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FORM 10-KSB
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[ ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended June 30, 1998
[X] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 for the transition period from January 1, 1998 to June 30, 1998.
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Commission File Number: 0-22390
SHARPS COMPLIANCE CORP.
(Name of Small Business Issuer in its Charter)
Delaware 74-2657168
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
9050 Kirby Drive, Houston, Texas 77054
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number (713) 432-0300
Securities Registered under 12(g) of the Exchange Act: Title of Each Class
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Common Stock, $0.01
Par Value
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
YES X NO
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Check if there is no disclosure of delinquent filers in response to item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ X]
Issuer's revenues for most recent six months: $730,000
Aggregate market value of the voting stock held by non-affiliates computed by
the closing stock price on September 15, 1998: $12,464,051
Number of shares outstanding of the issuer's Capital Stock as of September 15,
1998: 7,593,944
DOCUMENTS INCORPORATED BY REFERENCE:
(1) Portions of the Registrant's definitive Proxy Statement for Annual Meeting
of Stockholders held on July 23, 1998 are incorporated by reference in Part
II and Part III hereof.
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(2) Portions of the Registrant's definitive Proxy Statement for Annual Meeting
of Stockholders to be held on November 11, 1998 are incorporated by
reference in Part II and Part III hereof.
(3) Portions of the Registrant's Transitional Report on Form 10-QSB for the
transition period January 1, 1998 to March 31, 1998 are incorporated by
reference in Part II hereof.
Transitional Small Business Disclosure Format (check one): Yes No X
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SHARPS COMPLIANCE CORP.
TABLE OF CONTENTS*
ANNUAL REPORT ON FORM 10-KSB
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PART I
Item 1 Description of Business . . . . . . . . . . . . . 2
Item 2 Description of Properties . . . . . . . . . . . . 7
Item 3 Legal Proceedings . . . . . . . . . . . . . . . . 7
Item 4 Submission of Matters to a Vote of Security
Holders . . . . . . . . . . . . . . . . . . . . 8
PART II
Item 5 Market for Registrant's Common Equity and Related
Stockholder Matters . . . . . . . . . . . . . . 8
Item 6 Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . 9
Item 7 Financial Statements . . . . . . . . . . . . . . 12
Item 8 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure . . . . . . 12
PART III
Item 9 Directors, Executive Officers, Promoters and
Control Persons of the Registrant; Compliance
with Section 16(a) of the Exchange Act . . . . 13
Item 10 Executive Compensation . . . . . . . . . . . . . 13
Item 11 Security Ownership of Certain Beneficial
Owners and Management . . . . . . . . . . . . . 13
Item 12 Certain Relationships and Related Transactions. . 13
Item 13 Exhibits and Reports on Form 8-K. . . . . . . . . 13
Signatures . . . . . . . . . . .. . . . . . . . . 15
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* This Table of Contents is inserted for convenience of reference only and
is not a part of this Report as filed.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
Until February 27, 1998, Sharps Compliance Corp. (formerly U. S. Medical
Systems, Inc.) (the "Company"), through its wholly owned subsidiary U. S.
Medical, Inc. developed, produced and marketed products directed at the
over-the-counter consumer market and products related to infection prevention
for the professional dental healthcare industry. As of September 2, 1998, and
as further discussed below, the Company divested all of the aforementioned
product lines to devote all of its resources to developing its systems that
center around the Sharps by Mail Disposal System described below.
On July 23, 1998, the stockholders voted to (i) elect three directors, (ii)
approve a one-for-5.032715 reverse stock split, (iii) change the name of the
Company to Sharps Compliance Corp., (iv) delete Article 10 of the Company's
Certificate of Incorporation relating to specific stockholders' rights, (v)
increase the number of shares subject to issuance under the Company's 1993 Stock
Plan (vi) ratify the selection of Arthur Andersen LLP as the Company's
independent auditors for the fiscal year June 30, 1998, and (vii) adopt the
Company's amended and restated Certificate of Incorporation. Also on July 23,
1998, the Board of Directors elected Dr. Burt Kunik as Chairman of the Board,
President and Chief Executive Officer of the Company. The executive offices of
the Company were moved from Austin, Texas to the offices of Sharps Compliance,
Inc. in Houston, Texas subsequent to the July 23, 1998 stockholders meeting.
On or about September 2, 1998, the Company entered into an agreement with Mr.
Lee Cooke, its former Chief Executive Officer and President to sell any and all
assets and liabilities related to its subsidiary U. S. Medical, Inc., including
(i) all cash on hand, less $40,000 (ii) all accounts receivable, (iii) all
personal property located at the offices in Austin, Texas, (iv) all patents and
trademarks owned or licensed to U. S. Medical, Inc., (v) customer lists of U. S.
Medical, Inc., (vi) rights to the name U. S. Medical Systems, Inc. and (vii) all
of the capital stock of U. S. Medical, Inc. As consideration for the sale of the
assets described above, Mr. Cooke waived and released the Company from any and
all liabilities in connection with those certain severance obligations of the
Company under that certain Employment Agreement entered into between Mr. Cooke
and the Company. The Company based its decision on, among other things, an
independent evaluation by CFO Services, Inc. of Austin, Texas, of the assets and
liabilities of U. S. Medical, Inc. for the total valuation of $99,000.
ACQUISITION OF SHARPS COMPLIANCE, INC.
The Company, Sharps Compliance, Inc. ("Sharps"), and all of the stockholders of
Sharps entered into an Agreement and Plan of Reorganization as of February 27,
1998. Sharps is a Texas corporation with its principal office located at 9050
Kirby, Houston, Texas 77054. Sharps focuses on developing cost effective systems
for home healthcare and industrial markets that include a Sharps by Mail
Disposal System component for medical sharps, which are used (i.e.,
contaminated) syringes/needles and razors in commercial, industrial and home
healthcare industries. Its services are provided primarily to generators of
small amounts of medical waste to facilitate their compliance with state and
federal regulations by tracking, incinerating and documenting the disposed
medical waste.
The Agreement and Plan of Reorganization closed on February 27, 1998. The
Company did not have sufficient authorized but unissued shares of Common Stock
to issue to the former stockholders of Sharps to complete the transaction.
Therefore, under the terms of the agreement, the Company acquired all of the
issued and outstanding
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common stock of Sharps in consideration for the issuance of 1,000,000 shares of
Preferred Stock such that each share of common stock of Sharps, par value $.01
per share, outstanding on the closing date was exchanged for 0.142858 shares of
Preferred Stock. The Company filed its Certificate of Designation, Powers,
Preferences and Rights of the Series of the Preferred Stock with the Secretary
of State of the State of Delaware on February 23, 1998, setting forth the terms
and conditions of the Preferred Stock upon its issuance. Among other provisions
of the Certificate of Designation, each share of Preferred Stock was entitled to
35.190319 votes.
On July 23, 1998, the stockholders of the Company approved a one-for-5.032715
reverse stock split. The Preferred Stock received by the former stockholders of
Sharps was converted into seven (7) shares of Common Stock of the Company, at
which time the former stockholders of Sharps owned approximately 91% of the
issued and outstanding Common Stock of the Company on a fully diluted basis.
Upon completion of the conversion, the Company had 7,583,944 shares of Common
Stock outstanding, of which the existing stockholders of the Company held
583,944 shares and the former stockholders of Sharps held 7,000,000 shares.
Subsequent to February 27, 1998, Sharps has operated as a wholly owned
subsidiary of the Company. The Agreement is treated as a reverse acquisition for
accounting and financial reporting purposes. As such, Sharps is considered the
acquiror for accounting and financial reporting purposes and the net assets of
the Company were combined with those of Sharps at their historical cost basis on
the effective date of the Agreement. Sharps has reflected the ongoing results of
operation of the Company in its financial statements from the effective date of
the Agreement. The combined entity will carry forward the Company's fiscal year
end of June 30.
Sharps was formed in May of 1994 by Dr. Burt Kunik. Sharps' systems provide a
product for use by small medical waste generators to facilitate their compliance
with state and federal regulations by tracking, incinerating and documenting the
disposal of sharps (syringes, razors, needles, etc.) by utilizing the Sharps by
Mail Disposal System (the "Mail Disposal System"). Sharps occupies a 7,274
square foot office facility in Houston, Texas, and employs 17 full-time
employees, most located at the principal place of business of Sharps, 9050 Kirby
Drive, Houston, Texas 77054.
The Mail Disposal System contains a securely sealed, leak and puncture resistant
sharps container; U.S. Postal Service approved shipping carton with priority
mail postage; absorbent material inside the container that can hold up to 150
milliliters; a red bag for additional containment; and complete documentation
and tracking manifest. When the container is full, the customer closes the
sharps container, places it in the red bag, places it back inside the approved
prepaid shipping carton and deposits the container with the mail carrier who
sends the authorized shipping carton through the U.S. Postal Service routing to
a municipally owned incinerator providing third party verification of
destruction. After destruction of the Mail Disposal System, the incinerator
sends verification of such destruction to the customer. The Company has not
expended any funds to comply with environmental regulations and relies on the
contracted incinerator to comply with all federal, state and local environmental
regulations.
Sharps' target market segments include the home healthcare industry;
non-healthcare institutional users; the diabetic community that requires insulin
injection; dental, veterinarian and physician markets; and other miscellaneous
markets where the Mail Disposal System is a fit and is currently under
development. While maintaining a low overhead structure, highly automated
tracking, accounting and operational systems, cross-trained employees and a
quality staff, Sharps has remained flexible and responsive to its customer needs
in an industry that demands flexibility, quick response and technological
innovation.
Sharps has strategically placed four sales people around the U.S. to sell to the
home care market. Sharps' goal is to obtain agreements with home care companies
to use its products and arrange for the distributor of choice of that home care
company to sell and deliver the product directly to the end user. Sharps sells
the product to home health companies and their distributors. Sharps also has two
sales people to sell to the non-healthcare institutional market. Sharps' goal is
to obtain agreements with large hospitality companies to use its products and
arrange for its exclusive distributor to sell and deliver the product to the end
user.
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In 1998, home care will be affected by the Department of Transportation's
("DOT") new medical waste regulations which will make it more difficult for
companies that are non-medical waste transporters to transport medical waste.
Management expects the new requirements to be a positive development for Sharps
since Sharps believes it can fulfill the home care companies' needs and keep
them in compliance with the new regulations.
INDUSTRY ANALYSIS
Today, almost all businesses are affected with waste disposal concerns for
safety and liability reasons. Regulated waste such as syringes, razor blades,
bloodborne items, bio-hazard waste spills and other sharp waste can occur in the
following situations: treating cuts, abrasions and burns; cleaning rooms and
finding needles, syringes or blood-soaked items; laundering linens and finding
needles or razor blades in towels; maintenance people finding syringes, needles
and broken glass with blood stains; and bio-hazard clean-up. Sharps has added
products in conjunction with the Mail Disposal System that create cost effective
alternatives to customers who are small quantity medical waste generators in
applicable industry segments.
MARKET SIZE
Management of Sharps believes that the overall consumption of the Mail Disposal
System will grow, with such growth being fueled by a number of factors and
applications, including:
1. The systems that Sharps has assembled makes the Mail Disposal System
both user friendly and cost effective.
2. DOT enforcement of regulations on the transportation of medical waste.
In 1998, new regulations will levy heavy fines against non-compliance
of regulatory statutes.
3. Occupational Safety and Health Administration ("OSHA") enhanced
regulations to protect all employees from bloodborne pathogens in the
workplace (i.e., medical, offices, hotels, office buildings and public
locations).
4. The continued move toward stronger regulations for transporting
medical waste. In 1998, new regulations are anticipated to make it
more difficult for homecare couriers, company trucks and nurses to
legally be able to transport sharps containers.
5. The overall increased need and appreciation for a full circle of
systemic computerized medical waste tracking and verification.
MARKET SEGMENTS
Home Healthcare Industry. The home healthcare industry is a primary market for
the SCI Trip LesSystem(TM) which centers around the Mail Disposal System.
Sharps' products are distributed to the home healthcare industry through major
national homecare equipment and supply distributors. The home healthcare
industry is a somewhat fragmented market; however, management of Sharps
estimates that there are approximately 20 corporations that dominate the home
healthcare market within the United States. Sharps currently has a presence with
the majority of those corporations. The SCI Trip LesSystem(TM) is the
predominate disposal system with many of the top healthcare corporations and is
under serious consideration with several of the remaining companies. Sharps'
current principal customers include major nationally known homecare customers
such as Apria Healthcare Inc., Coram Healthcare Inc. and Olsten Health Services
Inc.
Homecare has intensified its focus on self-injection, resulting in a significant
increase in used syringes outside of medical care facilities. Sharps has created
a system for the home healthcare industry that will free them from making
unnecessary and more costly trips to the patient's home. Sharps has created the
SCI Trip LesSystem(TM) for homecare which virtually eliminates the need for all
pick-ups from the home after treatment has been completed. Thus, the creation of
the SCI Trip LesSystem(TM) has combined three complete programs for return and
disposal. All systems contain the Mail Disposal System along with either (i) a
prepaid pump return box using Federal Express, (ii) a disposable IV pole to
which Sharps owns the patents and manufactures or (iii) a
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reusable case for the collapsible IV pole and pole mounted IV pump, depending on
the patient's therapy. In the home healthcare industry, Sharps has become part
of the formulary for dealing with the disposal of the sharps encountered by the
leading national homecare companies primarily because of the SCI Trip
LesSystem(TM). Sales of the SCI Trip LesSystem(TM) recently have begun to
escalate and now account for approximately 20% of Sharps' sales.
Non-healthcare Institutional. The second market segment of Sharps is the
non-healthcare institutional market. Management believes that this market will
be one of the fastest growing segments and will include hotels, restaurants and
manufacturing sites.
Sharps has contracted with ECOLAB as its exclusive distributor to the industrial
market. ECOLAB has an extensive marketing program that includes 7,000 sales
people. ECOLAB markets to potential users of the Mail Disposal System such as
hotels, motels, resorts, schools, colleges, stadiums, daycare centers, planes,
trains, cruise ships, casinos, supermarkets, distribution centers, business
offices, restaurants, bars and clubs. ECOLAB has a substantial impact in this
market, and Sharps has granted an exclusivity to ECOLAB to distribute its Mail
Disposal System, custom design cones and wall mount brackets along with Sharps'
customized automatic reorder service available for all ECOLAB customers within
this marketplace.
Diabetic Community. A third area of focus is the diabetic who often requires
numerous insulin injections. Sharps intends to actively market to the vast
number of insulin injected diabetics, and this market is expected to grow over
the next three to five years because more people are being tested for the
condition and modern dietary habits are leading to an increased number of
diabetics.
Sharps has positioned itself with Gainor Medical, which management of Sharps
believes to be the largest lancet manufacturer in the United States. Gainor
distributes directly to the diabetic community through its mail order division
and is also in the managed care diabetes management market. Sharps and Gainor
are the only marketers of the Mail Disposal System to the diabetic community.
Dentists, Veterinarians and Physicians. Sharps has made a presence within the
medical market that has identified the usefulness of the Mail Disposal System.
Sharps' product has been demonstrated to be a perfect fit for these small volume
waste generators. Sharps has grouped the dental, physician and veterinarian
market together due to their similar model and duration usage. 1997 census
figures supplied by the American Dental Association, the American Medical
Association and the American Veterinary Association indicate that there are
approximately 115,000 dentists, 600,000 physicians and 60,000 veterinarians in
active practice in the U.S.
Sharps utilizes distributors to reach the dental, veterinarian and physician
marketplace. In all areas, Sharps' product is distributed through major
distributors within each of the respective markets. Henry Schein and Patterson
Dental distribute to dental customers. In the veterinary market, the
distributors utilized are The Butler Company and MWI Veterinary Supply. In the
physician market, a variety of methods are used to reach the needs of all
physicians.
RESEARCH & DEVELOPMENT
The Sharps' Mail Disposal System is seeking new applications in many different
areas since small infectious waste generators can be found in many industries.
The Company is constantly looking into development of new products to comply
with OSHA regulations for disposal of potentially infectious waste and
attempting to reduce potential liability. The Company has dedicated a minimum
amount of time and money towards research and development of alternative
disposal and healthcare treatments, focusing on the acquisition of compatible
product lines such as the acquisition of new products such as the "PitchIt" and
"PitchIt Jr." disposable IV poles.
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MARKET RISKS
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, which are primarily
distributors. During the six months ended June 30, 1998, four distributors
represented approximately 62% of sales; during the year ended December 31, 1997,
three distributors represented approximately 74% of sales; and, during the year
ended December 31, 1996, one distributor represented approximately 50% of sales.
At June 30, 1998, four distributors comprised approximately 72% (or $146,700) of
the total accounts receivable balance, and at December 31, 1997, three
distributors comprised approximately 80% (or $89,741) of the total accounts
receivable balance. Sharps may be affected by its dependence on a limited number
of distributors. Management believes the risk is mitigated by the long-standing
business relationships with and reputation of Sharps' major customers. Further
management believes a loss of any distributor does not necessarily mean the loss
of the underlying customer base of that distributor for the Mail Disposal
System.
Sharps continues to sole-source each of its manufacturing, assembly,
transportation and disposal functions. Sharps may be affected 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 continued future business associations,
after expirations of certain agreements between Sharps and its suppliers,
management believes that alternative sources would be available at similar costs
due to the large number of potential waste generators.
MANUFACTURING
Manufacturing capabilities are key in the total solution offered by Sharps.
Sharps can control quality, remain flexible and be responsive to its customer
requirements. The technology required to participate in the various markets is
key to being on the forefront of project design. Sharps manufactures its
products in Houston, Texas and is currently producing approximately 1,000
systems per day, per shift. The manufacturing facility has the ability to
increase its capacity to produce in excess of 3,000 systems per day, per shift.
Sharps currently operates one shift, and its manufacturing facility is
approximately 15,000 square feet. Sharps entered into a contractual agreement
with Winfield Medical on May 12,1998 to manufacture a certain line of Sharps
containers for one specific distributor. The Company entered into a contract
with Lukens Medical Corporation for the manufacture of certain one, two and
three gallon containers for sale to the Company's industrial and healthcare
facilities, and diabetic patients.
PATENTS
On June 18, 1998 Sharps completed the purchase of two patented disposable IV
poles from IVy Green Corp. for approximately $100,000. The assets purchased
included two patents for two different poles, all manufacturing rights, existing
customers and a completed prototype for a third pole. On July 22, 1998, the
Company filed with the U. S. Patent & Trademark Office an assignment of Patents
numbers D390952 and D390953 from IVy Green Corporation to Sharps Compliance,
Inc. These disposable poles can be a significant cost saver for homecare
companies by eliminating trips to the home to pick up poles after treatment is
completed. Sharps has combined these poles with its Mail Disposal Systems to
further eliminate unnecessary pick-up trips to a homecare patient.
RISK FACTORS
Dependence on Certain Management Personnel
Sharps' growth and development to date has been largely dependent upon active
participation of its current chief executive officer, Dr. Burt Kunik. Although
Sharps expects to hire and retain other qualified and experienced management
personnel from time to time, the loss of services of any of its current
executives, especially Dr. Burt Kunik, could have a material adverse affect on
the development of the Company's business. Sharps has applied for key man life
insurance on Dr. Kunik only and not on any other officer, director or employee
of the Company, but may elect to do so in the future.
Competition
There are several competitors who offer disposal of medical waste services, such
as Browning Ferris Industries, Inc. and Ongard System, Inc.; however, no other
company focuses primarily on the disposal of sharps and other medical waste use
through transport by the U.S. Postal Service. While Sharps currently does not
face any significant competition in the mail sharps business, Sharps must
compete with other, larger and better financed and capitalized companies. It
also may face contemplating additional competition in the future from other
businesses which may enter into the same or similar business as Sharps and may
be better capitalized than Sharps.
Customer Relationships
Sharps has no firm long-term volume commitments from its customers and generally
enters into individual purchase orders with its customers. Sharps has
experienced fluctuations in order levels from period to period and expects it
will continue to experience fluctuations in the near future. In addition,
customer purchase orders may be canceled and order volume levels can be changed,
canceled or delayed with limited or no penalties. The replacement of canceled,
delayed or reduced purchase orders with new business cannot be assured.
Moreover, the businesses, financial condition and results of operations of
Sharps will depend in significant part upon its ability to obtain orders from
new customers, as well as the financial condition and success of its customers,
its customers' products and the general economy. The factors affecting any of
the major customers of Sharps or its customers, could have a material adverse
effect on the businesses, financial condition and results of operations of
Sharps.
Limitation on Burn Facilities
Sharps currently has a contractual arrangement with American 3CI, a company
primarily in the business of medical waste disposal through heat incineration.
American 3CI has an exclusive arrangement with the City of Carthage, Texas to
burn its medical waste at the municipal facility. If for any reason American 3CI
was no longer able to burn at the Carthage facility, the Company would be
required to obtain an alternative burn site or enter into a contractual
relationship with the City of Carthage, Texas. There can be no assurance that
such an agreement would ultimately be entered into between Sharps and the City
of Carthage, or that the Company would be able to enter into another arrangement
for the incineration of its products and at cost that would be acceptable to
Sharps.
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Limited Operating History; History of Losses
Sharps has a limited operating history, has incurred significant losses from
operations since its inception and has had working capital deficits in the past.
There can be no assurance that Sharps will ever attain profitable operations or
will be able to generate future revenue levels to support operations. The future
success of Sharps is dependent upon many factors, including environmental
regulation, continuity of its distributorship agreements, successful completion
of its product development activities, and the identification of penetration of
additional markets for its products and services. There can be no assurance that
future additional capital will be available to Sharps from any other sources, or
that if available, it will be on terms acceptable to Sharps.
Governmental Regulation
Currently, Sharps is required to operate within the guidelines established by
the OSHA, administered by the Occupational Safety and Health Administration.
