 1,000 $ - $ (31,464) $ (30,464)
Contribution of fixed assets - 2,900 - - 2,900
Net loss - - - (41,647) (41,647)
---------- --------- ----------- ------------- -------------
BALANCE, December 31, 1996 3,000,000 3,900 - (73,111) (69,211)
Issuance of common stock for
consulting services 2,000,000 20,000 125,000 - 145,000
Stock split - 26,100 (26,100) - -
Net loss - - - (295,282) (295,282)
---------- --------- ----------- ------------- -------------
BALANCE, December 31, 1997 5,000,000 $ 50,000 $ 98,900 $ (368,393) $ (219,493)
---------- --------- ----------- ------------- -------------
---------- --------- ----------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of
these financial statements.
<PAGE>
SHARPS COMPLIANCE, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
For the Year Ended
December 31
------------------------
1996 1997
---------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (41,647) $(295,282)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities-
Depreciation and amortization 8,515 7,751
Changes in operating assets and liabilities-
Increase in accounts receivable (83,561) (13,310)
Increase in inventory (11,425) (21,190)
Decrease in other current assets - 1,471
Increase in accounts payable 175 31,829
Increase in accrued disposal costs 151,679 252,726
---------- -----------
Net cash provided by (used in) operating activities 23,736 (36,005)
---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Note receivable from stockholder - (300,000)
Purchase of property and equipment (9,496) (4,739)
---------- -----------
Net cash used in investing activities (9,496) (304,739)
---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable to stockholders - 430,000
Payments on notes payable (5,056) (34,703)
---------- -----------
Net cash provided by (used in) financing activities (5,056) 395,297
---------- -----------
NET INCREASE IN CASH 9,184 54,553
CASH, beginning of year 3,377 12,561
---------- -----------
CASH, end of year $ 12,561 $ 67,114
---------- -----------
---------- -----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for interest $ 2,499 $ 3,706
Contribution of fixed assets by stockholder 2,900 -
NONCASH FINANCING AND INVESTING ACTIVITY:
Deferred issuance costs - 158,600
Trade-in of automobile and reduction of note payable - 17,409
</TABLE>
The accompanying notes are an integral part of
these financial statements.
<PAGE>
SHARPS COMPLIANCE, INC.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND BACKGROUND:
Sharps Compliance, Inc. (Sharps), was incorporated on May 20, 1994, as a
provider of mail disposal products and services for certain medical sharps
(i.e., needles, syringes and razors) products. Sharps' service is primarily
provided to small waste generators to facilitate their compliance with state
and federal regulations by tracking, incinerating and documenting the waste
disposal at a facility in Carthage, Texas (see Note 8). In 1996 and 1997,
Sharps also provided consulting services to other entities related to medical
sharps products.
Although Sharps has experienced growth in revenues over the past few years,
there is an inherent concentration of credit risk associated with accounts
receivable arising from sales to its major customers. During 1996, one
customer represented approximately 50 percent of sales and, during 1997,
three customers represented approximately 74 percent of sales. At December
31, 1996, two customers comprised approximately 85 percent (or $83,500) of
the total accounts receivable balance, and at December 31, 1997, three
customers comprised approximately 80 percent (or $89,741) of the total
accounts receivable balance. As Sharps has historically funded its operations
with cash flows from operations, Sharps may be impacted by its dependence on
a limited number of customers. Management believes the risk is mitigated by
the long-standing business relationships with and reputation of Sharps' major
customers.
Sharps has sole-sourced each of its manufacturing, assembly, transportation
and disposal functions. Sharps may be impacted by its dependence on the
suppliers of these functions. The risk is mitigated by the long-standing
business relationships with and reputation of Sharps' suppliers. Although
there are no assurances with regard to the future business associations,
after expirations of certain agreements between Sharps and its suppliers,
management believes that alternative sources would be available at similar
costs.
Sharps has a working capital deficit at December 31, 1997, has received
limited revenues to date and has incurred cumulative losses since its
inception. The future success of Sharps is dependent upon many factors,
including environmental regulation, continuity of its license agreements,
successful completion of its product development activities, the
identification and penetration of markets for its products and services, and
the obtaining of the funds necessary to complete these activities (see Note 9).
2. SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES:
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent liabilities at the date of the financial statements and the
reported amounts of revenue and expense during the reporting period. Actual
results could differ from those estimates.
<PAGE>
-2-
Specifically, Sharps has estimated the costs and related liabilities for
postage and incineration associated with the mail-back of full sharps
containers for disposal. These estimates are based on Sharps' experience to
date and are reflected in accrued disposal costs on the accompanying balance
sheet. Future results may differ from these estimates.
INVENTORY
Inventory primarily represents containers and assembly supplies and is stated
at the lower of cost or market using the specific-identification method.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost less accumulated depreciation.
Depreciation is computed using the straight-line method based on the
estimated useful lives of the assets. Additions, improvements and renewals
significantly adding to the asset value or extending the life of the asset
are capitalized. Ordinary maintenance and repairs, which do not extend the
physical or economic life of the property or equipment, are charged to
expense as incurred.
REVENUE RECOGNITION
Product sales are recognized as revenue when the finished product is shipped
to customers. Sales are presented net of refunds to customers for returned
merchandise. Sharps also recognizes costs, including estimated disposal costs
for incineration and postage, at the time the product is shipped. Consulting
revenue is recognized as the related services are performed.
INCOME TAXES
Through December 31, 1997, Sharps' stockholders elected to have Sharps taxed
as an S Corporation for federal and state tax purposes, whereby the
stockholders are liable for the entity's taxable income on their individual
federal and state income tax returns. Accordingly, the historical financial
statements do not include provisions for income taxes.
On February 18, 1998, Sharps changed its federal tax status from an S
Corporation to a C Corporation and, accordingly, will be subject to federal
and certain state income taxes. (See Note 6)
NET LOSS PER SHARE
Earnings per share data for all periods presented has been computed pursuant
to Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per
Share," that requires a presentation of basic earnings per share (basic EPS)
and diluted earnings per share (diluted EPS). Basic EPS excludes dilution and
is determined by dividing income or loss available to common stockholders by
the weighted average number of common shares outstanding during the period.
Diluted EPS reflects the potential dilution that could occur if securities
and other contracts to issue common stock were exercised or converted into
common stock. There are no differences in basic EPS and diluted EPS for all
periods presented.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Sharps considers the fair value of all financial instruments not to be
materially different from their carrying values at year-end based on
management's estimate of Sharps' ability to borrow funds under terms and
conditions similar to those of Sharps' existing debt.
3. NOTE RECEIVABLE FROM STOCKHOLDER
<PAGE>
-3-
In November 1997, Sharps entered into a note receivable with a stockholder
and officer of Sharps. The note receivable allows the officer to borrow up to
$400,000 from Sharps. The note accrues interest at 8% per annum and payments
are due over five annual installments equal to one-fifth of the outstanding
balance of principal and accrued
<PAGE>
-4-
interest. All unpaid principal and accrued interest is due in November, 2002.
In November 1997, the stockholder borrowed $300,000 from Sharps. Subsequent
to December 31, 1997, the stockholder borrowed the remaining $100,000
available under this note. Pursuant to the officer's employment agreement
entered into in January 1998, an annual cash bonus will be paid to that
officer equal to one-fifth of the outstanding balance of principal and
interest due in 1998 and 1999, with the annual cash bonus to be paid to the
officer in 2000 to be equal to the remaining principal and accrued interest
due under this note agreement.
4. PROPERTY AND EQUIPMENT:
Property and equipment at December 31, 1997, consists of the following at the
date shown:
<TABLE>
Useful Life
------------
<S> <C> <C>
Furniture and fixtures 5 years $ 13,767
Computers and software 3 years 4,784
Automobiles 5 years 30,758
---------
49,309
Less- Accumulated depreciation (10,519)
---------
$ 38,790
---------
---------
</TABLE>
5. DEBT:
In July 1995, Sharps entered into a promissory note agreement with an
automobile finance company to finance the purchase of a vehicle. In October
1997, the vehicle was traded in for another vehicle and Sharps entered into a
new promissory note agreement with another automobile finance company, which
bears interest at 7.75 percent. The note matures in October 2002 and is due
in monthly installments of $581. The acquired automobile secures the new
note. The balance outstanding on the note at December 31, 1997, was $28,044
and is due as follows:
<TABLE>
<S> <C>
Year ending December 31-
1998 $ 4,997
1999 5,377
2000 5,809
2001 6,276
2002 5,585
--------
$ 28,044
--------
--------
</TABLE>
In September 1997, Sharps entered into an unsecured promissory note agreement
for $30,000 with a stockholder. The principal and related accrued interest
were paid in December 1997.