Such guidelines have been established to promote occupational safety and health
standards, and certain standards have been established in connection with the
handling, transportation and disposal of certain types of medical wastes
including mail sharps. Sharps believes that it is currently in compliance in all
material respects with all applicable laws and regulations governing its
business. However, in the event additional guidelines are established to more
specifically control the business of Sharps, additional expenditures may be
required in order for Sharps to be in compliance with such changing regulations.
Furthermore, any material relaxation of any existing regulatory requirements
governing the transportation and disposal of medical sharps products could
result in a reduced demand for Sharps' services and could have a material
adverse effect on Sharps' revenues and financial condition. The scope and
duration of existing and future regulations affecting the medical waste disposal
industry cannot be anticipated and are subject to change due to political and
economic pressures.
Postal Work Interruptions
Since the basis by which Sharps transports its medical sharps products is by use
of the United States Postal Service, any interruption in the day-to-day postal
services would have a material adverse effect on Sharps' revenues and financial
condition. Postal delivery interruptions are rare and cannot be predicted with
any certainty. However, since United States Postal employees are federal
employees, such employees may be prohibited from engaging in or continuing a
postal work stoppage, although there can be no assurance that such work
stoppage can be avoided.
ITEM 2. DESCRIPTION OF PROPERTY
Sharps currently leases 7,274 square feet of commercial office space in Houston,
Texas. The lease period commenced August 1, 1998 and runs through July 31, 2002
at an annual rental rate of $14.11 per square foot. The lease agreement provides
for annual escalations based on increases in common area maintenance, property
taxes, insurance costs and management. Sharps believes that the facility is
adequate and anticipates remaining in the facility for the period of the lease.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any pending litigation and is not aware of any
contemplated proceeding.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company sent out proxies to its stockholders dated June 29, 1998 for matters
to be voted at the Annual Meeting of Stockholders held on July 23, 1998, in
Austin, Texas, and the following proposals were adopted by the margins indicated
at such meeting:
1) The election of three directors to hold office until the next Annual
Meeting of Stockholders or until the election and qualification of
their respective successors.
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Lee Cooke For 34,202,694 Against -0- Abstain 4,415
Parris H. Holmes, Jr. For 34,202,694 Against -0- Abstain 4,415
Dr. Burt Kunik For 34,202,694 Against -0- Abstain 4,415
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2) A proposal to amend the Company's Certificate of Incorporation to
effect a one-for-5.032715 reverse stock split of the Company's
common stock.
For 34,192,019 Against 6,318 Abstain 4,399
3) A proposal to amend the Company's Certificate of Incorporation to
rename the Company Sharps Compliance Corp.
For 34,199,311 Against 3,494 Abstain 405
4) A proposal to amend the Company's Certificate of Incorporation to
delete Article 10 relating to specific stockholders' rights.
For 33,053,923 Against 5,822 Abstain 7,658
5) A proposal to approve an amendment to the Company's 1993 Stock Plan to
increase the number of shares of common stock subject to issuance
under this plan from 59,609 shares to 1,000,000 shares (after giving
effect to the reverse stock split under Proposal 2 above).
For 33,059,285 Against 10,087 Abstain 712
6) A proposal to ratify the appointment of Arthur Andersen LLP as
independent public accountants of the Company for the fiscal year
ending June 30, 1998.
For 34,149,459 Against 1,581 Abstain 14,744
7) A proposal to adopt the Company's Amended and Restated Certificate of
Incorporation.
For 34,153,541 Against 7,167 Abstain 7,117
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION. During the two (2) years ended June 30, 1998 and subsequent,
the Common Stock of the Company has been quoted on the NASD OTC Bulletin Board
under the symbol "SCOM" (subsequent to July 22, 1998), "USME" (prior to July 23,
1998 and subsequent to December 18, 1996), and "MPTI" (prior to December 19,
1996). The Common Stock has also traded on the Vancouver Stock Exchange for the
period under the symbol "USS" except
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that the Company voluntarily removed its Common Stock from the exchange on
June 8, 1998. The Company's Common Stock has had limited trading volume
averaging approximately 7,600 shares traded per month (giving effect to
the one-for-5.032715 reverse stock split effective July 23, 1998) on the OTC
Bulletin Board. The table below sets forth the high and low closing prices at
the OTC Bulletin Board for each quarter within the last two (2) fiscal years.
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Common Stock (1)
<S> <C> <C>
Fiscal Year Ended June 30, 1997 High Low
First Quarter $5.28 $4.40
Second Quarter $4.40 $1.89
Third Quarter $7.54 $1.88
Fourth Quarter $6.29 $1.89
Fiscal year Ended June 30, 1998
First Quarter $3.15 $1.89
Second Quarter $3.15 $2.83
Third Quarter $5.03 $2.99
Fourth Quarter $5.03 $4.43
Fiscal Year Ended June 30, 1999
First Quarter (through September 23, 1998) $7.50 $2.25
</TABLE>
(1) Prices have been adjusted to reflect the effect of the one-for-5.032715
reverse split effective July 23, 1998.
Stockholders: At September 23, 1998, there were 583,944 shares of Common Stock
that could be traded. They were held by 209 holders of record. The last reported
sale of the Common Stock on September 15, 1998, was $2.25 per share.
Dividend Policy: The Company has never declared or paid any cash dividends on
its Common Stock. The Company currently intends to retain all of its earnings
for the operation and expansion of its business and does not anticipate paying
any such dividends in the foreseeable future.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This annual report on Form lO-KSB contains certain forward-looking statements
and information relating to the Company and its subsidiaries that are based on
the beliefs of the Company's management as well as assumptions made by and
information currently available to the Company's management. When used in this
report, the words "anticipate," "believe," "estimate" and "intend" and words or
phrases of similar import, as they relate to the Company or its subsidiaries or
Company management, are intended to identify forward-looking statements. Such
statements reflect the current risks, uncertainties and assumptions related to
certain factors, including without limitations, competitive factors, general
economic conditions, customer relations, relationships with vendors,
governmental regulation and supervision, seasonality, distribution networks,
product introductions and acceptance, technological change, changes in industry
practices, onetime events and other factors described herein. Based upon
changing conditions, should any one or more of these risks or uncertainties
materialize, or should any underlying assumptions prove incorrect, actual
results may vary materially from those described herein as anticipated,
believed, estimated, expected or intended. The Company does not intend to update
these forward-looking statements.
9
<PAGE> 12
The discussion below analyzes changes in the consolidated operating results and
financial condition of the reorganized company (i.e., Sharps Compliance Corp.
and Sharps) during the six months ended June 30, 1998. The comparison is made to
the operating results and financial condition of Sharps as an independent entity
for the six months ended June 1997.
GENERAL
On February 27, 1998, the Company, Sharps, and all of the stockholders of Sharps
entered into the Agreement and Plan of Reorganization (the "Agreement"). The
Agreement closed on February 27, 1998. The Company did not have sufficient
authorized but unissued shares of Common Stock to issue to the former
stockholders of Sharps to complete the transaction. Therefore, under the terms
of the Agreement, the Company acquired all of the issued and outstanding Common
Stock, $.01 par value, of Sharps in consideration for the issuance of 1,000,000
shares of Preferred Stock, $.01 par value, such that each share of Common Stock
of Sharps outstanding on the closing date was exchanged for 0.142858 shares of
Preferred Stock. Each share of Preferred Stock is entitled to 35.190319 votes
On July 23, 1998, the stockholders voted to (i) elect three directors, (ii)
approve a one-for-5.032715 reverse stock split, (iii) change the name of the
Company to Sharps Compliance Corp., (iv) delete Article 10 of the Company's
Certificate of Incorporation relating to specific stockholders' rights, (v)
increase the number of shares subject to issuance under the Company's 1993 Stock
Plan, (vi) ratify the selection of Arthur Andersen LLP as the Company's
independent auditors for the fiscal year ended June 30, 1998 and (vii) adopt the
Company's Amended and Restated Certificate of Incorporation. Also on July 23,
1998, the Board of Directors elected Dr. Burt Kunik as Chairman of the Board,
President and Chief Executive Officer of the Company. The executive offices of
the Company were moved from Austin, Texas to the offices of Sharps Compliance,
Inc. in Houston, Texas subsequent to the July 23, 1998 stockholders meeting.
Following the closing of the Agreement on February 27, 1998, the combined
company shifted its main product focus to the Mail Disposal System and sought to
sell the PDS(R) Clean and Miracle Grip(R) product lines. Management believed
that the new Sharps product presented a better opportunity for growth of the
Company and future value to the stockholder.
On or about September 2, 1998, the Company entered into an agreement with Mr.
Lee Cooke, its former Chief Executive Officer and President, to sell any and all
assets and liabilities related to its subsidiary U. S. Medical, Inc., including
(i) all cash on hand, less $40,000 (ii) all accounts receivable, (iii) all
personal property located at the offices in Austin, Texas, (iv) all patents and
trademarks owned or licensed to U. S. Medical, Inc., (v) customer lists of U. S.
Medical, Inc., (vi) rights to the name U. S. Medical Systems, Inc. and (vii) all
of the capital stock of U. S. Medical, Inc. As consideration for the sale of the
assets described above, Mr. Cooke waived and released the Company from any and
all liabilities in connection with those certain severance obligations of the
Company under that certain Employment Agreement entered into between Mr. Cooke
and the Company.
The Agreement is treated as a reverse acquisition for accounting and financial
reporting purposes. As such, Sharps is considered the acquiror for accounting
and financial reporting purposes and the net assets of the Company were combined
with those of Sharps at their historical cost basis on the effective date of the
Agreement. Sharps has reflected the ongoing results of operations of the Company
in its financial statements from the effective date of the Agreement. The
combined entity will carry forward the Company's fiscal year end of June 30.
<PAGE> 13
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain items from
the Company's Condensed Consolidated Financial Statements of Operations,
expressed as a percentage of revenue:
<TABLE>
<CAPTION>
Six Months Ended Year Ended
June 30 December 31
------------------ ------------------
1998 1997 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales 100% 100% 100% 100%
Costs and expenses:
Cost of sales (77%) (66%) (75%) (52%)
Selling, general and administrative (163%) (63%) (59%) (52%)
Depreciation and amortization (2%) (3%) (1%) (1%)
---- ---- --- ---
Total operating expenses (242%) (132%) (135%) (105%)
---- ----
Loss from operations (142%) (32%) (35%) (5%)
Total other income (expense) 11% (2%) (1%) (1%)
---- ---- --- ---
Net loss (131%) (34%) (36%) (6%)
==== ==== === ===
</TABLE>
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997
Net sales increased approximately 129% during the six months ended June 30, from
$318,000 in 1997 to $730,000 in 1998. Included in net sales for the six months
ended June 30, 1998 were sales from PDS(R) Clean and Miracle Grip(R) products of
$45,000 for the period subsequent to the closing of the Agreement which were not
part of the Company's sales in 1997. Sharps' net sales increase can be
attributed to a wider acceptance of the Sharps mail back disposal system as a
more cost effective means of disposing of contaminated sharps than is currently
being used by the small waste generator. Secondly, Sharps has created a product
line defined as the Trip LesSystem(TM) which will further decrease the need for
Sharps' primary customer, home healthcare facilities, to make an additional trip
to the patient's home to retrieve the used sharps container. Finally, due to the
overall increase in exposure to contaminated sharps, the Company is continually
finding new markets where the Sharps product is a natural fit. Sharps has been
successfully working with ECOLAB, a major supplier of hotel and restaurant
cleansing products, to place the mail back disposal system within many major
hotel and motel chains across the United States.
The increases in selling, general and administrative expenses are due to the
Company's expansion of its infrastructure and additional resources expended to
penetrate the new markets in the six months ended June 30, 1998. The Company has
incurred significant general and administrative expenses, resulting in a net
loss. As discussed in "Results of Operations," selling, general and
administrative expenses have significantly increased in the first six months of
1998 in relation to the same period in 1997. The needed additional support and
sales staffing, the travel expenses associated with Sharps sales personnel and
the additional overall increased marketing effort have considerably increased
these expense items.
The reorganized Company completed a $4 million private equity offering prior to
the acquisition on February 27, 1998. Some of these capital resources are being
used to provide Sharps with a more nationally identifiable image. Sharps has
retained a Houston, Texas based marketing firm to better assist the Company with
this new image effort. Additionally, a sales team has been assembled to
strategically cover the United States to better identify, qualify and assist the
existing and new customer base in the use and efficiency benefits of the Sharps
product line. As of June 30, 1998, the Company has approximately $3,044,000 in
cash and short-term investments.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Net sales experienced a significant increase for the period. Net sales
for the year ended December 31, 1996 totaled approximately $591,000. Sales for
Sharps products increased 40% to $830,000 over the same period in 1997, when
sales were $591,000. The increase in sales can be attributed to two major events
that were undertaken during the year 1997: first, Sharps introduced a new
product line named the Trip LesSystem(TM); and second, the Sharps product line
has entered the industrial marketplace, which has proven to be a significant
part of its customer base. During 1997, the Company had revenues of $500,000
attributable to the product lines of the Company which are not included in the
financial statements of the Company on a pre-acquisition basis. Because Sharps
has been treated as the acquiror for accounting and financial reporting
purposes, financial results of the Company (formerly U. S. Medical Systems,
Inc.) have been excluded from the Results of Operations.
11
<PAGE> 14
Sharps' selling, general and administrative expenses increased approximately 44%
in year ended December 31, 1997 compared to the same period in 1996. This
increase is directly attributable to the addition of sales and support staff
required to properly market and support the product line on a national basis.
Interest expense increased to $8,000 due to an increase in notes payable to
stockholders of $430,000 during October 1997. Interest income for the Company
was approximately $3,000 in the period.
As a result of the above activities, the Company's loss for the year ended
December 31, 1997 increased to $295,000, or $(0.08) per share, from a loss of
$41,000, or $(0.01) per share, in the same period in 1996
LIQUIDITY AND CAPITAL RESOURCES
Working capital at June 30, 1998 was $2,395,000. The relatively favorable
liquidity ratios are primarily due to the successful private placement of
2,000,000 shares of Sharps Common Stock in February 1998.
Capital expenditures for the combined Company during the six months ended June
30, 1998 were approximately $131,000 and consisted of the acquisition of patents
and trademarks of $101,000 and computers and computer networking related
equipment.
At June 30, 1998, total long-term debt outstanding was approximately $40,000 for
the combined Company.
The Company expects to incur substantial costs related to sales, marketing and
administrative activities. The amount and timing of anticipated expenditures
will depend upon numerous factors both within and outside the Company's control,
including the nature and timing of marketing and sale activities. Moreover, the
Company's ability to generate income from operations will be dependent upon,
among other things, sufficient penetration of the home healthcare, industrial
and other markets. Management believes the reorganization and Sharps acquisition
will satisfactorily fund operations for the next 12 to 24 months. There can be
no assurance that the Company will be able to obtain financing on acceptable
terms if at all, to fund operations beyond that time frame.
YEAR 2000 ISSUES
The Company has been evaluating its computer programs and systems to
identify potential Year 2000 readiness problems. The Year 2000 problem refers
to the limitations of the programming code in certain existing software
programs to recognize date-sensitive information for the Year 2000 and beyond.
Unless modified prior to December 31, 1999, such systems may not properly
recognize such information and could generate erroneous data or cause a system
to fail to operate properly.
The Company believes that the Year 2000 problem will not pose a significant
operational problem for the Company. However, it is possible that non-compliant
third-party computer systems may pose a problem for the Company in the future.
The Company's business, financial condition and results of operations would not
be materially adversely affected by the Year 2000 problem if it or unrelated
parties fail to successfully address this issue.
Management of the Company currently anticipates that minimal expenses and
capital expenditures would be associated with correcting any of its Year 2000
problems.
In the event the Company determines the need in the future to implement a
plan to address the Year 2000 problem, the Company may need to devote more
resources to developing such plan and additional costs may be incurred, which
the Company believes would not have a material adverse effect on the Company's
financial condition and results of operations. The Company believes problems
encountered by the Company's vendors, customers and other third parties would
not have a material adverse effect on the Company's financial condition and
results of operations.
ITEM 7. FINANCIAL STATEMENTS
The financial statements of the Company are annexed to this report and are
referenced as pages F-1 to F-16
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The information set forth under the caption "Changes in Registrant's Certifying
Accountant" on page 13 of the Transitional Report on Form 10-QSB for the
transition period January 1, 1998 to March 31, 1998 is incorporated herein by
reference.
12
<PAGE> 15
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS OF THE
REGISTRANT; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The information set forth under the caption "Management," Pages 30 through 32,
inclusive, of the Registrant's definitive Proxy Statement for Annual Meeting of
Stockholders held on July 23, 1998 are incorporated herein by reference.
Paragraph 16(a) of the Securities Exchange Act of 1934, as amended, requires the
Company's executive officers and directors, and persons who beneficially own
more than 10% of the Company's equity securities, to file reports of security
ownership and changes in such ownership with the Commission. Officers, directors
and greater than 10% beneficial owners also are required by Commission
regulations to furnish the Company with copies of all Section 16(a) forms they
file.
To the Company's knowledge, based solely on review of the copies of such reports
furnished to the Company, during the fiscal year ended June 30, 1998, all
Section 16(a) filing requirements applicable to its officers, directors and
greater than 10% beneficial owners were complied with.
ITEM 10. EXECUTIVE COMPENSATION
The information set forth under the captions "Management" and "Executive
Compensation," Pages 30 through 36, inclusive, of the Registrant's definitive
Proxy Statement for Annual Meeting of Stockholders held on July 23, 1998 are
incorporated herein by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information set forth under the captions "Security Ownership of Management"
and "Certain Beneficial Owners," Pages 16 through 19, inclusive, of the
Registrant's definitive Proxy Statement for Annual Meeting of Stockholders held
on July 23, 1998 are incorporated herein by reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information set forth under the caption "Certain Relationships and Related
Transactions," Pages 36 and 37, inclusive, of the Registrant's definitive Proxy
Statement for Annual Meeting of Stockholders held on July 23, 1998 are
incorporated herein by reference.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit Number Description of Exhibit
2.1 Plan of Reorganization pursuant to Board of Directors
Resolutions dated August 13, 1996.
2.2 Agreement and Plan of Reorganization dated as of
February 27, 1998, between and among U.S. Medical
Systems, Inc., Sharps Compliance, Inc. and its
Stockholders
3.1 Certificate of Domestication of the Company
3.2 Certificate of Incorporation of Company
3.3 Certificate of Amendment
3.4 Bylaws of Company
*3.5 Amended and Restated Certificate of Incorporation of
U.S. Medical Systems, Inc.
*3.6 Certificate of Elimination of the Series "A" Voting
Convertible Preferred Stock
13
<PAGE> 16
4.1 Escrow Agreement, dated February 7, 1992, between the
Company and Pacific Corporate Trust Company
("Pacific Trust")
4.2 Form of 1992 Stock Purchase Warrant
4.3 Warrant Agreement, dated September 10, 1993
Form of Note and Waiver
*4.4 Specimen Stock Certificate
10.1 Letter Agreement, dated December 15, 1991, between the
Company and 406586 B. C. Ltd., Medical Polymers, a
California corporation ("MP") and certain stockholder
of MP
10.2 Letter Agreement, dated as of February 7, 1992, between
the Company and 405586 B. C. Ltd.
10.3 Amendment to Exhibit 10.2, dated March 20, 1992
10.4 Share Purchase Agreement, dated as of February 7, 1992,
between the Company, MP, and the stockholders of MP
10.5 Exclusive Technology License Agreement, dated
December 14, 1990, between Dr. Marvin H. Gold and MP
10.6 Assignment, dated March 30, 1992, by Marvin H. Gold
10.7 Letter Agreement, dated March 30, 1992, between
Marvin H. Gold and MP
10.8 Assignment, dated March 30, 1992, by Marvin H. Gold and
Robert H. Hodam, Jr.
10.9 Letter Agreement, dated March 30, 1992, between
Marvin H. Gold and MP
10.10 Letter Agreement, dated March 30, 1992, between
Robert H. Hodam, Jr. and MP
10.11 Supply and Distribution Agreement, dated
December 18, 1992, between Midwest Dental Products
Corporation and MP
10.12 Amendment to 10.11, dated June 9, 1993
10.13 Manufacturing Agreement, dated September 10, 1992,
between DPT Laboratories, Inc. and MP
10.14 Research/Development and Laboratory Services Contract,
dated March 13, 1993, between NewForm Development
Laboratories, Inc. and MP
10.15 Product Formulation Consulting Agreement, dated
January 18, 1993, between EcoTech and MP
10.16 Letter Agreement, dated September 4, 1992, between
Gibraltar Biological Laboratories and MP
10.17 Amendment to Exhibit 10.16, dated October 20, 1992
10.18 Employment Agreement, dated May 22, 1994, between Lee
Cooke and the Company
10.19 Consulting Agreement, dated July 1, 1993, between
Parris H. Holmes, Jr. and the Company
10.20 Amendments to Exhibit 10.14, dated April 26, 1995 and
August 1, 1994
10.21 Research and Development Contract dated
December 22, 1993 between MGB and MP
10.22 Letter of Agreement on consulting services for stock
options, dated July 1, 1994, between Wolf Group and
MPTI
10.23 Amendment to Exhibit 10.22, dated March 16, 1995
10.24 Consulting Agreement, dated February 1, 1995, between
Parris H. Homes, Jr. and the Company
10.25(a) Amendment to Exhibit 10.22, dated March 16, 1995
10.25(b) Amendment pursuant to Board of Directors Resolution,
dated August 17, 1995
10.26(a) Form of Warrant, dated March 1, 1995
10.26(b) Form of Note, dated March 1, 1995
10.27 Employment Agreement, dated May 22, 1996, between
Lee Cooke and the Company
14
<PAGE> 17
10.28 Assignment, dated October 26, 1995, by James W.
McGinity, Thomas G. Gerding and Roland Bodmeier
10.29 Employment Agreement effective January 1, 1998 by and
between Sharps Compliance, Inc. and Dr. Burt Kunik, and
First Amendment to Employment Agreement
*10.30 Second Amendment to Employment Agreement dated
May __, 1998
*10.31 Exclusive Distributorship Agreement, dated
April 1, 1998 between Pro-Tec Containers, Inc. and
Sharps Compliance, Inc.
*10.32 Purchase Agreement between IVY Green Corporation and
Sharps Compliance, Inc., dated June 19, 1998
*10.33 Lease Agreement between Lakes Technology Center, Ltd.
and Sharps Compliance, Inc. dated August 1, 1998
*10.34 Severance Agreement, dated
September 2, 1998, between C. Lee Cooke, Jr. and
Sharps Compliance, Inc. (formerly known as - U.S.
Medical Systems, Inc.)
16.1 Letter regarding Change in Certifying Accountant
16.2 Letter regarding Change in Certifying Accountant
16.3 Letter regarding Change in Certifying Accountant to
Faske Lay & Co., L.L.P.
16.4 Letter regarding changes in Certifying Accountant to
Arthur Andersen LLP
*27.1 Financial Data Schedule
Notes:
* Filed herewith.
(b) Reports on Form 8-K
The information set forth under the caption "Exhibits and Reports on Form 8-K"
on page 14 of the Registrant's Transitional Report on Form 10-QSB for the
transition period January 1, 1998 to March 31, 1998 is incorporated herein by
reference.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
REGISTRANT:
SHARPS COMPLIANCE CORPORATION
Dated: September 28, 1998 By: /s/ Burton J. Kunik
------------------------------------
Dr. Burton J. Kunik, Chairman
of the Board, President and
Chief Executive Officer
By: /s/ Kent Manby
------------------------------------
Kent Manby, Vice President and
Chief Financial Officer
15
<PAGE> 18
SHARPS COMPLIANCE CORP. AND SUBSIDARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
<S> <C>
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Public Accountants............................... F-2
Consolidated Balance Sheets as of June 30, 1998
and December 31, 1997............................................... F-3
Consolidated Statements of Operations for the Six Months
Ended June 30, 1998 and 1997 (Unaudited) and the Years Ended
December 31, 1997 and 1996.......................................... F-4
Consolidated Statements of Stockholders' Equity (Deficit)
For the Year Ended December 31, 1997 and the
Six Months Ended June 30, 1998...................................... F-5
Consolidated Statements of Cash Flows for the Six Months Ended June 30,
1998 and 1997 (Unaudited) and the Years Ended December 31, 1997 and
1996................................................................ F-6
Notes to Consolidated Financial Statements............................. F-7
</TABLE>
F-1
<PAGE> 19
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Sharps Compliance Corp.:
We have audited the accompanying consolidated balance sheets of Sharps
Compliance Corp. (a Texas corporation) and subsidiaries as of June 30, 1998, and
December 31, 1997, and the related consolidated statements of operations,
stockholders' equity (deficit) and cash flows for the six months ended June 30,
1998, and the years ended December 31, 1997 and 1996. 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Sharps Compliance
Corp. and subsidiaries as of June 30, 1998, and December 31, 1997, and the
results of their operations and their cash flows for the six months ended June
30, 1998, and the years ended December 31, 1997 and 1996, in conformity with
generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
Houston, Texas
August 19, 1998
F-2
<PAGE> 20
SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
ASSETS 1998 1997
------ ------------ ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 444,498 $ 67,114
Short-term investments 2,600,000 --
Accounts receivable 203,608 111,682
Inventory 171,506 40,316
Prepaids and other 81,258 2,893
------------ ------------
Total current assets 3,500,870 222,005
PROPERTY AND EQUIPMENT, net of accumulated depreciation of
$123,476 and $10,519, respectively 122,351 38,790
INTANGIBLE ASSETS 101,225 --
NOTE RECEIVABLE FROM STOCKHOLDER 400,000 300,000
DEFERRED ISSUANCE COSTS -- 158,600
------------ ------------
Total assets $ 4,124,446 $ 719,395
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable and accrued liabilities $ 418,558 $ 69,116
Accrued disposal costs 646,482 441,728
Current maturities of long-term debt 40,707 4,997
Note payable to stockholder -- 400,000
------------ ------------
Total current liabilities 1,105,747 915,841
LONG-TERM DEBT, net of current maturities 39,980 23,047
------------ ------------
Total liabilities 1,145,727 938,888
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock, $.01 par value per share; 1,000,000 shares authorized,
issued and outstanding at June 30, 1998 10,000 --
Common stock, voting, $.01 par value per share; 20,000,000 shares authorized
at June 30, 1998; 583,940 and 5,000,000 shares issued and outstanding,
respectively 5,839 50,000
Additional paid-in capital 4,287,311 98,900
Accumulated deficit (1,324,431) (368,393)
------------ ------------
Total stockholders' equity (deficit) 2,978,719 (219,493)
------------ ------------
Total liabilities and stockholders' equity (deficit) $ 4,124,446 $ 719,395
============ ============
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
F-3
<PAGE> 21
SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Six Months For the Year Ended
Ended June 30 December 31
-------------------------- --------------------------
1998 1997 1997 1996
----------- ----------- ----------- -----------
(Unaudited)
REVENUES:
<S> <C> <C> <C> <C>
Sales, net $ 730,034 $ 318,154 $ 830,211 $ 591,353
Consulting services and other -- -- 4,225 59,093
----------- ----------- ----------- -----------
Total revenues 730,034 318,154 834,436 650,446
COSTS AND EXPENSES:
Cost of revenues 560,071 208,172 625,238 340,370
Selling, general and administrative expenses 1,192,853 200,599 492,126 340,692
Depreciation and amortization 11,701 9,619 7,751 8,515
----------- ----------- ----------- -----------
Operating loss (1,034,591) (100,236) (290,679) (39,131)
INTEREST EXPENSE (6,061) (6,798) (7,570) (2,516)
INTEREST INCOME 84,614 74 2,967 --
----------- ----------- ----------- -----------
Net loss $ (956,038) $ (106,960) $ (295,282) $ (41,647)
=========== =========== =========== ===========
BASIC AND DILUTED NET LOSS PER SHARE $ (.14) $ (.04) $ (.08) $ (.01)
=========== =========== =========== ===========
SHARES USED IN COMPUTING BASIC AND
DILUTED NET LOSS PER SHARE 6,770,216 3,000,000 3,494,520 3,000,000
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
F-4
<PAGE> 22
SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Sharps Compliance Corp.
-----------------------------------------------------
Preferred Stock Common Stock
------------------------ -------------------------
Shares Amount Shares Amount
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1996 -- $ -- -- $ --
Issuance of common stock for consulting services in
October 1997 -- -- -- --
Net loss -- -- -- --
----------- ----------- ----------- -----------
BALANCE, December 31, 1997 -- -- -- --
Private placement of common stock in February 1998 at
$2.00 per share, net of offering costs of $161,075 -- -- -- --
Issuance of common stock in February 1998, valued at
$2.00 per share, in satisfaction of note payable -- -- -- --
Reverse acquisition in February 1998 1,000,000 10,000 583,944 5,839
Net loss -- -- -- --
----------- ----------- ----------- -----------
BALANCE, June 30, 1998 1,000,000 $ 10,000 583,944 $ 5,839
=========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
Sharps Compliance Inc.
Common Stock Additional Total
------------------------- Paid-In Accumulated Stockholders'
Shares Amount Capital Deficit Equity (Deficit)
----------- ----------- ----------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1996 3,000,000 $ 30,000 $ (26,100) $ (73,111) $ (69,211)
Issuance of common stock for consulting services in
October 1997 2,000,000 20,000 125,000 -- 145,000
Net loss -- -- -- (295,282) (295,282)
----------- ----------- ----------- ----------- -----------
BALANCE, December 31, 1997 5,000,000 50,000 98,900 (368,393) (219,493)
Private placement of common stock in February 1998 at
$2.00 per share, net of offering costs of $161,075 1,915,000 19,150 3,649,775 -- 3,668,925
Issuance of common stock in February 1998, valued at
$2.00 per share, in satisfaction of note payable 85,000 850 169,150 -- 170,000
Reverse acquisition in February 1998 (7,000,000) (70,000) 369,486 -- 315,325
Net loss -- -- -- (956,038) (956,038)
----------- ----------- ----------- ----------- -----------
BALANCE, June 30, 1998 -- $ -- $ 4,287,311 $(1,324,431) $ 2,978,719
=========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
F-5
<PAGE> 23
SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Six Months For the Year Ended
Ended June 30 December 31
-------------------------- --------------------------
1998 1997 1997 1996
----------- ----------- ----------- -----------
(Unaudited)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (956,038) $ (106,960) $ (295,282) $ (41,647)
Adjustments to reconcile net loss to net cash provided
by (used in) operating activities-
Depreciation and amortization 11,701 9,619 7,751 8,515
Changes in operating assets and liabilities-
(Increase) decrease in accounts receivable 79,074 21,160 (13,310) (83,561)
Increase in inventory (108,190) -- (21,190) (11,425)
(Increase) decrease in other current assets (24,866) 4,363 1,471 --
Increase in accounts payable and accrued
liabilities 333,442 20,200 31,829 175
Increase in accrued disposal costs 204,754 54,757 252,726 151,679
----------- ----------- ----------- -----------
Net cash provided by (used in) operating
activities (460,123) 3,139 (36,005) 23,736
----------- ----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash acquired in acquisition of business 73,826 -- -- --
Note receivable from stockholder (100,000) -- (300,000) --
Purchases of property and equipment (30,262) -- (4,739) (9,496)
Purchases of patents and trademark (101,225) -- -- --
Purchases of short-term investments (2,600,000) -- -- --
----------- ----------- ----------- -----------
Net cash used in investing activities (2,757,661) -- (304,739) (9,496)
----------- ----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable to stockholders -- 430,000 --
Payments on notes payable (232,357) (2,701) (34,703) (5,056)
Net proceeds of private placement 3,827,525 -- -- --
----------- ----------- ----------- -----------
Net cash provided by (used in) financing
activities 3,595,168 (2,701) 395,297 (5,056)
----------- ----------- ----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 377,384 438 54,553 9,184
CASH AND CASH EQUIVALENTS,
beginning of period 67,114 12,561 12,561 3,377
----------- ----------- ----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 444,498 $ 12,999 $ 67,114 $ 12,561
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
F-6
<PAGE> 24
SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
1. ORGANIZATION AND BACKGROUND:
Organization
The accompanying consolidated financial statements include the accounts of
Sharps Compliance Corp. (SCC) (formerly U.S. Medical Systems, Inc.) and its
wholly owned subsidiaries, Sharps Compliance of Texas, Inc., d.b.a. Sharps
Compliance, Inc. (Sharps), and U.S. Medical Inc. (USM) (collectively, the
Company). All significant intercompany accounts and transactions have been
eliminated in consolidation.
On February 27, 1998, SCC and Sharps entered into an agreement and plan of
reorganization (the Agreement). SCC acquired all of the issued and outstanding
common stock, $.01 par value, of Sharps in consideration for the issuance of
1,000,000 shares of preferred stock, $.01 par value, such that each share of
Sharps' common stock outstanding on the closing date was exchanged for 0.142858
shares of preferred stock. Under the terms of the Agreement, in July 1998, SCC's
stockholders approved a 1-for-5.032715 reverse stock split of its common stock,
which has been given retroactive effect in the financial statements.
Simultaneously with the reverse stock split, each share of preferred stock was
converted into seven shares of common stock of SCC, resulting in the existing
stockholders of SCC holding 583,944 shares and the former stockholders of Sharps
holding 7,000,000 shares. Had the preferred stock conversion taken place as of
June 30, 1998, unaudited pro forma stockholders' equity at June 30, 1998, would
have been as follows:
Preferred stock $ --
Common stock 75,839
Additional paid-in-capital 4,227,311
Accumulated deficit (1,324,431)
------------
Total stockholders' equity $ 2,978,719
============
The Agreement is treated as a reverse acquisition for accounting and financial
reporting purposes. As such, Sharps is considered the accounting acquiror for
accounting and financial reporting purposes, and the net assets of SCC were
combined with those of Sharps at their historical basis, which approximated
their fair market value on the effective date of the Agreement. Sharps has
reflected the ongoing results of operations of SCC in its financial statements
from the effective date of the Agreement.
Set forth below are unaudited pro forma combined revenues and income data
reflecting the pro forma effect of the acquisition on the Company's results of
operations for the six months ended June 30, 1998 and 1997, and the year ended
December 31, 1997, as if the acquisition had occurred at the beginning of each
period presented. These pro forma results are not necessarily indicative of the
results which would have actually occurred, nor are they necessarily indicative
of future results.
<TABLE>
<CAPTION>
Six Months Ended Year Ended
June 30 December 31,
-------------------------
1998 1997 1997
----------- ----------- -----------
<S> <C> <C> <C>
Revenue $ 900,834 $ 557,154 $ 1,334,000
Net loss (945,713) (175,960) (367,000)
Basic and diluted earnings per share (.14) (.05) (.09)
</TABLE>
F-7
<PAGE> 25
Business
Sharps, which operates as a wholly owned subsidiary of SCC, provides mail
disposal services for certain medical sharps products (i.e., needles, razors and
syringes). Sharps' products are primarily designed to facilitate small waste
generators' compliance with state and federal regulations for the disposal of
medical waste. During the years ended December 31, 1997 and 1996, Sharps also
provided consulting services related to medical sharps products to other
entities.
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 which are primarily
distributors. During the six months ended June 30, 1998, four distributors
represented approximately 62 percent of sales; during the year ended December
31, 1997, three distributors represented approximately 74 percent of sales; and,
during the year ended December 31, 1996, one distributor represented
approximately 50 percent of sales. At June 30, 1998, four distributors comprised
approximately 72 percent (or $146,700) of the total accounts receivable balance,
and at December 31, 1997, three distributors comprised approximately 80 percent
(or $89,741) of the total accounts receivable balance. Sharps may be affected by
its dependence on a limited number of distributors. Management believes the risk
is mitigated by the long-standing business relationships with and reputation of
Sharps' major customers. Further, management believes the loss of any
distributor does not necessarily mean the loss of the underlying customer base
of that distributor for the Mail Disposal System.
Sharps has sole-sourced each of its manufacturing, assembly, transportation and
disposal functions. Sharps may be affected 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 and terms.
USM previously developed, produced and marketed products directed at the
over-the-counter consumer market and products related to infection prevention
for the professional dental care industry. Effective July 23, 1998, USM ceased
operating as a subsidiary of SCC (see Note 10).
The Company has received limited revenues to date and has incurred cumulative
losses since its inception. The future success of the Company is dependent upon
many factors, including environmental regulation, continuity of its license
agreements, successful completion of its product development activities, the
identification of and penetration of markets for its products and services, and
obtaining funds necessary to complete these activities (see Note 9).
2. SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES:
Interim Financial Information
The interim statement of operations for the six months ended June 30, 1997, is
unaudited, and certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been omitted. In the opinion of management, all adjustments,
consisting only of normal recurring adjustments, necessary to fairly present the
results of operations and cash flows with respect to the interim financial
statements have been included. The results of operations for the interim period
are not necessarily indicative of the results for the entire fiscal year.
F-8
<PAGE> 26
Cash Equivalents and Short-Term Investments
The Company considers all highly liquid investments with a maturity of three
months or less at the time of purchase to be cash equivalents. As of June 30,
1998, cash equivalents consist of certificates of deposit totaling $250,000.
Short-term investments consist of certificates of deposit with original
maturities greater than three months but less than one year. Short-term
investments are classified as held-to-maturity and are classified at amortized
cost, which approximates fair value.
Inventory
Inventory primarily represents finished goods and supplies and is stated at cost
using the first-in, first-out method. Cost is not in excess of market.
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.
Intangible Assets
Intangible assets consist of costs related to two patents acquired in June 1998.
No amortization expense was recorded through June 30, 1998, as the amount was
not significant. The patents will be amortized over their estimated useful lives
of five years.
Realization of Long-Lived Assets
In accordance with Statement of Financial Accounting Standards (SFAS) No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long Lived Assets to
Be Disposed Of," the Company evaluates the recoverability of property and
equipment and intangible or other assets, if facts and circumstances indicate
that any of those assets might be impaired. If an evaluation is required, the
estimated future undiscounted cash flows associated with the asset are compared
to the asset's carrying amount to determine if a write-down to market value or
discounted cash flow value is necessary.
Revenue Recognition
Product sales are recognized as revenue when the finished product is shipped to
customers. Sales are presented net of estimated refunds to customers for
returned merchandise. The Company 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
were liable for the entity's taxable income on their individual federal and
state income tax returns. Accordingly, the financial statements through December
31, 1997, do not include provisions for income taxes.
Effective January 1, 1998, Sharps changed its federal tax status from an S
Corporation to a C Corporation and, accordingly, is now subject to federal and
certain state income taxes (see Note 7). No pro forma disclosure
F-9
<PAGE> 27
reflecting income tax expense for periods prior to Sharps' changing its tax
status to a C corporation has been presented as the pro forma tax expense for
each period is not significant.
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.
Options outstanding as of June 30, 1998 (see Note 9), have not been included in
the calculation of diluted EPS as they would have an anti-dilutive effect on
EPS. For the six months ended June 30, 1998, preferred shares have been included
in the calculation of basic and diluted EPS on an as-converted basis (see Note
1). There are no differences in basic EPS and diluted EPS for all periods
presented.
Fair Value of Financial Instruments
The Company 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 the Company's ability to borrow funds under terms and
conditions similar to those of the Company's existing debt.
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.
Specifically, Sharps has estimated the cost and related liability for postage
and incineration costs 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 consolidated balance
sheets. Future results may differ from these estimates.
3. NOTE RECEIVABLE FROM STOCKHOLDER:
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 percent per annum, and
payments are due over five annual installments equal to one-fifth of the
outstanding balance of principal and accrued interest. All unpaid principal and
accrued interest are due in November 2002. In November 1997 and February 1998,
the stockholder borrowed $300,000 and $100,000, respectively, from Sharps.
Pursuant to the officer's employment agreement entered into in January 1998, an
annual cash bonus will be paid to the 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. At June 30, 1998,
approximately $42,000 has been accrued for the portion of the annual bonus
earned during the six months ended June 30, 1998. In the event the officer
withdraws from the Company or is terminated, with or without cause, any
remaining principal and interest will remain the obligation of the officer and
continue to be due in accordance with the terms of the note agreement.
F-10
<PAGE> 28
4. PROPERTY AND EQUIPMENT:
At June 30, 1998, and December 31, 1997, property and equipment consisted of the
following:
<TABLE>
<CAPTION>
June 30, December 31,
Useful Life 1998 1997
------------ ----------- -----------
<S> <C> <C> <C>
Furniture and fixtures 3 to 5 years $ 42,767 $ 13,767
Equipment 5 years 81,000 --
Computers and software 3 to 5 years 91,302 4,784
Automobiles 5 years 30,758 30,758
----------- -----------
245,827 49,309
Less - Accumulated depreciation (123,476) (10,519)
----------- -----------
Net property and equipment $ 122,351 $ 38,790
=========== ===========
</TABLE>
5. DEBT:
In July 1995, Sharps entered into a promissory note agreement 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, 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 June 30, 1998, was $25,187 and is due as follows:
<TABLE>
<CAPTION>
Year ending June 30-
<S> <C>
1999 $ 5,207
2000 5,625
2001 6,077
2002 6,565
2003 1,713
--------
$ 25,187
========
</TABLE>
In April 1998, the Company entered into a note agreement with a vendor to
purchase equipment. The note bears no interest and is due in monthly
installments of $2,500 through February 2000. The note was not discounted as the
discount was not significant. The balance outstanding on the note at June 30,
1998, was $55,500 and is due as follows:
<TABLE>
<CAPTION>
Year ending June 30-
<S> <C>
1999 $ 35,500
2000 20,000
---------
$ 55,500
=========
</TABLE>
6. PROMISSORY NOTES WITH STOCKHOLDERS:
In September 1997, Sharps entered into a $30,000 unsecured promissory note
agreement with a stockholder. The principal and related accrued interest were
paid in December 1997.
F-11
<PAGE> 29
In November 1997, Sharps issued an unsecured promissory note to a stockholder in
the amount of $400,000. The note accrues interest at 8 percent annually with
principal and interest due monthly beginning April 15, 1998. In connection with
a stock offering in February 1998, Sharps retired the note by paying the
stockholder $230,000 in cash and issuing the stockholder 85,000 shares of common
stock valued at $2.00 per share, which was management's estimate of fair value
at the date of issuance (see Note 9).
7. INCOME TAXES:
Prior to January 1, 1998, Sharps maintained the status of S Corporation for
federal and certain state income tax purposes. As an S Corporation, Sharps was
generally not responsible for income taxes. Effective January 1, 1998, Sharps
terminated its S Corporation election. Accordingly, the Company is subject to
federal and state income taxes from that date forward. Effective with the
termination of Sharps' S Corporation status, the Company adopted the provisions
of Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for
Income Taxes." SFAS No. 109 requires recognition of deferred tax liabilities and
assets for the expected future tax consequences of events that have been
included in a company's financial statements or tax returns. Under this method,
deferred tax liabilities and assets are determined based on the differences
between the financial statement carrying amounts and tax bases of assets and
liabilities using currently enacted tax rates in effect for the years in which
the differences are expected to reverse. Deferred tax assets are evaluated for
realization based on a more-likely-than-not criteria in determining whether a
valuation allowance should be provided.