On November 14, 1997, Sharps issued an unsecured promissory note to a
stockholder in the amount of $400,000. The note accrues interest at 8 percent
annually and is payable in equal monthly principal and interest payments
beginning on April 15, 1998, with maturity of all amounts due on September
15, 1998. In connection with the stock offering in February 1998 and Sharps
subsequently retired the note by paying the stockholder approximately
$409,000 for principal and accrued interest (see Note 9).
<PAGE>
-5-
6. CHANGE IN S CORPORATION STATUS AND PRO FORMA INCOME TAXES:
Prior to February 18, 1998, Sharps maintained the status of S Corporation for
federal and certain state income tax purposes. As an S Corporation, Sharps is
generally not responsible for income taxes.
On February 18, 1998, Sharps terminated its S Corporation election.
Accordingly, Sharps will be subject to federal and state income taxes from
that date forward.
Effective with the termination of Sharps' S Corporation status, Sharps will
provide for deferred income taxes for cumulative temporary differences
between the tax basis and financial reporting basis of its assets and
liabilities at the date of termination.
Significant components of Sharps' pro forma deferred tax assets and
liabilities at December 31, 1997, are as follows:
<TABLE>
<S> <C>
Deferred tax assets-
Accrued disposal costs $ 117,083
Deferred tax valuation allowance (117,083)
---------
Net deferred tax assets $ -
---------
---------
</TABLE>
A reconciliation of taxes based on the federal statutory rate of 34 percent
and the unaudited pro forma provision for income taxes for the year ended
December 31, 1997, is summarized as follows (in thousands):
<TABLE>
<S> <C>
Income tax benefit at the federal statutory rate $(100,396)
Increase in deferred tax valuation allowance 117,083
---------
Unaudited pro forma provision for income taxes $ 16,687
---------
---------
</TABLE>
7. COMMON STOCK:
In May 1994, the founding stockholder of Sharps made a capital contribution
of $1,000. In return for this cash contribution, the stockholder received
3,000,000 shares of common stock with a $.01 par value. In addition to the
cash contribution discussed above, certain fixed assets were contributed by
the stockholder to Sharps.
In October 1997, Sharps issued a total of 2,000,000 shares of common stock to
two consultants for services provided. Management valued the shares at $.006
per share, which is management's estimate of the fair market value of the
services provided.
On December 12, 1997, Sharps' stockholders increased the number of authorized
shares of common stock of Sharps from 1,000,000 shares to 10,000,000 shares
and effected a 300-for-1 stock split of Sharps' common stock outstanding on
that date. All common stock and per share information included in the
accompanying financial statements has been adjusted to give retroactive
effect to the split.
8. COMMITMENTS AND CONTINGENCIES:
INSURANCE
Sharps is subject to numerous risks and uncertainties because of the nature
and status of its operations. Sharps maintains insurance coverage for events
and in amounts that it deems appropriate. Management
<PAGE>
-6-
believes that uninsured losses, if any, will not be materially adverse to
Sharps' financial position or results of operations.
<PAGE>
-7-
SALES AND DISTRIBUTION AGREEMENT
On June 1, 1995, Sharps entered into an exclusive sales and distribution
agreement with American 3CI Complete Compliance Corporation (American 3CI)
that expires in 2001. The agreement grants Sharps the exclusive right to sell
and distribute American 3CI's mail sharps disposal system (MSDS), including
disposal services to one or more incinerators under contract with American
3CI, to all wholesale and retail organizations which have a need for such a
system. Pursuant to the agreement, Sharps has agreed to pay a per pound fee
up to a maximum of $6.00 for every MSDS that is destroyed at an American 3CI
incinerator. Obligations related to MSDS units sold but not yet incinerated
are estimated and included in accrued disposal costs in the accompanying
balance sheet, although amounts in excess of minimum payments are not due
until incineration has occurred. Expenses related to this agreement during
1996 and 1997 were $11,797 and $41,018, respectively.