The reconciliation of the statutory federal income tax rate to the Company's
effective income tax rate for the six months ended June 30, 1998, is as follows:
<TABLE>
<CAPTION>
<S> <C>
Statutory rate (34.0)%
Increase in valuation allowance 36.2
Meals and entertainment 0.7
Other (2.9)
----------
-- %
==========
</TABLE>
Significant components of the Company's net deferred tax asset at June 30, 1998,
are as follows:
<TABLE>
<CAPTION>
<S> <C>
Deferred tax assets relating to-
Net operating loss carryforwards $2,283,538
Accrued disposal costs 239,004
----------
Total deferred tax assets 2,522,542
Deferred tax liability relating to-
Cash to accrual adjustment
(53,147)
Deferred tax valuation reserve
(2,469,395)
----------
Net deferred tax asset $ --
==========
</TABLE>
At June 30, 1998, the Company had net operating loss carryforwards for federal
income tax purposes of approximately $6.2 million, of which approximately $5.6
million was acquired in the acquisition in February 1998. The Company's ability
to utilize these net operating losses to reduce future taxable income may be
limited upon a change of ownership and amounts of separate Company taxable
income, as defined by the Internal Revenue Code. The carryforwards will begin to
expire in 2008 if not otherwise used. A valuation allowance has been established
to fully offset the Company's deferred tax assets due to the Company's history
of losses since inception. The valuation reserve relates primarily to the
Company's net losses. The Company has not made any income tax payments since
inception.
F-12
<PAGE> 30
8. SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest during the six months ended June 30, 1998 and 1997, and
the years ended December 31, 1997 and 1996, was $6,062, $6,798, $3,706 and
$2,499, respectively.
The following noncash financing and investing transactions have been excluded
from the consolidated statements of cash flows for the six months ended June 30,
1998 and 1997, and the years ended December 31, 1997 an 1996:
<TABLE>
<CAPTION>
Six Months Year Ended
Ended June 30 December 31
------------------------ -----------------------
1998 1997 1997 1996
---------- ---------- ---------- ----------
(unaudited)
<S> <C> <C> <C> <C>
Deferred issuance costs $ (158,600) $ -- $ 158,600 $ --
Trade-in of automobile and
reduction of note payable -- -- 17,409 --
Purchase of equipment through
issuance of note payable 66,000 -- -- --
Satisfaction of note payable
through issuance of
common stock 170,000 -- -- --
</TABLE>
9. STOCKHOLDERS' EQUITY:
Common Stock
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 $145,000,
which was 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.
In February 1998, Sharps completed a private placement (the Offering) of
1,915,000 shares of common stock for net proceeds of approximately $3,828,000.
The proceeds from the Offering were used to support Sharps' sales and marketing
program and for other working capital needs. Additionally, Sharps issued 85,000
shares of common stock in partial satisfaction of its $400,000 note payable to a
stockholder (see Note 6).
In February 1998, SCC acquired Sharps through the issuance of preferred stock in
exchange for all of Sharps' outstanding common stock. In July 1998, the
preferred stock of SCC was converted to 7,000,000 shares of common stock (see
Note 1).
Warrants
At June 30, 1998, 40,904 warrants to purchase one-half share of common stock at
$5.03 per share were outstanding. These warrants expire in January 1999 and
have not been assigned a dollar value as management believes the value of the
warrants was not significant at the date of issuance.
F-13
<PAGE> 31
1993 Stock Plan
During 1993, SCC established the 1993 Stock Plan (the Plan) covering employees
of and consultants to the Company. The Plan, as amended, provides for the
granting of options, either incentive or nonstatutory, to purchase up to
1,000,000 shares of the Company's common stock. Options granted vest over a
period of up to four years. Options expire five years after the date of grant.
At June 30, 1998, 75,140 options with an exercise price of $3.02 per share had
been granted and were exercisable. These options expire in January 2002. As of
June 30, 1998, no options had been exercised or canceled, no additional grants
had been made, and 924,860 shares remained available for grant under the Plan.
Pursuant to the Plan, in July 1998, certain employees and consultants were
granted 232,500 options with an exercise price of $2.00 per share.
10. 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 believes that uninsured losses, if
any, will not be materially adverse to Sharps' financial position or results of
operations.
Sales and Distribution Agreement
On June 1, 1995, Sharps entered into a six-year exclusive agreement with
American 3CI Complete Compliance Corporation (American 3CI). Among other things,
Sharps has agreed to pay a per pound fee up to a maximum of $6.00 for every
Sharps by Mail Disposal System (the "Mail Disposal System") that is destroyed at
an American 3CI incinerator. Obligations related to Mail Disposal System units
sold but not yet incinerated are estimated and included in accrued disposal
costs in the accompanying balance sheets, although amounts in excess of minimum
payments are not due until incineration has occurred. Payments related to this
agreement during the six months ended June 30, 1998, and the years ended
December 31, 1997 and 1996, were $32,641, $41,018 and $11,797, respectively.
Sharps has guaranteed annual minimum payments to American 3CI of $25,000 through
June 30, 2001. 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 Agreements
On August 1, 1996, Sharps entered into an agreement with Ecolab, Inc., for it to
be Sharps' exclusive U.S. distributor of the Mail Disposal System 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.
On April 1, 1998, the Company entered into an agreement with Lukens Medical
Corporation (Lukens), for the Company to be the exclusive domestic distributor
of certain of Lukens' medical waste containers. The term of the agreement is
for five years, with automatic renewals for two-year periods unless either
party provides notice of termination to the other within 90 days prior to the
expiration of the then current term. Purchases related to this agreement during
the six months ended June 30, 1998 were $60,479. The Company has guaranteed
annual purchase commitments under this agreement as follows:
Year ending June 30-
1999 $ 157,500
2000 189,000
2001 227,000
2002 277,750
2003 233,250
----------
Total purchase commitments $1,079,500
==========
Manufacturing Agreement
On May 12, 1997, Sharps entered into an agreement with Winfield Medical
(Winfield) for it 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. Effective March 16, 1998, the
agreement was amended to extend its term
F-14
<PAGE> 32
through January 15, 1999, with an option to further extend the term to December
31, 1999, if certain minimum purchase requirements are established. As of June
30, 1998, these requirements had not been determined and minimal purchases under
this agreement had occurred.
Licensing and Purchase Agreement
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 June 30, 1998, 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 Mail Disposal System 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 $1,150,
$3,679 and $2,589 for the six months ended June 30, 1998, and the years ended
December 31, 1997 and 1996, respectively.
On April 1, 1995, Sharps entered into a sales representation agreement with an
independent sales agent for promotion of the Mail Disposal System. 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 was to be paid to the sales
representative based on net sales. This agreement was terminated effective
December 31, 1997. Commission expense related to this agreement was $12,714 and
$4,286 for the years ended December 31, 1997 and 1996, respectively.
Operating Leases
Sharps leases office space and equipment under operating lease agreements, which
expire at various dates through July 2002. Rent expense for the six months ended
June 30, 1998, and the years ended December 31, 1997 and 1996, was approximately
$8,300, $18,100 and $11,700, respectively. Future minimum lease payments under
noncancelable operating leases are as follows:
<TABLE>
<CAPTION>
Year ending June 30-
<S> <C>
1999 $ 50,284
2000 51,518
2001 50,060
2002 47,136
2003 3,928
---------
Total minimum lease payments $ 202,926
=========
</TABLE>
F-15
<PAGE> 33
Severance Agreement
Effective July 22, 1998, an employment agreement with the former chief executive
officer and president (former officer) of SCC was terminated. Subsequently
thereafter and in connection therewith, the former officer received certain
assets and assumed certain liabilities of SCC. Additionally, the former officer
obtained the rights to all patents and trademarks, products, customer lists and
the former corporate name of SCC and received all of the capital stock of USM, a
wholly owned subsidiary of SCC (see Note 1).
F-16
<PAGE> 34
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT
-------------- ----------------------
<S> <C>
2.1 Plan of Reorganization pursuant to Board of Directors
Resolutions dated August 13, 1996.
2.2 Agreement and Plan of Reorganization dated as of
February 27, 1998, between and among U.S. Medical
Systems, Inc., Sharps Compliance, Inc. and its
Stockholders
3.1 Certificate of Domestication of the Company
3.2 Certificate of Incorporation of Company
3.3 Certificate of Amendment
3.4 Bylaws of Company
*3.5 Amended and Restated Certificate of Incorporation of
U.S. Medical Systems, Inc.
*3.6 Certificate of Elimination of the Series "A" Voting
Convertible Preferred Stock
4.1 Escrow Agreement, dated February 7, 1992, between the
Company and Pacific Corporate Trust Company
("Pacific Trust")
4.2 Form of 1992 Stock Purchase Warrant
4.3 Warrant Agreement, dated September 10, 1993
Form of Note and Waiver
*4.4 Specimen Stock Certificate
10.1 Letter Agreement, dated December 15, 1991, between the
Company and 406586 B. C. Ltd., Medical Polymers, a
California corporation ("MP") and certain stockholder
of MP
10.2 Letter Agreement, dated as of February 7, 1992, between
the Company and 405586 B. C. Ltd.
10.3 Amendment to Exhibit 10.2, dated March 20, 1992
10.4 Share Purchase Agreement, dated as of February 7, 1992,
between the Company, MP, and the stockholders of MP
10.5 Exclusive Technology License Agreement, dated
December 14, 1990, between Dr. Marvin H. Gold and MP
10.6 Assignment, dated March 30, 1992, by Marvin H. Gold
10.7 Letter Agreement, dated March 30, 1992, between
Marvin H. Gold and MP
10.8 Assignment, dated March 30, 1992, by Marvin H. Gold and
Robert H. Hodam, Jr.
10.9 Letter Agreement, dated March 30, 1992, between
Marvin H. Gold and MP
10.10 Letter Agreement, dated March 30, 1992, between
Robert H. Hodam, Jr. and MP
10.11 Supply and Distribution Agreement, dated
December 18, 1992, between Midwest Dental Products
Corporation and MP
10.12 Amendment to 10.11, dated June 9, 1993
10.13 Manufacturing Agreement, dated September 10, 1992,
between DPT Laboratories, Inc. and MP
10.14 Research/Development and Laboratory Services Contract,
dated March 13, 1993, between NewForm Development
Laboratories, Inc. and MP
10.15 Product Formulation Consulting Agreement, dated
January 18, 1993, between EcoTech and MP
</TABLE>
<PAGE> 35
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT
-------------- ----------------------
<S> <C>
10.16 Letter Agreement, dated September 4, 1992, between
Gibraltar Biological Laboratories and MP
10.17 Amendment to Exhibit 10.16, dated October 20, 1992
10.18 Employment Agreement, dated May 22, 1994, between Lee
Cooke and the Company
10.19 Consulting Agreement, dated July 1, 1993, between
Parris H. Holmes, Jr. and the Company
10.20 Amendments to Exhibit 10.14, dated April 26, 1995 and
August 1, 1994
10.21 Research and Development Contract dated
December 22, 1993 between MGB and MP
10.22 Letter of Agreement on consulting services for stock
options, dated July 1, 1994, between Wolf Group and
MPTI
10.23 Amendment to Exhibit 10.22, dated March 16, 1995
10.24 Consulting Agreement, dated February 1, 1995, between
Parris H. Homes, Jr. and the Company
10.25(a) Amendment to Exhibit 10.22, dated March 16, 1995
10.25(b) Amendment pursuant to Board of Directors Resolution,
dated August 17, 1995
10.26(a) Form of Warrant, dated March 1, 1995
10.26(b) Form of Note, dated March 1, 1995
10.27 Employment Agreement, dated May 22, 1996, between
Lee Cooke and the Company
10.28 Assignment, dated October 26, 1995, by James W.
McGinity, Thomas G. Gerding and Roland Bodmeier
10.29 Employment Agreement effective January 1, 1998 by and
between Sharps Compliance, Inc. and Dr. Burt Kunik,
and First Amendment to Employment Agreement
*10.30 Second Amendment to Employment Agreement dated
May __, 1998
*10.31 Exclusive Distributorship Agreement, dated
April 1, 1998 between Pro-Tec Containers, Inc. and
Sharps Compliance, Inc.
*10.32 Purchase Agreement between IVY Green Corporation and
Sharps Compliance, Inc., dated June 19, 1998
*10.33 Lease Agreement between Lakes Technology Center, Ltd.
and Sharps Compliance, Inc. dated August 1, 1998
*10.34 Severance Agreement, dated
September 2, 1998, between C. Lee Cooke, Jr. and
Sharps Compliance, Inc. (formerly known as - U.S.
Medical Systems, Inc.)
16.1 Letter regarding Change in Certifying Accountant
16.2 Letter regarding Change in Certifying Accountant
16.3 Letter regarding Change in Certifying Accountant to
Faske Lay & Co., L.L.P.
16.4 Letter regarding changes in Certifying Accountant to
Arthur Andersen LLP
*27.1 Financial Data Schedule
</TABLE>
Notes:
* Filed herewith.
<PAGE> 1
EXHIBIT 3.5
STATE OF DELAWARE
SECRETARY OF STATE
DIVISION OF CORPORATIONS
FILED 03:45 PM 07/23/1998
981287629 - 2316242
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
U.S. MEDICAL SYSTEMS, INC.
This document constitutes an amendment and restatement of the original
Certificate of Incorporation of U.S. MEDICAL SYSTEMS, INC. which was filed with
the Secretary of State of Delaware on November 17, 1992 under the name Medical
Polymers Technologies, Inc. and amended by (i) Certificate of Amendment to the
Certificate of Incorporation filed with the Secretary of State of Delaware on
August 24, 1993, (ii) Certificate of Amendment of Certificate of Incorporation
filed with the Secretary of State of Delaware on December 19, 1996 and (iii)
Certificate of Designation, Powers, Preferences and Rights of the Series of the
Preferred Stock filed with the Secretary of State of Delaware on February 23,
1998, as corrected by Corrected Certificate of Designation, Powers, Preferences
and Rights of the Series of the Preferred Stock filed with the Secretary of
State of Delaware on March 5, 1998. This Amended and Restated Certificate of
Incorporation was duly adopted in accordance with the provisions of Sections
242 and 245(c) of the Delaware General Corporation Law and shall become
effective upon filing with the Secretary of State of Delaware.
1. The name of the corporation is SHARPS COMPLIANCE CORP.
2. The address of its registered office in the State of Delaware is 10th
Floor, One Rodney Square, 10th and King Streets, in the City of Wilmington,
County of New Castle. The name of its registered agent at such address is RL&F
Service Corp.
3. The nature of the business or purposes to be conducted or promoted
is:
To manufacture, purchase or otherwise acquire, invest in, own,
mortgage, pledge, sell, assign and transfer or otherwise dispose of, trade,
deal in and deal with goods, wares and merchandise and personal property of
every class and description.
To acquire, and pay for in cash, stock or bonds of this corporation
or otherwise, the good will, rights, assets and property, and to undertake or
assume the whole or any part of the obligations or liabilities of any person,
firm association or corporation.
To acquire, hold, use, sell, assign, lease, grant licenses in respect
of, mortgage or otherwise dispose of letters patent of the United States or any
foreign country, patent rights, licenses and privileges, inventions,
improvements and processes, copyrights, trademarks and trade names, relating to
or useful in connection with any business of this corporation.
To acquire by purchase, subscription or otherwise, and to receive,
hold, own, guarantee, sell, assign, exchange, transfer, mortgage, pledge or
otherwise dispose of or deal in and with any of the shares of the capital
stock, or any voting trust certificates in respect of the shares of capital
stock, scrip, warrants, rights, bonds, debentures, notes, trust receipts, and
other securities, obligations, choses in action and evidences of indebtedness
or interest issued or
<PAGE> 2
created by any corporations, joint stock companies, syndicates, associations,
firms, trusts or persons, public or private, or by the government of the United
States of America, or by any foreign government, or by any state, territory,
province, municipality or other political subdivision or by any governmental
agency, and as owner thereof to possess and exercise all the rights, powers and
privileges of ownership, including the right to execute consents and vote
thereon, and to do any and all acts and things necessary or advisable for the
preservation, protection, improvement and enhancement in value thereof.
To borrow or raise money for any of the purposes of the corporation
and, from time to time without limit as to amount, to draw, make, accept,
endorse, execute and issue promissory notes, drafts, bills of exchange,
warrants, bonds, debentures and other negotiable or non-negotiable instruments
and evidences of indebtedness, or to secure the payment of any thereof and of
the interest thereon by mortgage upon or pledge, conveyance or assignment in
trust of the whole or any part of the property of the corporation, whether at
the time owned or thereafter acquired, and to sell, pledge or otherwise dispose
of such bonds or other obligations of the corporation for its corporate
purposes.
To purchase, receive, take by grant, gift, devise, bequest or
otherwise, lease, or otherwise acquire, own, hold, improve, employ, use and
otherwise deal in and with real or personal property, or any interest therein,
wherever situated and to sell, convey, lease, exchange, transfer or otherwise
dispose of, or mortgage or pledge, all or any of the corporation's property and
assets, or any interest therein, wherever situated.
In general, to possess and exercise all the powers and privileges
granted by the General Corporation Law of Delaware or by any other law of
Delaware or by this certificate of incorporation together with any powers
incidental thereto, so far as such powers and privileges are necessary or
convenient to the conduct, promotion or attainment of the business or purposes
of the corporation.
The business and purposes specified in the foregoing clauses shall,
except where otherwise expressed, be in no way limited or restricted by
reference to, or inference from, the terms of any other clause in this
certificate of incorporation, but the business and purposes specified in each
of the foregoing clauses of this article shall be regarded as independent
business and purposes.
4A. GENERAL. The corporation shall have authority to issue two classes
of stock, and the total number authorized shall be Twenty Million (20,000,000)
shares of Common Stock of the par value of One Cent ($0.01) each, and one
million (1,000,000) shares of Preferred Stock of the par value of One Cent
($0.01) each. All shares of the Common Stock shall rank equally and all shares
of the Preferred Stock shall rank equally, and be identical in all respects
regardless of series, except with respect to the Preferred Stock (i) as to
terms which may be specified by the board of directors pursuant to the
provisions of Section B of this Article 4, and (ii) that shares of any one
series issued at different times may differ as to the dates from which
dividends thereon shall accrue and be cumulative. A description of the
different classes of stock of the corporation and a statement of the
designations and the powers, preferences and rights, and the qualifications,
limitations or restrictions thereof, in respect of each class of such stock are
as follows:
<PAGE> 3
4B. ISSUANCE IN SERIES. The Preferred Stock may be issued from time to
time in one or more series. The terms of a series shall be as specified in the
resolution or resolutions adopted by the board of directors providing for the
issue of such series, which resolution or resolutions the board of directors is
hereby expressly authorized to adopt. Such resolution or resolutions with
respect to a series shall specify, if applicable: (a) the number of shares to
constitute such series and the distinctive designation thereof; (b) the annual
dividend rate on the shares of such series and the date or dates from which
dividends shall accrue, whether such dividends shall be cumulative, and, if
cumulative, the date or dates from which dividends shall accumulate; (c) the
time or times and price or prices of redemption, if any, of the shares; (d) the
terms and conditions of a retirement or sinking fund, if any, for the purchase
or redemption of the shares; (e) the amount which the shares shall be entitled
to receive in the event of any liquidation, dissolution or winding up of the
corporation; (f) the terms and conditions, if any, on which the shares shall be
convertible into, or exchangeable for, shares of stock of any other class or
classes, or other series of the same class, of the corporation; (g) the voting
rights, if any, of shares of stock in addition to those granted herein; (h) the
status as to reissuance or sale of such shares redeemed, purchased or otherwise
reacquired, or surrendered to the corporation on conversion; (i) the seniority
of such series in relation to the Common Stock or to any other series of
Preferred Stock in respect of the payment or declaration of dividends,
redemptions and payments upon liquidation; (j) the conditions and restrictions,
if any, on the payment of dividends or on the making of other distributions on,
or the purchase, redemption or other acquisition by the corporation or any
subsidiary, of Common Stock or of any other class of stock of the corporation
ranking junior to such shares as to dividends or upon liquidation; and (k) such
other preferences, rights, restrictions and qualifications as shall not be
inconsistent herewith.
4C. DIVIDENDS. Subject to the provisions and on the conditions set forth
herein, or in any resolution or resolutions providing for the issue of a series
of Preferred Stock, such dividends (payable in cash, stock or otherwise) as may
be determined by the board of directors may be declared and paid on the Common
Stock from time to time out of any funds legally available therefor.
4D. LIQUIDATION, DISSOLUTION OR WINDING UP. In the event of any
liquidation, dissolution or winding up of the affairs of the corporation, after
payment to the holders of Preferred Stock of the amount to which they are
entitled pursuant to any resolution or resolutions of the board of directors
providing for t he issue of a series of Preferred Stock, the holders of Common
Stock shall be entitled to share ratably in all assets then remaining and
subject to distribution to the stockholders.
4E. GENERAL VOTING RIGHTS. Except when otherwise required by law or as
otherwise specifically provided herein or in any resolution of the board of
directors providing for the issuance of any particular series of Preferred
Stock the exclusive voting power of the corporation shall be vested in the
Common Stock of the corporation. Each share of Common Stock shall entitle the
holder thereof to one vote at all meetings of the stockholders of the
corporation.
4F. SERIES A 10% VOTING CONVERTIBLE PREFERRED STOCK. The corporation is
authorized to issue up to 1,000,000 shares Series A 10% Voting Convertible
Preferred Stock (such Preferred
3
<PAGE> 4
Stock hereinafter being referred to as the "Series A Preferred Stock"). The
designations, powers, preferences and relative, participating, optional and
other special rights, and qualifications, limitations and restrictions
thereof, with respect to the Series A Preferred Stock are as set forth in
EXHIBIT "A" attached hereto and incorporated herein for all purposes.
4G. REVERSE STOCK SPLIT. On July 24, 1998, each 5.032715 issued and
outstanding shares of previously authorized Common Stock, par value one cent
($.01) per share, of the corporation ("Pre-split Common Stock"), shall thereby
and thereupon be combined into one (1) validly issued, fully paid and
nonassessable share of Common Stock, par value one cent ($.01) per share, of
the corporation ("Post-split Common Stock"). Each certificate that theretofore
represented shares of Pre-split Common Stock shall thereafter represent that
number of shares of Post-split Common Stock into which the shares of Pre-split
Common Stock represented by such certificate shall be combined; provided,
however, that each person holding of record a stock certificate or certificates
that represented shares of Pre-split Common Stock shall receive, upon surrender
of such certificate or certificates, a new certificate or certificates
evidencing and representing the number of shares of Post-split Common Stock to
which such person is entitled, and provided further that the corporation shall
not issue fractional shares with respect to the combination. Each stockholder
will receive cash for each fractional interest resulting from such division.
5. The corporation is to have perpetual existence.
6. In furtherance and not in limitation of the powers conferred by the
General Corporation Law of Delaware, the board of directors is expressly
authorized:
To make, alter or repeal the by-laws of the corporation;
To authorize and cause to be executed mortgages and liens upon the
real and personal property of the corporation;
To set apart out of any of the funds of the corporation available for
dividends a reserve or reserves for any proper purpose and to abolish any such
reserve in the manner in which it was created;
By a majority of the whole board, to designate one or more
committees, each committee to consist of one or more of the directors of the
corporation. The board may designate one or more directors as alternate
members of any committee, who may replace any absent or disqualified member at
any meeting of the committee. The by-laws may provide that in the absence of
disqualification of a member of a committee, the member or members thereof
present at any meeting and not disqualified from voting, whether or not he or
they constitute a quorum, may unanimously appoint another member of the board
of directors to act at the meeting in the place of any such absent or
disqualified member. Any such committee, to the extent provided in the
resolution of the board of directors, or in the by-laws of the corporation,
shall have and may exercise all the powers and authority of the board of
directors in the management of the business and affairs of the corporation, and
may authorize the seal of the corporation to be affixed to all papers which may
require it; but no such committee shall have the power of authority in
4
<PAGE> 5
reference to amending the certificate of incorporation, adopting an agreement
of merger or consolidation, recommending to the stockholders the sale, lease or
change of all or substantially all of the corporation's property and assets,
recommending to the stockholders a dissolution of the corporation or a
revocation of a dissolution, or amending the by-laws of the corporation; and
unless the resolution or by-laws expressly so provide, no such committee shall
have the power or authority to declare a dividend or to authorize the issuance
of stock.
When and as authorized by the stockholders in accordance with
statute, to sell, lease or exchange all or substantially all of the property
and assets of the corporation, including its good will and its corporate
franchises, upon such terms and conditions and for such consideration, which
may consist in whole or in part of money or property including shares of stock
in, and/or other securities of any other corporation or corporations, as its
board of directors shall deem expedient and for the best interests of the
corporation.
7. Elections of directors need not be by written ballot unless the by-
laws of the corporation shall so provide.
8. Meetings of the stockholders may be held within or without the State
of Delaware, as the by-laws may provide. The books of the corporation may be
kept (subject to any provisions contained in the General Corporation Law of
Delaware) outside the State of Delaware at such place or places as may be
designated from time to time by the board of directors or in the by-laws of the
corporation.
9. The corporation reserves the right to amend, alter, change or repeal
any provision contained in this certificate of incorporation, in the manner now
or hereafter prescribed by statute, and all rights conferred upon stockholders
herein are granted subject to this reservation.
10. A director of this corporation shall not be personally liable to the
corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except for liability (i) for any breach of the director's
duty of loyalty to the corporation or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) under Section 174 of the Delaware General
Corporation Law, or (iv) for any transaction from which the director derived in
improper benefit.
IN WITNESS WHEREOF, U.S. MEDICAL SYSTEMS, INC. has caused its corporate
seal to be hereunto fixed and this Certificate to be signed by Burt Kunik, its
Chief Executive Officer and President, this 23rd day of July, 1998.
U.S. MEDICAL SYSTEMS, INC.
By: /s/ Burt Kunik
-----------------------------------------
Name: Burt Kunik
Title: Chief Executive Officer and President
5
<PAGE> 6
EXHIBIT "A"
TERMS OF SERIES A 10% VOTING CONVERTIBLE PREFERRED STOCK
A. DESIGNATION OF THE SERIES. There shall be a series of Preferred
Stock to be known as "Series A 10% Voting Convertible Preferred Stock"
consisting of 1,000,000 shares of Preferred Stock having a par value of $0.01
per share (the "Shares"). Such shares shall constitute the entire Series A
Preferred Stock, and no other shares of such Series shall be issued.
B. DIVIDENDS. The holders of shares of Series A Preferred Stock shall
be entitled to receive, if and when declared by the Board of Directors from
funds legally available therefor, cash dividends at the rate of $0.05 per share
per annum, payable quarterly on the last day of the months April, July, October
and January in each year. In the event a dividend is declared, but unpaid,
such dividend shall accrue and be cumulative (whether or not in any quarterly
dividends period there shall be funds of the Company legally available for the
payment of such dividend) from the first day of July 1998 (unless such day is
not a business day, in which event on the next business day), and thereafter
from the date of the last quarterly dividend date to which dividends were
declared and paid on the Preferred Stock of the Company. Each such dividend
shall be paid to the holders of record of the shares of Preferred Stock as they
appear on the stock register of the Company on the last day of the month next
preceding the payment date thereof. Dividend on account of arrears for any
past dividend periods may be declared and paid at any time, without reference
to any regular dividend payment date, to holders of record on such date, not
exceeding forty-five (45) days preceding the payment date hereof, as may be
fixed by the Board of Directors, of the Company or by a committee of said Board
of Directors duly authorized to fix such date.
Dividends payable on the Preferred Stock for each full quarterly
dividends period shall be computed by dividing the annual rate by four (4).
Dividends payable on the Preferred Stock for any period less than a full
quarterly dividend period and, for the initial dividend period, shall be
computed on the basis of a 360-day year of four (4) 90-day quarters, and the
actual number of days elapsed on the period for which payable, including the
date of the payment.
C. CONVERSION. The Series A Preferred Stock shall automatically and
immediately be converted into fully paid and nonassessable shares of Common
Stock of the Company, without any action or election on the part of the holder
thereof, immediately after the Company has effected a one-for-five or greater
reverse stock split of its Common Stock ("Automatic Conversion Date"). In
addition, so long as the Company has sufficient authorized and unissued shares
of Common Stock, each share of Series A Preferred Stock shall be convertible at
the option of the holder thereof into the number of fully paid and
nonassessable shares of Common Stock provided below. The holders of Series A
Preferred Stock hereby acknowledge that as of the date hereof, the Company does
not have sufficient authorized and unused shares of Common Stock to effect a
conversion of the Series A Preferred Stock into Common Stock. The term "Common
Stock" shall refer to the Common Stock, $0.01 par value per share of the
Company, as constituted on January 30, 1998, and any stock into which such
Common Stock shall have been changed or any stock resulting from any
reclassification of such Common Stock.
A-1
<PAGE> 7
1. CONVERSION RATE. At the Automatic Conversion Date, or upon the
exercise of the option to convert described above, each share of Series A
Preferred Stock shall be converted into seven (7) shares of Common Stock, as
adjusted and readjusted from time to time in accordance with the terms and
provisions hereof (the "Conversion Rate").
2. METHOD OF CONVERSION. As soon as feasible, but in no event
later than five (5) days, after the Automatic Conversion Date, the Company
shall mail a notice to each holder of record of the shares of the Series A
Preferred Stock on the Automatic Conversion Date of the occurrence thereof and
informing each holder of the conversion and the number of shares of Common
Stock into which such holder's shares of the Series A Preferred Stock shall
have been converted. In the event the holder desires to exercise the option to
convert, the holder shall give written notice to the Company at its principal
corporate office of the election to convert the same. The Company or its
transfer agent shall also inform the holder of the procedures for exchanging
the certificate or certificates representing shares of Series A Preferred Stock
for certificates representing the shares of Common Stock into which the Series
A Preferred Stock shall have been converted. Until surrendered to the Company,
each outstanding certificate which, prior to the conversion, represents shares
of the Series A Preferred Stock will, following such conversion, be deemed for
all corporate purposes of the Company to evidence ownership of the number of
shares of Common Stock into which the shares of the Series A Preferred Stock
shall have been converted. After the Automatic Conversion Date there shall be
no further registry of transfers on the records of the Company of the shares of
Series A Preferred Stock, and if a certificate representing such shares is
presented to the Company, it shall be canceled and exchanged for a certificate
representing the number of shares of Common Stock as herein provided.
3. FRACTIONAL SHARES. No fractional shares shall be issued upon
the conversion of any shares, share or fractional share of Series A Preferred
Stock. All shares of Common Stock, including fractions thereof, issued upon
conversion of shares (or fractions thereof) of Series A Preferred Stock by the
holder thereof shall be aggregated for purposes of determining whether the
conversion would result in the issuance of fractional shares. If, after the
aforementioned aggregation, the conversion would result in the issuance of a
fractional share of Common Stock, the Company shall, in lieu of issuing any
fractional share, pay the holder otherwise entitled to such fraction a sum in
cash equal to the Closing Bid Price of the Company's Common Stock on the Nasdaq
Bulletin Board on the Automatic Conversion Date multiplied by such fraction.
D. VOTING. Prior to the Automatic Conversion Date, and except as
otherwise provided by law, the holders of the Series A Preferred Stock will be
entitled to 35.190319 votes per share of Series A Preferred Stock, subject to
adjustment in accordance with Subsection E below, on all matters subject to a
vote of stockholders of the Company, without any regard to classification or
series.
E. STOCK DISTRIBUTIONS, SPLITS AND COMBINATIONS; ADJUSTMENTS. In case
(i) the outstanding shares of Common Stock (or other securities) shall be
subdivided into a greater number of shares, (ii) a non-cash dividend in Common
Stock (or other securities) shall be paid in
A-2
<PAGE> 8
respect of Common Stock (or other securities), or (iii) the outstanding
shares of Common Stock (or other securities) shall be combined into a smaller
number of shares thereof, the number of shares of Common Stock or other
securities into which the Preferred Stock (subsequent to such subdivision or
combination or at the record date of such dividend or distribution) shall
(simultaneously with the effectiveness of such subdivision or combination or
immediately after the record date of such dividend or distribution) be
convertible into shall be equal to the number of shares of Common Stock or
other securities a holder would have owned and had a right to receive as a
result of such subdivision, combination, dividend or distribution, if such
holder had actually held of record (immediately prior to the effectiveness of
such subdivision or combination or immediately prior to the record date of
such dividend or distribution) the number of shares of Common Stock or other
securities that would have been subject to receipt by the holders upon
conversion of the Series A Preferred Stock immediately prior to the
effectiveness of such subdivision or combination or the record date of such
dividend or distribution.
F. LIQUIDATION RIGHTS. In the event of any liquidation or dissolution
or winding up of the Company, voluntary or involuntary, the holders of the
Series A Preferred Stock shall be entitled to receive, subject to the rights of
any other class of stock which makes senior to the Preferred Stock as to
distribution of assets on liquidation, but before any distribution is made on
any class of stock ranking junior to the Series A Preferred Stock as to the
payment of dividends or the distribution of assets, the sum of $4.00 per share,
plus any arrearages in dividends thereon.
6. REDEMPTION RIGHTS. There shall be no right of redemption by the
holders of the Preferred Stock, except as may be determined by the Board of
Directors and approved by a majority of the holders of the Preferred Stock.
A-3
<PAGE> 1
EXHIBIT 3.6
STATE OF DELAWARE
SECRETARY OF STATE
DIVISION OF CORPORATIONS
FILED 10:00 AM 08/14/1998
981319471 - 2316242
CERTIFICATE OF ELIMINATION OF THE
SERIES A 10% VOTING CONVERTIBLE PREFERRED STOCK OF
SHARPS COMPLIANCE CORP.
Pursuant to Section 151(g)
of the General Corporation Law
of the State of Delaware
Sharps Compliance Corp., a corporation organized and existing under the laws of
the State of Delaware (the "Company"), in accordance with the provisions of
Section 151(g) of the General Corporation Law of the State of Delaware, hereby
certified as follows:
1. That, pursuant to Section 151 of the General Corporation Law of the State
of Delaware and authority granted in the Certificate of Incorporation of
the Company, as theretofore amended, the Board of Directors of the Company,
by resolution duly adopted, authorized the issuance of a series of One
Million (1,000,000) shares of Series A 10% Convertible Preferred Stock, par
value $0.01 per share (the "Series A Preferred Stock"), and established the
voting powers, designations, preferences and relative, participating and
other rights, and the qualifications, limitations or restrictions thereof,
and, on February 23, 1998, filed a Certificate of Designation (the
"Certificate of Designation") with respect to such Series A Preferred Stock
in the office of the Secretary of State of the State of Delaware.
2. That no shares of said Series A Preferred Stock are outstanding and no
shares thereof will be issued subject to said Certificate of Designation.
3. That the Board of Directors of the Company has adopted the following
resolutions:
WHEREAS, by Unanimous Written Consent dated February 18,
1998, the Board of Directors of the Company authorized the
issuance of a series of One Million (1,000,000) shares of Series
A 10% Convertible Preferred Stock, par value $0.01 per share (the
"Series A Preferred Stock"), and established the voting powers,
designations, preferences and relative, participating and other
rights, and the qualifications, limitations or restrictions
thereof, and, on February 23, 1998, filed a Certificate of
Designation (the "Certificate of Designation") with respect to
such Series A Preferred Stock in the office of the Secretary of
State of the State of Delaware;
WHEREAS, as of the date hereof no shares of Series A
Preferred Stock are outstanding and no shares of such Series A
Preferred Stock will be issued subject to said Certificate of
Designation; and
WHEREAS, it is desirable that all matters set forth in the
Certificate of Designation with respect to such Series A
Preferred Stock be
<PAGE> 2
eliminated from the Certificate of Incorporation, as heretofore
amended, of the Company;
NOW, THEREFORE, IT IS HEREBY RESOLVED, that as of the date
hereof no shares of such Series A Preferred Stock are outstanding
and no shares of such Series A Preferred Stock will be issued
subject to said Certificate of Designation;
FURTHER RESOLVED, that all matters set forth in the
Certificate of Designation with respect to such Series A
Preferred Stock be eliminated from the Certificate of
Incorporation, as heretofore amended, of the Company; and
FURTHER RESOLVED, that the officers of the Company be, and
hereby are, authorized and directed to file a Certificate with
the office of the Secretary of State of the State of Delaware
setting forth a copy of these resolutions whereupon all matters
set forth in the Certificate of Designation with respect to such
Series A Preferred Stock shall be eliminated from the Certificate
of Incorporation, as heretofore amended, of the Company.
4. That, accordingly, all matters set forth in the Certificate of Designation
with respect to such Series A Preferred Stock be, and hereby are,
eliminated from the Certificate of Incorporation, as heretofore amended, of
the Company.
IN WITNESS WHEREOF, SHARPS COMPLIANCE CORP. has caused this Certificate
to be signed by Burt Kunik, its Chief Executive Officer and President, as of
this ____ day of August, 1998.
SHARPS COMPLIANCE CORP.
By: /s/ Burt Kunik
--------------------------------------
Name: Burt Kunik
Title: Chief Executive Officer
and President
<PAGE> 1
EXHIBIT 4.4
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
NUMBER SHARPS COMPLIANCE CORP. SHARES
-----------------
CUSIP 820017 10 1
-----------------
THIS CERTIFIES THAT
is the registered holder of
FULLY PAID AND NON-ASSESSABLE SHARES OF COMMON STOCK WITH A PAR VALUE OF
$0.01 PER SHARE.
in the Capital of the above named Corporation transferable on the books of
the Corporation by the registered holder in person or by Attorney duly
authorized in writing upon surrender of this certificate properly endorsed.
This certificate and the shares represented hereby are subject to the laws of
the State of Delaware, and to the Articles of Incorporation and Bylaws of the
Corporation, as now or hereafter amended.
This certificate is not valid unless countersigned by the Transfer Agent and
Registrar of the Corporation.
IN WITNESS WHEREOF the Corporation has caused this certificate to be signed
on its behalf by the facsimile signatures of its duly authorized officers.
DATED
/s/ Burt Kunik COUNTERSIGNED AND REGISTERED
- -------------------- PACIFIC CORPORATE SERVICES LTD. VANCOUVER
President TRANSFER AGENT AND REGISTRAR
/s/ [ILLEGIBLE]
- -------------------- By SPECIMEN
Secretary ------------------------------------------
Authorized Officer
The Shares represented by this Certificate are transferable at the offices
of Pacific Corporate Services Ltd., Vancouver, B.C.
<PAGE> 2
FOR VALUE RECEIVED the undersigned hereby sells, assigns and transfers unto
PLEASE INSERT SOCIAL INSURANCE NUMBER OF TRANSFEREE
--------- --------- ---------
- -
--------- --------- ---------
- -------------------------------------------------------------------------------
(Name and address of transferee)
- -------------------------------------------------------------------------------
- ------------------------------------------------------------------------ shares
registered in the name of the undersigned on the books of the Corporation
named on the face of this certificate and represented hereby, and irrevocably
constitutes and appoints
- ------------------------------------------------------------------ the attorney
of the undersigned to transfer the said shares on the register of transfers
and books of the Corporation with full power of substitution hereunder.
DATED:
- ---------------------------------- -----------------------------------
(Signature of witness) (Signature of Stockholder)
NOTICE: The signature of this assignment must correspond with the name as
written upon the face of the certificate, in every particular, without
alteration or enlargement, or any change whatsoever, and must be
guaranteed by a bank, trust company or a member of a recognized stock
exchange.
Signature Guaranteed By:
<PAGE> 1
EXHIBIT 10.30
SECOND AMENDMENT
TO
EMPLOYMENT AGREEMENT
This Second Amendment to Employment Agreement (the "Second Amendment")
dated May _____, 1998 by and among Sharps Compliance, Inc., a Texas Corporation,
with its principle offices located at 8928 Kirby Drive, Houston, Texas 77054
(hereinafter referred to as "Employer"), and Dr. Burt Kunik, a resident of
Harris County, Texas (hereinafter referred to as "Employee"), and hereby amends
that certain Employment Agreement entered into effective the 1st day of January,
1998 by and between Employer and Employee (the "Agreement") and hereby amends
that certain First Amendment entered into effective the ____ day of April, 1998
by and between Employer and Employee (the "First Amendment").
W I T N E S S E T H
WHEREAS, Employer and Employee have previously entered into the certain
Employment Agreement and First Amendment.
WHEREAS, Employer and Employee hereby desire to further amend the
Employment Agreement in accordance with those terms and conditions provided
herein by entering into this Second Amendment.
THEREFORE, in consideration of the covenants mutual benefits contained
herein, and other good and valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, the parties hereto, intend to be legally
bound, hereby agree as follows:
1. AMENDMENT TO SECTION 3.3 OF THE AGREEMENT. Section 3.3 of the
Agreement, as amended, is hereby deleted in its entirety.
2. ENFORCEABILITY OF REMAINING PROVISION. All other provisions of
the Agreement and First Amendment shall remain in full force and
effect and any inconsistencies between this Second Amendment, First
Amendment and the Agreement shall be construed in favor of this Second
Amendment.
Executed as of the date first written above.
COMPANY: SHARPS COMPLIANCE, INC.
By: /s/ John Dalton
---------------------------------------
Printed Name: John Dalton
Title: Board of Director
EMPLOYEE: DR. BURT KUNIK
/s/ Dr. Burt Kunik
---------------------------------------
Dr. Burt Kunik
<PAGE> 1
EXHIBIT 10.31
EXCLUSIVE DISTRIBUTORSHIP AGREEMENT
Agreement made this 1st day of April 1998, between Pro-Tec Containers,
Inc., a division of Lukens Medical Corporation, a corporation organized and
existing under the laws of the State of New Mexico, (the "Company") and Sharps
Compliance, Inc., a corporation organized and existing under the laws of Texas,
(the "Distributor").
WHEREAS, the Company is engaged in the business of developing,
manufacturing, importing and marketing various medical products; and
WHEREAS, the Company is desirous of increasing sales of its products in
the human healthcare market through the use of a distributor; and
WHEREAS, the Distributor wishes to engage in the business of purchasing
and reselling certain of the Company's products to certain of the healthcare
market in certain geographical areas,
NOW, THEREFORE, in consideration of these premises and the mutual
covenants contained herein, the parties hereby agree as follows:
l. Definitions.
1.1 Customers shall mean all industrial and healthcare
facilities, and diabetic patients.
1.2 Products shall mean the items set forth on Schedule A
attached hereto, as amended from time to time.
1.3 Territory shall mean the countries or geographical areas
set forth on Schedule B attached hereto, as amended from time to time. In the
event any governmental agency in the Territory shall impose new or additional
currency restrictions, monetary or exchange controls, export or import
regulations, custom levies or other taxes or, through legislation, ordinance,
regulation, decree or treaty, shall impose conditions or restrictions that shall
take effect during the term hereof and that, in the reasonable opinion of the
Company affect materially the commercial feasibility of the transactions
contemplated by this Agreement, the Company shall have the right, to
unilaterally delete the affected country, state or jurisdiction from the
Territory upon ninety (90) days prior written notice to the Distributor and the
Company shall have the same limitation as set forth in Section 9 below.