Sharps has guaranteed annual minimum payments to American 3CI as follows:
<TABLE>
<S> <C>
Year ending December 31-
1998 $25,000
1999 25,000
2000 25,000
2001 12,500
</TABLE>
Sharps has the option to renew the agreement after 2002 for an additional
five-year period at a rate not in excess of 20 percent more than the current
disposal rate and the minimum annual payments.
DISTRIBUTOR AGREEMENT
On August 1, 1996, Sharps entered into an agreement with Ecolab, Inc.
(Ecolab), for Ecolab to be Sharps' exclusive U.S. distributor of the MSDS in
commercial and industrial markets. The price of the system remained constant
for the first six months of the agreement. Thereafter, the price was and will
be reviewed quarterly and adjusted upon the mutual agreement of the parties.
The term of the agreement is for one year with an automatic renewal for
one-year periods unless either party provides notice of termination to the
other within 120 days prior to expiration of the then current term.
MANUFACTURING AGREEMENT
On May 12, 1997, Sharps entered into an agreement with Winfield Medical
(Winfield) for Winfield to be Sharps' exclusive manufacturer of a certain
line of sharps containers for one specific distributor. The prices of the
containers are fixed based upon the number purchased, and Winfield may
increase prices, no more than once per year, upon notice to Sharps. The term
of the agreement is one year, with an option to extend the term for up to an
additional four years if certain purchase requirements have been met. The
agreement calls for minimum purchase requirements to be set at a date
subsequent to the agreement date. As of December 31, 1997, these requirements
had not been determined and minimal purchases under this agreement had
occurred.
LICENSING AND PURCHASE AGREEMENTS
On May 12, 1997, Sharps entered into a license and purchase agreement with
Cardico, Inc. (Cardico), for certain molds used in the manufacture of sharps
containers. The term of the license agreement is for three years, with the
option to extend the term for an additional five years if certain milestones
have been achieved. The agreement calls for royalties to be paid to Cardico
of $.10 per container sold, up to $150,000 in royalty payments, for the
exclusive right to use the molds. Additionally, the agreement specifies that
Sharps has an option to purchase the molds under the following conditions:
(a) within two years of the license and
<PAGE>
-8-
purchase agreement, Sharps pays Cardico royalties of $150,000 or a purchase
fee equal to $150,000 less all royalties paid, (b) anytime after the second
year, but no later than three years from the effective date of the license
agreement, Sharps pays royalties of $150,000 or a purchase fee equal to
$150,000 less all royalties paid and pays an additional $50,000 within 90
days from the election to purchase the molds or grants Cardico a five-year
royalty of $.02 per sharps container sold or (c) anytime after the expiration
of eight years, if all royalties have been paid. At December 31, 1997, no
sharps containers relating to the Cardico agreement had been sold.
<PAGE>
-9-
On August 13, 1997, Sharps entered into a letter of intent with Novo Nordisk
Pharmaceutical, Inc. (Novo), for the exclusive right to develop and use molds,
patents, if any, and technical know-how attributable to the manufacturing of
plastic sharps containers for use by Novo. The term of the agreement is for five
years with automatic renewal periods of one year, unless either party provides
notice of termination to the other within 60 days prior to the expiration of the
current term. Associated with this agreement, Sharps agreed to pay Novo a per
unit royalty to be mutually agreed upon by the companies. At December 31, 1997,
no sharps containers relating to this agreement had been sold.
SALES REPRESENTATION AGREEMENTS
On February 21, 1995, Sharps entered into a sales representation agreement with
a sales agency for promotion of the MSDS exclusively in the veterinary market.
The initial term of the agreement was for a two-year period with automatic
two-year renewal periods, unless either party notified the other 90 days prior
to expiration of the current period of its intent to terminate. The agreement
further specifies a 15 percent commission on net sales as defined in the
agreement. Commission expense related to this agreement was $2,589 and $3,679
for the years ended December 31, 1996 and 1997, respectively.
On April 1, 1995, Sharps entered into a sales representation agreement with an
independent sales agent for promotion of the MSDS. The initial term of the
agreement was for a two-year period with an automatic three-year renewal unless
either party notified the other in writing, 90 days prior to expiration, of its
intent to terminate at the end of such period. As defined in the agreement, a 10
percent commission is to be paid to the sales representative based on net sales.
Commission expense related to this agreement was $4,286 and $12,714 for the
years ended December 31, 1996 and 1997, respectively.
OPERATING LEASES
Sharps leases office space and equipment under operating lease agreements, which
expire at various dates over the next four years. Rent expense for the years
ended December 31, 1996 and 1997 was approximately $11,700 and $18,100,
respectively. Future minimum lease payments under noncancelable operating leases
are as follows:
<TABLE>
<S> <C>
Year ending December 31-
1998 $ 15,156
1999 4,382
2000 3,945
2001 1,170
--------
Total minimum lease payments $ 24,653
--------
--------
</TABLE>
9. SUBSEQUENT EVENTS:
In February 1998, Sharps completed a private placement of 2,000,000 shares of
common stock (the Offering). In return, Sharps received approximately $4,000,000
in proceeds, net of issuance costs of approximately $171,000. The proceeds from
this Offering will be used to retire Sharps' indebtedness to a certain
stockholder, support Sharps' sales and marketing program and for other working
capital purposes.
In connection with the stock offering discussed above, in February 1998, Sharps
retired the note payable to a stockholder in the amount of $400,000 plus accrued
interest of approximately $9,000.
<PAGE>
-10-
The following unaudited pro forma information assumes that Sharps received
the net proceeds from the Offering and retired the note payable to a
stockholder at December 31, 1997.
<TABLE>
<S> <C>
Current assets $ 3,647,005
-----------
-----------
Total assets $ 4,144,395
-----------
-----------
Note payable to stockholder $ -
-----------
-----------
Common stock $ 70,000
Additional paid-in capital 3,907,900
Accumulated deficit (368,393)
-----------
Total stockholders' equity $ 3,609,507
-----------
-----------
</TABLE>
On February 27, 1998, Sharps and all the stockholders of Sharps entered into an
agreement and plan of reorganization (the Agreement) with U.S. Medical Systems,
Inc. (USMS). Under the terms of the Agreement, USMS acquired all of the issued
and outstanding common stock of Sharps in consideration for the issuance of
1,000,000 shares of convertible preferred stock of USMS. Each share of
convertible preferred stock is entitled to 35.190319 common stock votes of USMS.
Upon the approval of a 1-for-5.032715 reverse stock split of USMS common stock
by the stockholders of USMS, each share of convertible preferred stock will be
converted into seven shares of USMS common stock, at which time the former
common stockholders of Sharps will own approximately 91 percent of the issued
and outstanding common stock of USMS.
<PAGE>
PRO FORMA UNAUDITED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1997
TOGETHER WITH AUDITORS' REPORT
<PAGE>
PRO FORMA FINANCIAL INFORMATION
The following pro forma unaudited statements assume (i) the effects of the
Agreement and Plan of Reorganization (the Reorganization) between U.S. Medical
Systems, Inc. (the Company), and Sharps Compliance, Inc. (Sharps), (ii) the
effect of the proposal to amend the Company's Certificate of Incorporation to
effect a 1-for-5.032715 reverse stock split of the Company's common stock and
(iii) the effect of a private placement of 2,000,000 shares of Sharps common
stock (the Offering), resulting in an estimated net proceeds of $3,964,000,
which was used to retire indebtedness of Sharps to a stockholder in the amount
of $400,000 plus accrued interest, support the sales and marketing program of
Sharps and for other working capital purposes. The pro forma unaudited balance
sheet assumes that the above-described transactions occurred on December 31,
1997, and the pro forma unaudited statements of income for the year ended
December 31, 1997, assumes that the above-described transactions occurred on
January 1, 1997.