2. Term.
2.1 Commencement. Unless earlier terminated as provided
herein, this Agreement shall commence on the date hereof and shall terminate
five (5) years from such date. Notwithstanding the foregoing, if the Exclusivity
Period (Section 3.2) does not commence prior to
1
<PAGE> 2
June 1st 1998, this Agreement shall at the option of the Company, upon thirty
(30) days prior written notice, terminate, in which event the provisions of
Section 4.2, shall be applicable.
2.2 Minimum Purchases. If the Distributor violates the
provisions of Section 7.3(a) relating to annual minimum purchase, and
Distributor does not cure within thirty (30) days of receipt of written notice
from the Company, the Company shall have the right to terminate the exclusivity
in Section 2.2 with ninety (90) days notice to the Distributor.
3. Appointment; Exclusivity and Non-Competition.
3.1 Appointment. Subject to the terms and conditions hereof,
the Company hereby appoints Distributor as its exclusive distributor of Products
to Customers, and the Distributor accepts appointment as the Company's exclusive
distributor to purchase Products from the Company for resale and delivery to
Customers in the Territory.
3.2 Exclusivity and Non-Competition. So long as this
Agreement shall be in effect, the Company shall refrain from selling Products to
any new Customers in the Territory and shall refer to the Distributor all
inquiries and orders for Products originating from the new Customers within the
Territory, (the "Exclusivity Period"). The Company shall have the right to fill
orders outstanding on the date thereof from Customers within the Territory and
shall refer all new and existing Customers of the Company to Distributor. During
the Exclusivity Period, the Company shall not appoint any new distributor or
sales agent for Products whose responsibilities include Customers within the
Territory. During the term of this Agreement, the Distributor shall not
manufacture, sell or promote for sale in the Territory any product, or part or
component thereof, which is the same in size to and has a wide mouth opening of
at least three inches (3") or larger as currently found in any of the Products.
3.3 Renewal. So long as the Distributor remains in
substantial compliance with each of the material terms of this Agreement,
including the provisions of Sections 6.3 and 7.3 hereof relating to payment and
minimum purchases respectively, the term of this Agreement shall be
automatically renewed for successive two (2) year periods unless terminated by
either party upon written notice given at least ninety (90) days prior to the
end of the applicable term.
4. Relationship of the Parties.
4.1 Relationship of the Parties. The relationship between the
Company and the Distributor shall be that of seller and buyer. Nothing herein
shall be construed to create the relationship of employer and employee, master
and servant, or principal and agent between the parties hereto, and the
Distributor shall be deemed to be an independent contractor at all times with
respect to its performance hereunder. The Distributor shall have no right or
authority to assume or create any obligation, express or implied, or to make any
warranty or representation on behalf of the Company. The Company shall have no
right or authority to assume or create any obligation, express or implied, or
make any warranty or representation on behalf of the Distributor.
2
<PAGE> 3
5. Orders and Shipments.
5.1 Purchase Orders. It is expressly agreed that no printed
terms and conditions contained in any purchase order or similar form submitted
at any time by the Distributor on the Distributor's form to the Company shall be
binding on the Company even though orders given on such forms have previously
been accepted or filled by the Company. The terms and conditions stated in the
Company's forms and invoices and/or acceptances of the Distributor's orders,
together with the terms and conditions stated herein shall govern each sale by
the Company to the Distributor hereunder, and, if no terms and conditions appear
on such forms, invoices or acceptances, then the terms of this Agreement shall
govern.
5.2 Confirmation. Upon receipt of each Purchase Order, the
Company shall promptly confirm same in accordance with its usual form or shall
advise the Distributor that it cannot accept such Purchase Order. The company
shall also advise the Distributor of any excessive lead times and the
Distributor shall at that time have the option of canceling orders for line
items with excessive (greater than sixty (60) days ) lead times.
5.3 Forecasts. Within fourteen (14) days prior to the first
day of each calendar quarter during the term hereof, the Distributor shall send
the Company a report with a non-binding forecast of the quantity of Products, by
Product code, that the Distributor expects to order in each of the subsequent
six (6) months. Such forecasts shall be updated by the Distributor in successive
quarterly reports. Failure to provide such forecast shall not be a breach of
this Agreement, but may affect the ability of the Company to deliver the
requested quantity for the applicable quarter.
5.4 Cancellation. The Company shall have the right to delay
shipment if the Distributor is not in compliance with Section 6.3 below. Such
withholding of shipments by the Company shall not be construed as a termination
or breach of this Agreement by the Company nor shall it relieve the Distributor
of its obligations under Section 7.3.
Except as elsewhere provided herein, and unless otherwise
specified in the Distributor's Purchase Order, shipments shall be by common
carrier selected by the Company. Title to all Products sold by the Company to
the Distributor shall pass to the Distributor and delivery shall be completed
when made F.0.B. the Distributor's loading dock. The Distributor shall pay all
applicable transportation and insurance costs.
6. Price and Payment.
6.1 Purchase Price. The initial purchase price to be paid by
the Distributor for Products purchased by it shall be as set forth on Schedule C
attached hereto. All amounts payable under this Agreement shall be paid in U.S.
dollars at the office of the Company.
6.2 Price Changes. The Company shall have the right from time
to time upon ninety (90) days' prior written notice to the Distributor to change
the prices of any or all Products.
3
<PAGE> 4
Price changes shall be effective for all Products ordered for delivery on or
after the effective date specified in the notice of such change. Price increases
shall be negotiated on an annual basis. There will be no price increases for the
first twelve (12) months of the Agreement.
6.3 Payment. The Distributor shall pay the Company for all
Products sold to it payable with a 2% discount if paid within ten (10) days, or
net thirty (30) days after the date of the relevant, bill of lading. These terms
may only be amended by the Company in writing. Any amounts due the Company which
are not paid within such period shall accrue interest at the rate of one and
one-half percent (1 1/2%) each month.
7. Duties of the Distributor.
7.1 Sales Effort. The Distributor agrees to use reasonable
efforts to maximize sales of Products to Customers in the Territory and to
provide Customers with satisfactory service reasonably expected by such
purchasers.
7.2 Minimum Purchases. During each year of the term hereof
Distributor shall purchase from the Company and pay for Products in an amount at
least equal to the Distributor's assigned quota (the "Guaranteed Minimum") as
shown on Schedule D for such year.
7.3 Compliance With Laws. The Distributor agrees to comply
with all applicable laws, ordinances, rules and regulations relating in any way
to its performance hereunder, to obtain all necessary import licenses, permits
or governmental approvals necessary for the importation and distribution of
Products in the Territory, and to pay all applicable taxes, fees, charges and
assessments imposed by any governmental authority in connection with the
distribution of the Products in the Territory.
The Distributor agrees to defend, Indemnify and hold harmless
the Company from and against any and all damages or expenses, including
reasonable attorneys' fees, incurred directly as a consequence of the
Distributor's failure to comply with any such laws, ordinances, rules or
regulations. This obligation shall survive the termination of this Agreement for
one (1) year.
7.4 No Representation. The Distributor agrees to make no
representations, guarantees or warranties concerning the Products which have not
been authorized in writing by the Company, and agrees to defend, indemnify and
hold harmless the Company from and against any and all damages or expenses,
including reasonable attorneys' fees, incurred directly as a result of a breach
of the provisions of this Section 7.7. This obligation shall survive the
termination of this Agreement for six months.
8. Duties of the Company.
8.1 Quantities. The Company shall promptly ship Products to
the Distributor in accordance with purchase orders accepted by the Company. In
the event that orders for Products
4
<PAGE> 5
exceed the Company's ability to promptly manufacture and deliver them, the
Company will take all reasonable steps necessary to secure additional
production, including retention of sub-contractors. If the Company cannot meet
Distributor's demand for two (2) consecutive months, Distributor shall be
entitled to secure Products from third parties until production demands can be
met by the Company.
8.2 Labeling. All Products supplied to Distributor hereunder
shall bear the Company's trademarks and trade names specified by it.
8.3 Quality Standards. All Products shall be manufactured by
the Company in a good and workmanlike manner of good quality material made for
the purpose to pass U.S. Postal Service specifications for permit.
8.4 Compliance With Laws. The Company agrees to comply with
all applicable laws, ordinances, rules and regulations relating in any way to
its performance hereunder, and to pay all applicable taxes, fees, charges and
assessments imposed by any governmental authority in connection with the
distribution of the Products in the Territory.
The Company agrees to defend, Indemnify and hold harmless the
Distributor from and against any and all damages or expenses, including
reasonable attorneys' fees, incurred directly as a consequence of the Company's
failure to comply with any such laws, ordinances, rules or regulations. This
obligation shall survive the termination of this Agreement for one (1) year.
8.5 Products Liability Insurance. Lukens shall maintain
product liability insurance to cover the Products being sold by Lukens and shall
carry a broad form vendor's endorsement naming the Distributor as an additional
insured.
9. Product Changes/Deletions. The Company reserves the right at
any time or from time to time upon ninety (90) days' notice to discontinue the
sale of any or all of the Products and parts thereof, and to change the design
of the Products and parts thereof, without notice to the Distributor, and the
Distributor shall have no claim for damages against the Company as a result of
any such change, or discontinuance. If the Company discontinues sales of the
Products for any reason, and subsequently begins producing Products within one
(1) year of discontinuation, the Company shall grant the Distributor the right
to enter into a new Agreement on the same terms as provided herein.
10. Trademarks, Trade Names and Copyrights.
10.1 Distributor. The Distributor may state in its
advertising that it is an authorized "Pro-Tec", "Lukens" or "Lukens Medical
Corporation" distributor.
10.2 No Removal. The Distributor shall not under any
circumstances remove or alter (i) any trademark of the Company affixed to any
Product or (ii) any carton, container or literature supplied by the Company with
such Product.
5
<PAGE> 6
10.3 Approval. Any advertising, packaging or promotional or
display material, including Distributor's catalog, prepared by or to be used by
or for Distributor, which refers in any to the Company, bears any Company
trademark, or uses any material copyrighted by the Company, shall be subject
to-the prior written approval of the Company as to the use of such reference,
trademark, or copyrighted material.
10.4 Acknowledgment. The Distributor acknowledges the
Company's title to the name "Lukens" and "Lukens Medical Corporation" and all
other trademarks and trade names of the Company (including those with respect to
the Products), and all copyrights used in connection with such trademarks and
trade names (collectively, the "Lukens Trademarks") on all materials provided by
the Company to the Distributor. In addition, the Distributor agrees it shall
never do any thing which will in any way impair the Company's title to or rights
in the Lukens Trademarks. For purposes of this Agreement, Lukens Trademarks
shall also be deemed to include the design of the labeling and packaging of the
Products as it applies to the Company. The Company acknowledges that "Sharps
Compliance, Inc." and "SCI" and all other trademarks and trade names of
Distributor (including those with respect to the Products), and all copyrights
used in connection with such trademarks and trade names (collectively the "SCI
Trademarks") on all the materials provided by Distributor to the Company. In
addition the Company agrees it shall never do anything which will in any way
impair the Distributor's title to or rights in the SCI Trademarks. For purposes
of this Agreement, SCI Trademarks shall also be deemed to include the design of
the labeling and packaging of the Products as it applies to SCI. This Section
10.4 shall survive any termination or expiration of this Agreement.
10.5 Infringement Action. The Distributor shall promptly
notify the Company of any and all infringements or attempted infringements of
any of the Company's Trademarks or patents that may come to its attention and
shall assist the Company in taking such action against such infringers as the
Company, in its discretion, may elect.
In addition, the Distributor shall promptly notify the Company
in writing of any suit or proceeding brought against the Distributor insofar as
such suit or proceeding is based upon any claim that the Products or any part
thereof, excluding the Trademarks, infringe the patent or propriety rights of
any person or entity. The Company shall defend such suit or proceeding and shall
indemnify and hold the Distributor harmless from and against damages, costs, and
expenses arising directly from such suit or proceeding provided that (i) the
Company is notified in writing of such suit or proceeding, (ii) the Distributor
has granted the Company complete authority to defend the suit or proceeding as
it deems appropriate, and (iii) the Distributor fully cooperates with the
Company in connection with such suit or proceeding and provides the Company with
all reasonable assistance in connection therewith.
11. Restrictions on Solicitation. The Distributor shall not
solicit sales of products from, or make any sales to, Customers outside the
Territory and/or human healthcare market.
6
<PAGE> 7
12. Confidential Information; Modification to Products.
12.1(a) Confidential Information of the Company. It is
understood that during the term hereof the Company may disclose to the
Distributor, or the Distributor may otherwise learn of, certain technical or
other information related to the Company or the Products. With the exception of
such information that is clearly a matter of public knowledge (other than as a
result of disclosure by the Distributor) or is already known to the Distributor
on the date hereof from a legitimate source other than the Company, all of such
technical and other information shall be deemed by the Company and the
Distributor to be "confidential" and a "trade secret" of the Company (any and
all of such information being hereinafter referred to as the "Confidential
Information").
The Distributor hereby agrees than during and after the term
hereof it shall keep secret and not make any direct or indirect commercial use
of (other than in the performance of its duties hereunder), or otherwise
disclose, the Confidential Information. The Distributor shall disclose the
Confidential Information only to these of its employees who must have knowledge
of it in order to perform the Distributor's duties hereunder, and the
Distributor shall take all necessary steps and use its best efforts to insure
that such employees will likewise keep secret and not make any direct or
indirect commercial use of, or otherwise disclose, the Confidential Information.
With the Company's express prior written consent, the
Distributor shall have the right to disclose during the term hereof such of the
Confidential Information as may be reasonably required solely in connection with
performance of its duties hereunder. The Distributor shall notify the Company in
writing immediately, and as far in advance of disclosure as possible, whenever
it becomes obligated by governmental regulation or by order of any court or
governmental body to disclose Confidential Information.
The Distributor hereby acknowledges the Company's sole and
exclusive ownership of and right to the Confidential Information and agrees that
it does not have and shall not have, and that nothing herein shall be deemed to
give it, any license or other rights in or with respect to Confidential
Information. The Distributor agrees that upon termination of this Agreement by
either party and for whatever reason it shall promptly return to the Company all
records containing such Confidential Information, regardless of whether such
records were supplied by the Company or were prepared by the Distributor from
information supplied by the Company.
12.1(b) Confidential Information of the Distributor. It is
understood that during the term hereof the Distributor may disclose to the
Company, or the Company may otherwise learn of, certain technical or other
information related to the Distributor or the Products. With the exception of
such information that is clearly a matter of public knowledge (other than as a
result of disclosure by the Company) or is already known to the Company on the
date hereof from a legitimate source other than the Distributor, all of such
technical and other information shall be deemed by the Distributor and the
Company to be "confidential" and a "trade secret" of the Distributor (any and
all of such information being hereinafter referred to as the "Confidential
Information").
7
<PAGE> 8
The Company hereby agrees than during and after the term
hereof it shall keep secret and not make any direct or indirect commercial use
of (other than in the performance of its duties hereunder), or otherwise
disclose, the Confidential Information. The Company shall disclose the
Confidential Information only to these of its employees who must have knowledge
of it in order to perform the Company's duties hereunder, and the Company shall
take all necessary steps and use its best efforts to insure that such employees
will likewise keep secret and not make any direct or indirect commercial use of,
or otherwise disclose, the Confidential Information.
With the Distributor's express prior written consent, the
Company shall have the right to disclose during the term hereof such of the
Confidential Information as may be reasonably required solely in connection with
performance of its duties hereunder. The Company shall notify the Distributor in
writing immediately, and as far in advance of disclosure as possible, whenever
it becomes obligated by governmental regulation or by order of any court or
governmental body to disclose Confidential Information.
The Company hereby acknowledges the Distributor's sole and
exclusive ownership of and right to the Confidential Information and agrees that
it does not have and shall not have, and that nothing herein shall be deemed to
give it, any license or other rights in or with respect to Confidential
Information. The Company agrees that upon termination of this Agreement by
either party and for whatever reason it shall promptly return to the Distributor
all records containing such Confidential Information, regardless of whether such
records were supplied by the Distributor or were prepared by the Company from
information supplied by the Distributor.
The obligations of the Distributor under this Section 12 shall
survive the termination of this Agreement.
13. Warranties. The Company represents, warrants and agrees that
all Products will be free from defects caused by faulty material or poor
workmanship for a period of twelve (12) months after delivery to Distributor,
and the Company agrees to repair any such defects or at its discretion to
replace such defective Products, which such defects shall have come to the
attention of Distributor and a claim therefore is made against the Company
within twelve (12) months after delivery. All such repair and replacement shall
be at the Company's sole expense without any charge to Distributor, including
all shipping and transportation expenses for defective Products. The Company
shall repair or replace any such defective Products as soon as practicable, it
being agreed that the standard is repair or replacement and delivery to a
carrier for shipment to Distributor within forty-five (45) days after receipt
thereof by the Company. THE FOREGOING WARRANTY IS IN LIEU OF ALL OTHER
WARRANTIES, EXPRESS OR IMPLIED, INCLUDING BUT NOT LIMITED TO THE IMPLIED
WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE. To the
extent permitted by law, in no case shall the Company, on account of the breach
of any warranty, be liable for any special, incidental or consequential damages
including, but not limited to, loss of profits, loss of revenues or claims of
third parties, including customers.
8
<PAGE> 9
Any action for breach of warranty must be brought within
twelve (12) months following delivery of the Product, the occurrences of the
breach or discovery thereof (or the date such occurrence should have been
discovered in the exercise of ordinary care), whichever is later.
The foregoing warranties can be modified only in writing. No
agent, representative or employee of the Company is authorized to make any in
addition to those set forth above.
14. Termination and Default.
14.l Termination. In the event either party hereto defaults in
the performance of any obligation hereunder and such default is not cured within
sixty (60) days after the defaulting party receives written notice from the
non-defaulting party specifying the nature of the default, the non-defaulting
party shall have the right, in addition to any other rights and remedies it may
have, to terminate the distributorship granted hereunder immediately by mailing
to the defaulting party written notice of such termination. If either party is
entitled to terminate the Exclusivity portion of this Agreement, the party who
wishes to terminate will give no less than one hundred eighty (180) days notice
in writing of such termination. The distributorship granted hereunder shall
automatically be terminated if the provisions of Section 2.2 shall be
applicable, and may be terminated immediately upon written notice by the Company
after the expiration of all cure periods, or if the Distributor breaches Section
12 hereof or if the Distributor fails to pay any sums due the Company within
sixty (60) days after written notice by the Company to the Distributor of such
failure to pay.
In addition, either party may terminate this Agreement
immediately upon written notice thereof if:
(a) the other party become insolvent or
makes a general assignment for the benefit of
creditors;
(b) bankruptcy or similar proceeding is
filed by or against the other party and is not
dismissed within sixty (60) days thereafter;
(c) the other party's assets are levied upon
or attached under process and such levy or attachment
is not discharged within sixty (60) days thereafter;
(d) a permanent receiver is appointed
for the property or assets of the other party; or
(e) liquidation proceedings are commenced by
or against the other party.
14.2 Effect of Termination. Upon termination of the
distributorship granted hereunder, the Distributor shall thereafter in no way
represent itself as acting on behalf of the
9
<PAGE> 10
Company with respect to the Products. Within ten (10) days after termination,
the Distributor shall promptly return to the Company all papers, price lists,
samples, bulletins, displays, or other data or material pertaining to the
Company, its Products or any Confidential Information.
Following termination of the distributorship granted hereunder
for any reason other than a breach of the Agreement by the Distributor, the
Company shall continue to honor orders placed prior to the effective date of
termination which shall be one hundred eighty (180) days from delivery of notice
of termination.
Upon termination of the distributorship by the Company due to
a breach of the Agreement by the Distributor, no payments shall be made by the
Company to the Distributor for loss of future sales, goodwill, creation of
clientele, termination of employees, salaries of employees, advertising costs,
or like expenses. Upon such termination, the Company may, but shall have no
obligation to, repurchase any of its Products which the Distributor may then
have in inventory. The price of any Products to be repurchased hereunder shall
be the Company's then current list price or the selling price thereof to the
Distributor, whichever is lower, less a fifteen percent (15%) charge for
restocking and relabeling. The product must be in saleable condition. No special
products will be considered.
No termination shall release either party from any then
outstanding obligations to the other under this Agreement nor shall it terminate
the obligations of the Distributor under Section 7.11 or 12.
15. Binding Effect; Assignment. This Agreement shall be binding
upon and inure to the benefit of the parties and their respective successors and
assigns.
16. Force Majeure. If the performance of this Agreement or of any
obligation hereunder by either party is prevented, restricted or interfered with
by reason of war, revolution, civil commotion, acts of public enemies, blockade,
embargo, strikes, any law, order, proclamation, regulation, ordinance, demand,
or requirements having a legal effect of any government or any judicial
authority or representative of any such government, or any other act whatsoever,
whether similar or dissimilar to those referred to in this clause, which is
beyond the reasonable control of the party affected, then the party so affected
shall, upon giving prior written notice to the other party, be excused from such
performance to the extent of such prevention restriction, or interference,
provided that the party so affected shall use its best effects to avoid or
remove such causes of nonperformance, and shall continue performance hereunder
with the utmost dispatch whenever such causes are removed.
17. Notice. All notices required or permitted hereunder shall be
sent, return receipt requested, postage prepaid, by registered or certified
mail by telex or facsimile transmission (followed immediately by a letter of
confirmation delivered in accordance with other provisions of this Section), by
Federal Express or similar courier service, or by hand, addressed to the Company
or the Distributor, as the case may be, at the address set forth below or at
such other address as such
10
<PAGE> 11
party shall have designated in the manner provided for in this section:
If to the Company: Pro-Tec Containers
A Division of
Lukens Medical Corporation
3820 Academy Parkway North, NE
Albuquerque, NM 87109
Attn: President & CEO
If to the Distributor: Sharps Compliance, Inc.
8928 Kirby Drive
Houston, Texas 77054
Attn: President
If given by telex, facsimile transmission, Federal Express or
similar courier service, or by hand, any such notice shall be deemed given when
received and, if mailed, such notice shall be deemed given seven (7) days after
mailing.
18. Arbitration. Any dispute, controversy or claim arising out of
or relating to this agreement, or the breach, termination or invalidity of it,
shall be settled by arbitration in accordance with rules of conciliation and
arbitration of the International Chamber of Commerce (ICC). The arbitration
authority shall be the American Arbitration Association. In any arbitration
pursuant to this section the award shall be rendered by majority of the members
of a Board of Arbitration consisting of three (3) members, one being appointed
by each party and the third being appointed by mutual agreement; if both
arbitrators fail to appoint the third, the matter shall be referred to the
president of ICC for appointment.
19. Governing Law. This Agreement shall be governed by the laws
of the State of New Mexico, U.S.A.
20. Entire Agreement. This Agreement sets forth the entire
agreement and understanding of the parties with respect to the subject matter
hereof and supersedes and replaces all prior agreements and understandings,
whether written or oral. This Agreement may not be modified or amended in any
way except by an instrument in writing executed by a duty authorized officer of
the Company and the Distributor.
21. Schedules. The schedules attached hereto form part of and are
an integral part of this Agreement.
22. Severability. If any provision of this Agreement or the
application thereof to any party or circumstance shall be declared invalid,
illegal or unenforceable, the remainder of this Agreement shall be valid and
enforceable to the extent permitted by applicable law, in such event, the
parties shall use their best efforts to replace the invalid or unenforceable
provision with a
11
<PAGE> 12
provision that, to the extent permitted by applicable law, achieves the purposes
intended under the invalid or unenforceable provision. Any deviation by either
party from the terms and provisions of this Agreement in order to comply with
applicable laws, rules, or regulations shall not be considered a breach of this
Agreement.
23. Counterparts. This Agreement may be executed in counterparts,
each of which shall be deemed to be an original and all of which together shall
be deemed to be the same instrument.
24. Waiver of Compliance. Any failure by any party hereto to
enforce at any time any term or condition of this Agreement shall not be
considered a waiver of that party's right to enforce each and every term and
condition hereof.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
signed by authorized officers or representatives on the date of the signature of
this Agreement.
LUKENS MEDICAL CORPORATION SHARPS COMPLIANCE, INC.
By: /s/ GARY K. PORTER By: /s/ BURT J. KUNIK
----------------------------------- --------------------------------
Gary K. Porter Burt J. Kunik
Title: V.P., Sales and Marketing Title: President
12
<PAGE> 13
SCHEDULE A
EXCLUSIVE DISTRIBUTORSHIP AGREEMENT
between
LUKENS MEDICAL CORPORATION
and
Sharps Compliance, Inc.
Products
"Products" means the following items:
Pro-Tec brand 1, 2 and 3 gallon sharps containers made from
polyethylene, in the standard large opening configuration with
non-vented lids, used for the purpose to pass U.S. Postal Inspection.
The product codes are defined as below:
#1G REDNVHDPE
#2G REDNVHDPE
#3G REDNVHDPE
All other products are EXCLUDED from this Agreement and are free to be
purchased on the open market.
13
<PAGE> 14
SCHEDULE B
to the
EXCLUSIVE DISTRIBUTORSHIP AGREEMENT
between
LUKENS MEDICAL CORPORATION
and
Sharps Compliance, Inc.
Territory
"Territory" shall mean the following countries or geographical areas:
United States of America
14
<PAGE> 15
SCHEDULE C
to the
EXCLUSIVE DISTRIBUTORSHIP AGREEMENT
between
LUKENS MEDICAL CORPORATION
and
Sharps Compliance, Inc.
Pricing
Pricing shall be based on Lukens current published list price less the following
discounts:
15
<PAGE> 16
SCHEDULE D
to the
EXCLUSIVE DISTRIBUTORSHIP AGREEMENT
between
LUKENS MEDICAL CORPORATION
and
Sharps Compliance, Inc.
Guaranteed Minimums
For purposes of Section 7.3 of this Agreement, the first year of the term shall
begin on the date of the Agreement and each succeeding year shall begin on the
anniversary date thereof. The Guaranteed Minimums for the Territory granted to
the Distributor are as follows:
Year 1 $150,000
Year 2 $180,000
Year 3 $216,000
Year 4 $260,000
Year 5 $311,000
16
<PAGE> 1
EXHIBIT 10.32
PURCHASE AGREEMENT
1. PARTIES: IVy Green Corporation, an Illinois corporation ("Seller")
agrees to sell and convey to Sharps Compliance, Inc., a Texas
corporation ("Buyer") and Buyer agrees to buy from Seller the Assets
only of the business operations of Pitch It, Pitch It, Jr. and other
disposable IV poles (collectively, the "Business") located at 83
Ambrogio, Suite B, Gurnee, Illinois 60031.
2. PRICE AND TERMS: Seller shall convey the Assets (as described below) to
Buyer on the Closing Date, and shall execute a Bill of Sale, in form
attached hereto as Exhibit "A", and those other documents described in
Section 12, below. The total purchase price for the Assets shall be
$100,000, payable and due at Closing. In accordance with paragraph 2 of
that certain Letter of Intent previously entered into between Buyer and
Seller, Buyer has previously tendered $12,500 to Seller as earnest
money, which earnest money shall be applied to the Purchase Price or in
the absence of a Closing, as provided in the Letter of Intent.
Simultaneously herewith, Buyer has tendered $87,500 in readily
available funds.
3. ASSETS INCLUDED: Seller agrees to sell, transfer, convey and assign to
Buyer at Closing the following:
(a) all personal property, leases, contracts, rights under or
pursuant to all warranties, representations and guaranties
made by suppliers in connection with products, materials or
services, permits, plans, licenses and licensing agreements
and any other agreements or undertakings of any kind of Seller
relating exclusively to the Business;
(b) all trade secrets, know-how, patents, applications for
patents, trademarks, inventions, engineering drawings,
licenses and other intellectual property and intangible assets
in, developed for exclusive use in, or under development for
exclusive use in the Business as set forth on Exhibit "B";
(c) all customer lists, and vender and supplier information as set
forth on Exhibit "C";
(d) all prototypes, plans, designs and test results of any and all
disposable IV poles manufactured or designed by Seller
including the Pitch It and Pitch It, Jr., and all other
disposable IV poles under development ("Disposable IV Poles");
and
(e) all files, records, information and data directly relating to
any of the Assets.
Items (a) through (e) are hereafter collectively referred to as
"Assets". Assets shall not include accounts receivable of Seller.
4. NO ASSUMPTION OF LIABILITIES: Buyer is not assuming and does not agree
to pay any liabilities incurred by Seller or incurred by the Business
or the Assets prior to Closing. Seller indemnifies Buyer and agrees to
defend and hold Buyer harmless from and against any
1
<PAGE> 2
and all claims, causes of action, debts, obligations and liabilities
incurred or arising prior to Closing for two (2) years from the date
hereof.
5. WARRANTIES AND COVENANTS OF SELLER:
a. Authority. The execution and delivery of this Agreement and
the consummation by Seller of the transactions contemplated
herein and therein (i) have been duly authorized by the Board
of Directors of Seller; (ii) are not prohibited by, and do not
violate any provisions or result in the breach of, or
accelerate or permit the acceleration of the performance
required by the terms of (a) the Articles of Incorporation or
Bylaws, or other governing documents of Seller; (b) any
applicable law, rule, regulation or other requirement of the
United States, any state, municipality or subdivision therein,
or of any authority, department, commission, board, bureau,
agency or instrumentality thereof; or (c) any contract,
indenture, agreement or commitment to which Seller is a party
or is bound or by which any of the Assets are bound, and (iii)
have not resulted and will not result in the creation or
imposition of any lien, encroachment, easement, encumbrances,
mortgage, hypothecation, equity, charge, restriction,
possibility of reversion or other similar conflicting
ownership or security interest in favor of any third party on
any of the Assets.
b. Title. Seller has and will have at Closing and will transfer,
convey and deliver to Buyer at Closing good and marketable
title to the Assets, free and clear of all liens and
encumbrances and claims of any third persons.
c. Compliance with Law. To the best of Seller's knowledge, Seller
has conducted and is now conducting Seller's business in
compliance with all applicable regulatory, federal, state or
local laws, statutes and regulations the violation of which
would have a material and adverse effect upon Seller's
business or the Assets.
d. Litigation. No litigation, including any arbitration,
investigation or other proceeding of or before any court,
arbitrator or governmental or regulatory official body or
authority is pending or, to the best knowledge of Seller,
threatened against Seller or which relates to the Assets of
Seller or the transactions contemplated by this Agreement.
Seller does not know of any reasonable likelihood for the
basis of any such litigation, arbitration, investigation or
proceeding, the result of which could adversely affect Seller,
the Assets or the transactions contemplated hereby.
e. Consents. No consent, approval, authorization or order of any
governmental agency or body or other persons are required for
the consummation of the transactions contemplated by this
Agreement.
f. Referrals. Seller hereby covenants and agrees that it shall
immediately forward to Buyer any and all indications of
interest to acquire any of the products subject to the
Business.
2
<PAGE> 3
6. FURTHER ASSURANCES: At the Closing, and at all times thereafter as it
may be necessary, Seller shall execute and deliver to Buyer such other
instruments of transfer as shall be reasonably necessary or appropriate
to vest in Buyer good and indefeasible title to all of the Assets
individually and/or in the aggregate including execution of all
documents necessary to assign all rights in and to United States
Letters Patent No(s). DES 390,952 and DES 390,953.
7. SPECIAL CONDITIONS: In addition to the agreements described herein,
Buyer agrees to grant to Wren Medical Systems the right to (a) acquire
Pitch It and Pitch It, Jr. from Buyer at a price equal to five percent
(5%) below the amount paid by other distributors, and (b) acquire the
Pump Pole from Buyer at a price, equal to the lesser of (i) five
percent (5%) less than other distributors, or (ii) a twenty-five (25)
point mark-up over cost. Seller agrees that all calls relating to the
sale and distribution of Disposable IV Poles shall be referred to Buyer
at 1-800-772-5657, except for sales to regional companies whose base of
operation are in the states of Illinois, Indiana, Wisconsin, Minnesota
and Michigan, which shall be referred to Wren Medical Systems. Seller
and Wren Medical Systems shall grant Buyer the right to audit Seller's
and Wren Medical Systems' sales of all Disposable IV Poles.
Distribution rights granted to Wren Medical Systems herein shall only
be applicable (i) for so long as Wren Medical Systems actively markets
and sells Disposable IV Poles, and (ii) for sales originated by Wren
Medical Systems to new customers in the States of Illinois, Indiana,
Wisconsin, Minnesota and Michigan. Wren Medical Systems hereby
acknowledges that Buyer shall be its exclusive manufacturer of
Disposable IV poles. Furthermore, in consideration of the pricing
schedule above, Wren Medical Systems hereby agrees that it shall not
manufacture, for itself or on behalf of others, any Disposable IV
Poles. Buyer acknowledges that Seller shall not be liable for a breach
by Wren Medical Systems of this Section 7, unless Seller shall have
directly contributed to such breach by Wren Medical Systems.
8. CONTINGENCIES: This contract and Buyer's obligations hereunder shall be
contingent upon satisfaction of the following:
a. all covenants, warranties, representations and agreements of
Seller hereunder shall be true and correct at the time of
execution of this contract and at closing of the transaction
described herein;
b. Seller shall have performed all of Seller's obligations
hereunder;
9. CLOSING DATE: The closing of the sale shall be on or before June 19,
1998 in the offices of DiCecco, Fant & Burman, L.L.P. or any other
place or by any other means as may be agreed upon by the parties.
10. POSSESSION: The possession of the Assets shall be delivered to Buyer,
in its present condition, ordinary wear and tear excepted, at Closing.
11. EFFECTIVE DATE: The effective date of sale shall be at closing. The
effective date of this Contract shall be the date of execution by all
parties hereto.
3
<PAGE> 4
12. CLOSING DOCUMENTS: Closing documents to be executed and delivered at
Closing shall consist of the following:
a. Bill of Sale;
b. Assignment of Patents in the form attached hereto as Exhibit
"D";
c. Assignment of Contracts in the form attached hereto as Exhibit
"E";
d. Assignment of Tradename in the form attached hereto as Exhibit
"F";
e. Any other documents deemed reasonably necessary or appropriate
to close this transaction.
13. SALES, TRANSFER AND DOCUMENTARY TAXES: Seller shall pay all federal,
state and local sales, documentary and other transfer taxes, if any,
due as a result of the purchase, sale or transfer of the Assets in
accordance herewith whether imposed by law on Seller or Buyer and
Seller shall indemnify, reimburse and hold harmless Buyer in respect of
the liability for payment of or failure to pay any such taxes or the
filing of or failure to file any reports required in connection
therewith.
14. WARRANTY: Seller warrants that the Business and assets being sold and
conveyed to Buyer will be sold, assigned, conveyed and transferred free
and clear of all debts, liens, taxes (including payroll, sales and
excise taxes) and/or any other encumbrances, except those specifically
disclosed herein/agreed to by Buyer, as of the Closing Date.
15. GENERAL INDEMNIFICATION OF SELLER: From the Closing Date, and for two
(2) years thereafter, Seller will (i) reimburse, indemnify and hold
harmless Buyer and its successors and assigns against and in respect of
any and all damages, losses, deficiencies, liabilities, costs and
expenses incurred or suffered by Buyer as a result of Seller's
operations or ownership of the Assets prior to Closing; (ii) any
misrepresentation, breach of warranty or nonfulfillment of any
agreement or covenant on the part of Seller under this Agreement, or
from any misrepresentation in or omission from any certificate,
schedule, exhibit, statement, document or instrument furnished to Buyer
pursuant hereto or in connection with the negotiation, execution or
performance of this Agreement and the attached Exhibits; and (iii) any
and all actions, suits, claims, proceedings, investigations, demands,
assessments, audits, filings, judgments, costs and other expenses
(including without limitation, reasonable legal fees, costs and
expenses) incident to Seller's operations or ownership of the Assets
prior to Closing or to the enforcement of this Section 15. From the
Closing Date, and for two (2) years thereafter, Buyer will reimburse,
indemnify and hold harmless Seller and its successors and assigns
against and in respect of any and all damages, losses, deficiencies,
liabilities, costs and expenses incurred or suffered by Seller as a
result of Buyer's operations or ownership of the Assets after the
Closing.
16. COVENANT NOT TO COMPETE: For three (3) years from execution of this
Agreement, Seller, its officers, directors, stockholders and
affiliates, (collectively "Seller Parties" agree that it shall not,
directly or indirectly, engage in the business operations of Pitch It,
Pitch It, Jr. and other Disposable IV Poles. Furthermore, Seller
Parties shall not contact any customers of the Buyer for the same time
period specified above in connection with the sale of Disposable Poles,
except as required in Section 7 above. Seller Parties shall be deemed
4
<PAGE> 5
to be in competition with Buyer and in violation of this Agreement if
payments for activities prohibited under this Agreement are received by
(a) Seller Parties, (b) any partnerships, corporations, affiliates or
other entities in which Seller Parties owns ten percent (10%) or
greater interest therein, or (c) any family members of Seller Parties,
with respect to competitive activities of such corporation as
authorized herein. Notwithstanding anything to the contrary herein,
this Agreement shall not (i) restrict Seller Parties from participating
or engaging in the business of manufacturing and selling non-disposable
IV poles, so long as said corporation confines its business to same and
in no way engages in the same or similar business as Buyer, or (ii)
restrict Wren Medical Systems from its distribution rights set forth in
Section 7.
17. ATTORNEY'S FEES: Any signatory to this contract who is the prevailing
party in any legal proceeding against any other signatory brought under
or with relation to this contract or transaction shall be additionally
entitled to recover court costs and reasonable attorney's fees from the
non-prevailing party.
18. BENEFIT: This contract shall inure to the benefit of and be binding on
the parties hereto, their heirs, executors, legal representatives,
successors and assigns.
19. SURVIVAL: All the terms, conditions, provisions, and obligations under
this contract, and all instruments related to this transaction, shall
survive the Closing for one (1) year.
20. GOVERNING LAW: This Agreement shall be governed by and interpreted and
enforced in accordance with the laws of the State of Texas, and the
venue for all proceedings shall be Harris County, Texas.
21. EXPENSES: Except as otherwise provided in this Agreement, each party
hereto shall pay its own expenses incidental to the preparation of this
Agreement, the carrying out of the provisions of this Agreement and the
consummation of the transactions contemplated hereby.
22. BROKER FEES: There are no broker fees to be paid in connection with the
consummation of this transaction. Each party shall indemnify the other
party from and against any claims by any brokers in connection with
this transaction.
23. NOTICES: Any notice, request, demand, waiver, consent, approval or
other communication which is required or permitted hereunder shall be
in writing and shall be deemed given if personally delivered or sent by
registered or certified mail to the party at the address set forth
below.
24. SEVERABILITY: Any provision of this Agreement which is invalid or
unenforceable in any jurisdiction shall be unaffected to the extent of
such invalidity or unenforceability without invalidating or rendering
unenforceable the remaining provisions hereof, and any such invalidity
or unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction.
5
<PAGE> 6
25. COUNTERPARTS: This Agreement may be executed in any number of
counterparts and any party hereto may execute any such counterpart,
each of which when executed and delivered shall be deemed to be an
original and all of which counterparts taken together shall constitute
one in the same instrument.
BUYER: SELLER:
SHARPS COMPLIANCE, INC. IVY GREEN CORPORATION
By: /s/ BURT KUNIK By:
-------------------------- --------------------------
Name: BURT KUNIK Name:
Title: President -------------------------
Title:
------------------------
ADDRESS: ADDRESS:
8928 Kirby Drive 83 Ambrogio, Suite B
Houston, Texas 77054 Gurnee, Illinois 60031
Attn: Dr. Burt Kunik Attn:
-------------------------
Wren Medical Systems hereby executes this Agreement solely for
acknowledging its agreement to the terms and conditions described in Section 7
above.
WREN MEDICAL SYSTEMS
By:
--------------------------
Name:
------------------------
Title:
-----------------------
ADDRESS:
- -----------------------------
- -----------------------------
- -----------------------------
6
<PAGE> 7
EXHIBIT A
BILL OF SALE
THE STATE OF ILLINOIS )
) KNOW ALL MEN BY THESE PRESENTS
COUNTY OF LAKE )
THAT IVY GREEN CORPORATION, an Illinois corporation ("Seller"), for and
in consideration of the purchase price provided for in, and the other terms and
conditions of, that certain Purchase Agreement, dated June ___, 1998, by and
among SHARPS COMPLIANCE, INC., a Texas corporation ("Buyer"), and Seller (the
"Agreement") (capitalized terms used and not otherwise defined herein shall have
the meanings ascribed to them in the Agreement) has bargained and sold, and by
these presents Seller does sell, assign, transfer and convey unto Buyer all of
Seller's right, title and interest in the Assets. Seller hereby acknowledges and
agrees that this Bill of Sale is made pursuant to and subject to all the terms
and conditions of the Agreement, including without limitation, Buyer's rights of
indemnification under the Agreement.
Seller hereby represents and warrants to Buyer that Seller is the
absolute owner of the Assets, that the Assets are free and clear of any and all
liens, charges and encumbrances of any kind whatsoever, and that Seller has full
right, power and authority to sell the Assets to Buyer and to make this Bill of
Sale.
Seller hereby binds itself, its successors and assigns to WARRANT AND
FOREVER DEFEND the title to the Assets to Buyer, and Buyer's successors and
assigns, against the lawful claim or claims of any and all persons.
The parties hereto agree that this Bill of Sale shall be governed by
and construed in accordance with the laws of the State of Texas, without resort
to the conflict of law principles thereof.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK.]
<PAGE> 8
EXECUTED effective the ____day of June, 1998.
BUYER: SELLER:
SHARPS COMPLIANCE, INC. IVY GREEN CORPORATION
a Texas corporation an Illinois corporation
By: /s/ DR. BURT KUNIK By:
--------------------------- -------------------------
Dr. Burt Kunik, Name: ,
President -----------------------
Title:
----------------------
<PAGE> 9
EXHIBIT B
LIST OF PATENTS, TRADEMARKS, ETC.
PATENTS:
U.S. Design Patent No. Des. 390,952
U.S. Design Patent No. Des. 390,953
TRADEMARKS:
Pitch It
Pitch It, Jr.
<PAGE> 10
EXHIBIT C
LIST OF CUSTOMERS, VENDORS AND SUPPLIERS
CUSTOMERS:
List attached
VENDORS/SUPPLIERS:
Sierra Pacific Co., Ltd.
Address: 3F-4, No. 14, Ta Ing St.
Nan Twen District, Taichung
Taiwan, R. O. C.
Phone: 011-886-4-381-2053
Fax: 011-886-4-382-8530
Email: [email protected]
Contact: Fred Lin
Ingrid
Bank Information: Bank of Taiwan
Liming Branch
6-1 No. 37, 37 Liming Road
Taichung
Taiwan ROC
Circle International (Freight forwarder)
Address: Bensenville, IL
Phone: 630-766-9220
Contact: Kim Hund
Note: Will need to establish account with
Houston office. Kim will provide
referral information.
<PAGE> 11
EXHIBIT D
ASSIGNMENT OF PATENTS
STATE OF ILLINOIS )
)
COUNTY OF LAKE )
WHEREAS IVY GREEN CORPORATION ("Assignor"), an Illinois corporation
with offices at 83 Ambrogio, Suite B, Gurnee, Illinois 60031 is the owner of the
entire right, title, and interest to the United States Letters Patent No(s).