The pro forma unaudited income statements for the 12-month period ended December
31, 1997, reflect the audited income statement of Sharps for the year ended
December 31, 1997, and the unaudited income statement of the Company for the
12-month period ended December 31, 1997, on a historical basis.
The pro forma financial information is a presentation of historical results with
accounting and other adjustments. The pro forma financial information does not
reflect the effects of any of the anticipated changes to be made as a result of
the Reorganization in the Company's operations from the historical operations.
THE PRO FORMA STATEMENTS ARE PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND SHOULD
NOT BE CONSTRUED TO BE INDICATIVE OF THE COMPANY'S FINANCIAL POSITION OR RESULTS
OF OPERATIONS HAD THE TRANSACTIONS BEEN CONSUMMATED ON THE DATES ASSUMED AND DO
NOT PROJECT THE COMPANY'S RESULTS OF OPERATIONS FOR ANY FUTURE PERIOD.
The following pro forma unaudited statements and accompanying notes should be
read in conjunction with the financial statements and the financial information
pertaining to the Company and Sharps included elsewhere in this Proxy Statement.
<PAGE>
PRO FORMA UNAUDITED BALANCE SHEET
AS OF DECEMBER 31, 1997
<TABLE>
Sharps Offering
U.S. Medical Compliance, Pro Forma
Systems, Inc. Inc. Combined Adjustments(1)
------------- ------------ ------------ --------------
ASSETS (Unaudited)
<S> <C> <C> <C> <C>
CURRENT ASSETS:
Cash $ 206,000 $ 67,000 $ 273,000 $ 3,425,000(A)
Accounts receivable 31,000 112,000 143,000 -
Inventory 22,000 40,000 62,000 -
Other current assets 87,000 3,000 90,000 -
------------- ---------- ------------ -----------
Total current assets 346,000 222,000 568,000 3,425,000
PROPERTY AND EQUIPMENT, net 11,000 39,000 50,000 -
- 458,000 458,000 -
------------- ---------- ------------ -----------
Total assets $ 357,000 $ 719,000 $ 1,076,000 $ 3,425,000
------------- ---------- ------------ -----------
------------- ---------- ------------ -----------
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable $ 38,000 $ 69,000 $ 107,000 $ (4,000)(B)
Accrued liabilities and disposal cost 14,000 442,000 456,000 -
Current maturities of long-term debt 50,000 5,000 55,000 -
Note payable to stockholder - 400,000 400,000 (400,000)(B)
------------- ---------- ------------ -----------
Total current liabilities 102,000 916,000 1,018,000 (404,000)
LONG-TERM DEBT, net of current maturities - 23,000 23,000 -
------------- ---------- ------------ -----------
Total liabilities 102,000 939,000 1,041,000 (404,000)
------------- ---------- ------------ -----------
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock 29,000 50,000 79,000 20,000(C)
Additional paid-in capital 7,039,000 99,000 7,138,000 3,809,000(C)
Accumulated deficit (6,813,000) (369,000) (7,182,000) -
------------- ---------- ------------ -----------
Total stockholders' equity (deficit) 255,000 (220,000) (35,000) 3,829,000
------------- ---------- ------------ -----------
Total liabilities and stockholders' deficit $ 357,000 $ 719,000 $ 1,076,000 $ 3,425,000
------------- ---------- ------------ -----------
------------- ---------- ------------ -----------
<CAPTION>
Reorganization
Subtotal Pro Forma Total
Pro Forma Adjustments(2) Pro Forma
------------- -------------- -----------
ASSETS
<S> <C> <C> <C>
CURRENT ASSETS:
Cash $ 3,698,000 $ - $ 3,698,000
Accounts receivable 143,000 - 143,000
Inventory 62,000 - 62,000
Other current assets 90,000 - 90,000
------------- ------------ -----------
Total current assets 3,993,000 - 3,993,000
PROPERTY AND EQUIPMENT, net 50,000 - 50,000
OTHER ASSETS:
Notes receivable from stockholder 458,000 - 458,000
------------- ------------ -----------
Total assets $ 4,501,000 $ - $ 4,501,000
------------- ------------ -----------
------------- ------------ -----------
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable $ 103,000 $ - $ 103,000
Accrued liabilities and disposal cost 456,000 - 456,000
Current maturities of long-term debt 55,000 - 55,000
Note payable to stockholder - - -
------------- ------------ -----------
Total current liabilities 614,000 - 614,000
LONG-TERM DEBT, net of current maturities 23,000 - 23,000
------------- ------------ -----------
Total liabilities 637,000 - 637,000
------------- ------------ -----------
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock 99,000 (23,000) 76,000
Additional paid-in capital 10,947,000 (6,790,000) 4,157,000
Accumulated deficit (7,182,000) 6,813,000 (369,000)
------------- ------------ -----------
Total stockholders' equity (deficit) 3,864,000 - 3,864,000
------------- ------------ -----------
Total liabilities and stockholders' deficit $ 4,501,000 $ - $ 4,501,000
------------- ------------ -----------
------------- ------------ -----------
</TABLE>
See the accompanying notes to pro forma unaudited financial statements.
<PAGE>
PRO FORMA UNAUDITED STATEMENT OF OPERATIONS
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1997
<TABLE>
Sharps Offering
U.S. Medical Compliance, Pro Forma
Systems, Inc. Inc. Combined Adjustments(1) Pro Forma
------------- ------------- ------------- -------------- -------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
REVENUES:
Sales, net $ 500,000 $ 830,000 $ 1,330,000 $ - $ 1,330,000
Consulting services - 4,000 4,000 - 4,000
------------- ------------- ------------- ------------ -------------
Total revenues 500,000 834,000 1,334,000 - 1,334,000
COSTS AND EXPENSES:
Cost of revenues 202,000 625,000 827,000 - 827,000
Selling, general and
administrative expenses 282,000 492,000 774,000 - 774,000
Depreciation and amortization
95,000 8,000 103,000 - 103,000
------------- ------------- ------------- ------------ -------------
Operating loss (79,000) (291,000) (370,000) - (370,000)
INTEREST AND OTHER INCOME
(EXPENSE), net 3,000 (4,000) (1,000) 4,000(D) 3,000
------------- ------------- ------------- ------------ -------------
Net loss $ (76,000) $ (295,000) $ (377,000) $ 4,000 $ (367,000)
------------- ------------- ------------- ------------ -------------
------------- ------------- ------------- ------------ -------------
PROFORMA NET LOSS PER SHARE
$ (.13) $ (.04) $ (.05)
------------- ------------- -------------
------------- ------------- -------------
PROFORMA WEIGHTED AVERAGE
NUMBER OF SHARES OUTSTANDING
571,023(E) 7,000,000(F) 7,571,023(E)(F)
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
See the accompanying notes to pro forma unaudited financial statements.
<PAGE>
NOTES TO PRO FORMA UNAUDITED FINANCIAL STATEMENTS
The following notes identify the pro forma adjustments made to the historical
amounts in the pro forma unaudited financial statements.
1. Pro forma adjustments related to the issuance of 2,000,000 shares of Sharps
common stock for $3,829,000 in net proceeds, and the use of proceeds to
retire Sharps indebtedness to a Sharps stockholder in the amount of
$400,000 plus interest payable of approximately $4,000, to support the
sales and marketing program of Sharps and for other working capital
purposes.
A. Represents the remaining net proceeds of the Offering assumed to be used
for working capital purposes.
B. Represents the retirement of the note payable to a Sharps stockholder
with the net proceeds of the Offering.
C. Represents the net proceeds of the Offering.
D. Represents the reduction interest expense related to the $400,000
stockholder note payable of Sharps assumed to be retired by the net
proceeds of the Offering.
2. Pro forma adjustments related to the Reorganization, the effect of the
proposal to amend the Company's Certificate of Incorporation to effect a
stock split of the Company's common stock outstanding as of December 31,
1997.
E. Represents the effect of the one-for-5.032715 stock split of the
Company's outstanding common stock subject to stockholder approval.
F. Reflects the issuance of 1,000,000 shares of convertible preferred
stock to Sharps in exchange for all the outstanding common stock of
Sharps, and the conversion of the convertible preferred stock into
seven shares of the Company's common stock for each share of
convertible preferred stock as if it occurred on January 1, 1997.