DES. 390,952 and DES. 390,953 (the "Patents") and the inventions covered by the
Patents (the "Inventions");
AND WHEREAS SHARPS COMPLIANCE, INC., ("Assignee"), a Texas corporation
with offices at 8928 Kirby Drive, Houston, Texas 77054, is desirous of acquiring
the entire right, title, and interest in and to the Inventions in the United
States and foreign countries and the Patents;
NOW THEREFORE, for good and valuable consideration, the receipt of
which is hereby acknowledged, and intending to be legally bound hereby, Assignor
hereby assigns and transfers to Assignee the entire right, title, and interest
in and to the Inventions in the United States and foreign countries and the
Patents, including but not limited to all reissues, divisions, continuations and
extensions of the Patents, all rights of action arising from the Patents, all
claims for damages by reason of past infringement of the Patents and the right
to sue and collect damages for such infringement, to be held and enjoyed by the
Assignee for its own use and benefit and for its successors and assigns as the
same would have been held by Assignor had this assignment not been made.
Dated: June ___, 1998.
ASSIGNOR:
By:
-------------------------
Title:
----------------------
Subscribed and sworn to before me on June ___, 1998.
Notary Public:
------------------------------
Printed Name:
-------------------------------
<PAGE> 12
EXHIBIT E
ASSIGNMENT OF CONTRACTS
AND WARRANTIES
THE STATE OF ILLINOIS )
) KNOW ALL MEN BY THESE PRESENTS:
COUNTY OF LAKE )
That IVY GREEN CORPORATION, (hereinafter called the "Assignor" whether
one or more), for and in consideration of the sum of Ten and No/100 Dollars
($10.00) and other good and valuable consideration paid to the Assignor by
SHARPS COMPLIANCE, INC. (hereinafter called the "Assignee" whether one or more),
the receipt and sufficiency of which consideration are hereby confessed and
acknowledged by the undersigned, has SOLD, ASSIGNED, TRANSFERRED and CONVEYED
and by these presents does hereby SELL, ASSIGN, TRANSFER and CONVEY unto
Assignee, and Assignee's heirs, legal representatives, successors and assigns,
all of Assignor's right, title and interest in and to all contracts, agreements,
and to the extent assignable, all guaranties, warranties and service contracts
with respect to all or any portion of the products known as Pitch It and Pitch
It, Jr.
TO HAVE and TO HOLD all of Assignor's right, title and interest in and
to said contracts and agreements unto the Assignee and Assignee's heirs, legal
representatives, successors and assigns forever.
EXECUTED effective the ___ day of June, 1998.
------------------------------
Name:
-------------------------
------------------------------
Name:
-------------------------
1
<PAGE> 13
THE STATE OF ILLINOIS )
)
COUNTY OF LAKE )
BEFORE ME, the undersigned authority, on this date personally appeared
________________________, known to me to be the person whose name is subscribed
to the foregoing instrument, and acknowledged to me that he/she executed the
same for the purposes and consideration therein expressed.
SWORN TO AND SUBSCRIBED BEFORE ME on this ___ day of June, 1998.
-----------------------------
Notary Public
My Commission Expires:
- ----------------------------- -----------------------------
(Print Name)
2
<PAGE> 14
EXHIBIT F
ASSIGNMENT OF TRADENAME
THE STATE OF ILLINOIS )
) KNOW ALL MEN BY THESE PRESENTS:
COUNTY OF LAKE )
That IVY GREEN CORPORATION, (hereinafter called the "Assignor" whether
one or more), for and in consideration of the sum of Ten and No/100 Dollars
($10.00) and other good and valuable consideration paid to the Assignor by
SHARPS COMPLIANCE, INC., (hereinafter called the "Assignee" whether one or
more), the receipt and sufficiency of which consideration are hereby confessed
and acknowledged by the undersigned, has SOLD, ASSIGNED, TRANSFERRED, and
CONVEYED and by these presents does hereby SELL, ASSIGN, TRANSFER, and CONVEY
unto the Assignee, and Assignee's heirs, legal representatives, successors and
assigns, all of Assignor's right, title and interest in and to the tradename
Pitch It and Pitch It, Jr. including, without limitation, the exclusive right to
use and enjoy such tradename to the fullest extent that the Assignor may
lawfully grant such exclusive right.
TO HAVE and TO HOLD all of Assignor's right, title and interest in and
to said tradename unto the Assignee and Assignee's heirs, legal representatives,
successors and assigns forever.
Executed effective the ___ day of June, 1998.
------------------------------
Name:
-------------------------
------------------------------
Name:
-------------------------
1
<PAGE> 15
THE STATE OF ILLINOIS )
)
COUNTY OF LAKE )
BEFORE ME, the undersigned authority, on this date personally appeared
________________________, known to me to be the person whose name is subscribed
to the foregoing instrument, and acknowledged to me that he/she executed the
same for the purposes and consideration therein expressed.
SWORN TO AND SUBSCRIBED BEFORE ME on this ___ day of June, 1998.
-----------------------------
Notary Public
My Commission Expires:
- ----------------------------- -----------------------------
(Print Name)
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EXHIBIT 10.33
LEASE AGREEMENT
(triple net lease)
STATE OF TEXAS
COUNTY OF HARRIS
This lease agreement ("Lease"), made and entered into by and between Lakes
Technology Center, Ltd. , hereinafter referred to as "Landlord", and Sharps
Compliance, Inc. , hereinafter referred to as "Tenant", upon the following terms
and conditions:
A G R E E M E N T
1. LEASED PREMISES.
In consideration of the rents reserved and the covenants and agreements
herein contained on the part of Tenant to be observed and performed, Landlord
hereby demises, lets and leases unto Tenant, and Tenant hereby rents from
Landlord, those certain premises consisting of a space containing an area of
approximately 7,274 square feet (hereinafter called the "Leased Premises") and
constituting a part of the office/warehouse building (hereinafter called the
"Building") located at 9050 Kirby Drive, Houston, Harris County, Texas which
Building is located upon the lot, tract or parcel of land more particularly
described on Exhibit "A" attached hereto and made a part hereof for all
purposes. If the Building is in a development containing one or more other
buildings, such buildings together with all related site land, improvements,
parking facilities, common areas, driveways and landscaping, together with the
Building, shall be referred to as the "Project".
The purpose of the site plan attached as Exhibit "B" is to show the
approximate location of the Leased Premises. Landlord reserves the right at any
time to relocate, vary and adjust the size of the various buildings, covenants,
automobile parking areas, and other common areas as shown on said site plan.
The use and occupancy by Tenant of the Leased Premises shall include the use, in
common with others entitled thereto, of the common service areas, loading
facilities, pedestrian walks, automobile driveways and parking areas, all as
shown on the site plan attached hereto as Exhibit "B".
In determining the number of square feet of area of the Leased Premises,
Tenant acknowledges that the Leased Premises includes the usable area, without
deduction for columns or projections, multiplied by a load factor to reflect a
share of certain areas, which may include lobbies, corridors, mechanical,
utility, janitorial, boiler and service rooms and closets, restrooms and other
public, common and service areas of the Building.
2. TERM.
To have and to hold the Leased Premises for a term commencing on August 1,
1998 , ("Commencement Date") and ending on July 31, 2002. However, if for any
reason, Landlord is unable to deliver possession of the Leased Premises on the
Commencement Date, Landlord shall not be liable for any damage caused by the
delay, nor shall this Lease be void or voidable, but, rather, it is agreed that
the Lease term shall commence upon the date Landlord tenders possession of the
Leased Premises to Tenant, and unless Landlord elects otherwise, the expiration
date of the Lease shall be extended by the number of days delayed from the
original Commencement Date as set out above. If this Lease is executed before
the Leased Premises become vacant or otherwise available and ready for
occupancy, or if any present tenant or occupant of the Leased Premises holds
over, and Landlord cannot acquire possession of the Leased Premises prior to the
date above recited as the Commencement Date of this Lease, Landlord shall not be
deemed to be in default hereunder, and Tenant agrees to accept possession of the
Leased Premises at such time as Landlord is able to tender the same, which date
shall thenceforth be deemed the Commencement Date, and Landlord hereby waives
payment of rent covering any period prior to the tendering of possession to
Tenant hereunder.
3. ACCEPTANCE OF LEASED PREMISES.
Tenant acknowledges that Landlord has not made any representations or
warranty with respect to the condition or quality of the Leased Premises or
Building. Tenant has inspected and accepts the Leased Premises and Building in
their present condition as suitable for the purpose for which the Leased
Premises are leased. Taking of possession by Tenant shall be deemed
conclusively to establish that the Leased Premises, Building and common areas
are in good and satisfactory condition as of when possession was taken. Tenant
further acknowledges that no representations as to the repair of the Leased
Premises or Building nor promises to alter, remodel or improve the Leased
Premises or Building have been made by Landlord, unless such are expressly set
forth in this Lease. After the Commencement Date Tenant shall, upon demand,
execute and deliver to Landlord a letter of acceptance of delivery of the Leased
Premises. If the leasehold improvements outlined on Addendum One and Exhibit
"C" attached hereto are not substantially completed by September 1, 1998 as
determined by Landlord's architect and such delay in the substantial completion
date was not caused by Tenant, Tenant shall have the right to cancel this Lease
Agreement only if Tenant provides Landlord written notice of its intent to
cancel this Lease Agreement by September 5, 1998 and only if Tenant pays to
Landlord a lump sum payment of $20,000.00 due along with such notice outlined
above. It is further agreed that Tenant's right to cancel the Lease Agreement is
Tenant's sole and exclusive remedy.
4. BASE RENT AND SECURITY DEPOSIT.
a) Tenant agrees to pay to Landlord rent for the Leased Premises in
advance, without demand, deduction or set off, for the entire term hereof at the
rate of Three Thousand Nine Hundred Twenty Eight and no/100---- per month. One
such monthly installment shall be due and payable on the date hereof and a like
monthly installment shall be due and payable on or before the first day of each
calendar month succeeding the Commencement Date recited above during the hereby
demised term, except that the rental payment for any fractional calendar month
at the commencement or end of the Lease period shall be prorated.
b) In addition, Tenant agrees to deposit with Landlord on the date hereof
the sum of Three Thousand Nine Hundred Twenty Eight and no/100----, which sum
shall be held by Landlord, without obligation for interest, as security for the
performance of Tenant's covenants and obligations under this Lease, it being
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expressly understood and agreed that such deposit is not an advance rental
deposit or a measure of Landlord's damages in case of Tenant's default. Upon
the occurrence of any event of default by Tenant, Landlord may, from time to
time, without prejudice to any other remedy provided herein or provided by law,
use such fund to the extent necessary to make good any arrears of rent or other
payments due Landlord hereunder, and any other damage, injury, expense or
liability caused by such event of default; and Tenant shall pay to Landlord on
demand the amount so applied in order to restore the security deposit to its
original amount. Although the security deposit shall be deemed the property of
Landlord any remaining balance of such deposit shall be returned by Landlord to
Tenant at such time after termination of this Lease that all of Tenant's
obligations under this Lease have been fulfilled.
5. TENANT'S PRO RATA SHARE OF BUILDING COSTS
Subject to all of the provisions of this Lease relevant hereto, Tenant
promises and agrees to pay, as additional rent hereunder and as provided herein,
at the office of the Landlord or at such other place designated by Landlord,
without any prior demand therefor and without any deduction or set-off
throughout the term of this Lease, Tenant's Pro Rata Share of certain Building
expenditures made by Landlord, as follows:
(1) Real Estate Taxes, as defined in Article 6;
(2) Common Area Maintenance Costs, as defined in Article 7; and
(3) Building Insurance Costs, as defined in Article 8.
(4) Management Fees, as defined in Article 7.
The amounts due from Tenant as Tenant's Pro Rata Share of Real Estate Taxes,
Common Area Maintenance Costs and Insurance shall be estimated by Landlord for
each calendar year and paid by Tenant in equal installments of one-twelfth
(1/12) of such estimated amount, monthly in advance, upon the first day of each
calendar month provided, however, if the term shall commence upon a day other
than the first day of the calendar month, Tenant shall pay upon the commencement
date of this Lease a portion of Tenant's Pro Rata Share of said expenses
calculated on a per diem basis with respect to the fractional month preceding
the commencement of the first full calendar month of the term of this Lease.
Said amounts shall be adjusted between Landlord and Tenant annually and at the
expiration or earlier termination of this Lease, and payment shall be made to,
or refund made by, Landlord, as the case may be, and Landlord shall receive the
precise amount due as Tenant's Pro Rata Share of the actual cost of said Real
Estate Taxes, Common Area Maintenance Costs and Insurance for the preceding
calendar year or any fractional calendar year.
Tenant will pay Landlord the sum of the following per month, in advance, payable
at the same time and place as the minimum rent is payable, as estimated charges
for Tenant's Pro Rata Share of Real Estate Taxes, Common Area Maintenance Costs
and Insurance Costs:
<TABLE>
<S> <C>
(1) Real Estate Taxes. . . . . . . . . . . . . . . . . . . . . $ 509.00
(2) Common Area Maintenance Costs. . . . . . . . . . . . . . . $ 472.00
(3) Insurance Costs . . . . . . . . . . . . . . . . . . . . . . $ 175.00
(4) Management Fees . . . . . . . . . . . . . . . . . . . . . . $ 125.00
---------
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,281.00
</TABLE>
The estimated charges as set out above are subject to changes from time to
time throughout the Lease term. Failure to pay any one or all of Tenant's Pro
Rata Share of Building Costs shall be constitute an event of default hereunder.
6. TAXES
(1) "Tax Year" means the calendar and/or fiscal year basis upon which
taxes and/or special assessments are assessed upon the Building throughout
the term of this Lease.
(2) "Real Estate Taxes" means the amount (in dollars) of taxes and/or
special assessments levied or assessed against the land and improvements of
the Building, said taxes to be either ad valorem taxes or a substitution
therefor which may be designated as appropriate by applicable governing
authorities, in any tax year or fractional part thereof. Excluded are all
estate or death, succession, income or franchise taxes.
(3) "Tenant's Pro Rata Share of Real Estate Taxes" means that amount
obtained by multiplying the Real Estate Taxes by a fraction, the numerator
of which is the square foot area of the Leased Premises and the denominator
of which is the gross leasable area of the Building.
(4) "Building" means all of the real estate and the buildings and other
improvements actually constructed thereon, including common areas, as more
specifically shown on the Site Plan attached hereto as Exhibit "B".
LANDLORD'S PAYMENT. Subject to the limitations, conditions and agreements
contained in this Article, Landlord shall pay annually, all Real Estate Taxes.
On or before one hundred eighty (180) days after the end of the Tax Year,
Landlord shall render a statement showing the total of Tenant's Estimated Tax
Payments made in advance during the preceding Tax Year, and the balance, if any,
then due from Tenant. At the time of rendering the statement, Landlord shall
submit to Tenant a true copy of the tax bills. Taxes and/or special assessments
for a fractional year, if any, shall be prorated. Landlord's failure to provide
the statements shall not relieve Tenant of any liability hereunder.
TENANT'S LIABILITY. Tenant promises and agrees to pay Tenant's Estimated
Pro Rata Share of Real Estate Taxes, monthly in advance, on the first day of
each calendar month, in an amount estimated by Landlord as provided above.
ANNUAL ADJUSTMENT. Within ten (10) days after the receipt of Landlord's
statement showing the total amount paid in advance by Tenant and a copy of the
paid tax bills showing the actual taxes paid or to be paid by Landlord, there
shall be an adjustment between Landlord and Tenant. Tenant shall pay to Landlord
on demand the difference between the amount paid by Tenant and the actual amount
due. If the total amount paid by Tenant
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hereunder for any such calendar year shall exceed such actual amount due from
Tenant for such calendar year, the excess shall be credited by Landlord against
any amounts then due and owing by Tenant to Landlord, and any remaining net
surplus shall then be refunded by Landlord to Tenant. Failure of Tenant to pay
Tenant's Pro Rata Share of Real Estate Taxes in the manner and time provided
herein shall constitute an event of default hereunder.
7. COMMON AREA MAINTENANCE.
Landlord agrees to maintain and repair throughout the term hereof the
common areas and facilities of the Building, including, without limitation, the
automobile entrances, exits, driveways, parking areas, pedestrian walks,
landscaped areas, public toilets, meeting rooms, lighting facilities, service
areas and Building signs not otherwise the responsibility of Tenant as set out
in this Lease (said areas hereinafter called the "Common Area"). Landlord's
maintenance and repairs shall include all repairs and replacements and the
supplies and materials therefor, which in Landlord's reasonable judgment are
necessary to preserve the utility of the Common Area and facilities in the
condition same were in at the time of completion, reasonable wear and tear only
excepted.
As used herein, the term "Common Area Maintenance Costs" shall mean all
costs and expenses of every kind paid or incurred during the term of this Lease
in connection with the operation and upkeep of the Common Area and facilities
within the Building, and where necessary, the cost of replacing any of said
common facilities and the cost of policing and protecting same. In addition to
the foregoing, the Common Area Maintenance Costs may include a reserve fund of
ten percent (10%) of the aggregate Common Area Maintenance Costs, which reserve
fund will be put into an escrow account and accrue interest until such time as a
major repair such as resurfacing the parking lot or major concrete drive
replacement, where it shall be applied against such "Major Repair Cost". Also,
in addition to the foregoing, the Common Area Maintenance Costs shall include
but not limited to, maintenance and repair costs, management fees, wages and
fringe benefits payable to employees of Landlord whose duties are connected with
the operation and maintenance of the Building and common areas, all services,
supplies, repairs, replacements or other expenses for maintaining and operating
the Building. Tenant's Pro Rata Share of the Common Area Maintenance Costs means
that amount obtained by multiplying said Costs by a fraction, the numerator of
which is the square foot area of the Leased Premises and the denominator of
which is the gross leasable area of the Building. Tenant promises to pay
Tenant's Pro Rata Share of Common Area Maintenance Costs monthly in advance, on
the first day of each calendar month in an amount estimated by Landlord as
provided above. Landlord's failure to provide the statements shall not relieve
Tenant of any liability hereunder.
ANNUAL ADJUSTMENT. Within ten (10) days after the receipt of Landlord's
statement showing the total amount paid in advance by Tenant and a copy of the
Common Area Maintenance bills showing the actual monies paid or to be paid by
Landlord, there shall be an adjustment between Landlord and Tenant. Tenant shall
pay to Landlord on demand the difference between the amount paid by Tenant and
the actual amount due. If the total amount paid by Tenant hereunder for any
such calendar year shall exceed such actual amount due from Tenant for such
calendar year, the excess shall be credited by Landlord against any amounts then
due and owing by Tenant to Landlord and any remaining net surplus shall then be
refunded by Landlord to Tenant. Failure of Tenant to pay Tenant's Common Area
Maintenance Costs in the manner and time provided herein shall constitute an
event of default hereunder.
8. INSURANCE
TENANT'S LIABILITY INSURANCE. Tenant agrees, at Tenant's sole cost, to
maintain in force during the term of this Lease a policy or policies of
comprehensive public liability insurance, including property damage, written by
one or more responsible insurance companies approved by Landlord (and such
approval shall not be unreasonably withheld) and licensed to do business in
Texas, which insurance companies shall be rated not less than A-13 by Best Guide
Rating, insuring Tenant and naming, as additional named insured, Landlord and
such other person, firms or corporations as are designated by Landlord and
acceptable to said insurance companies, insuring against loss of life, bodily
injury and/or property damage with respect to the Leased Premises and the
business operated by Tenant and any subtenant, licensee, concessionaire or
assignee of Tenant in the Leased Premises or Building, in which the limit of
public liability shall not be less than ONE MILLION AND NO/100 DOLLARS
($1,000,000.00) single limit bodily injury and in which the limit of property
damage liability shall be not less than FIVE HUNDRED THOUSAND AND NO/100 DOLLARS
($500,000.00). Additionally, Tenant shall maintain at Tenant's sole cost,
plate glass insurance on the windows and door or doors of the Leased Premises.
Each such policy shall be noncancellable for any cause without first giving
Landlord thirty (30) days prior written notice. Subject to all of the
foregoing, the insurance coverage required to be furnished by Tenant pursuant to
this Section B may be in a blanket policy covering all of Tenant's operations.
A copy of each such policy, or a certificate of such insurance together with a
receipt showing all premiums paid thereon for at least one (1) year in advance,
shall be delivered to Landlord upon the commencement of the term of this Lease
and annually thereafter upon the first day of each lease year throughout the
term hereof.
LANDLORD'S LIABILITY INSURANCE. Landlord agrees to maintain in force
during the term of this Lease a policy or policies of comprehensive public
liability insurance, including property damage, written by one or more
responsible insurance companies approved by Landlord and licensed to do business
in Texas insuring Landlord against loss of life, bodily injury and/or property
damage with respect to the common areas of the Building and the operation of the
Building, in which the limit of public liability shall be not less than FIVE
HUNDRED THOUSAND AND NO/100 DOLLARS ($500,000.00) single limit bodily injury and
in which the limit of property damage liability shall be not less than ONE
HUNDRED THOUSAND AND NO/100 DOLLARS ($100,000.00). In addition, Landlord may
maintain in force such umbrella policy or policies of public liability insurance
as Landlord, in its sole discretion, may deem appropriate.
LANDLORD'S FIRE AND EXTENDED COVERAGE INSURANCE. Landlord agrees to
procure and keep in effect during the term of this Lease a policy or policies of
fire and extended coverage insurance covering the Building, or separate fire
rating division as determined by the State Board of Insurance which includes the
Leased Premises, including rent abatement, vandalism and malicious mischief
coverage, written by an insurance company authorized to do business within the
State of Texas, and in an amount equal to not less than eighty percent (80%) of
the replacement cost of the premises covered. Such insurance shall provide
protection against losses so insured against for the benefit of Landlord and any
first mortgagee of Landlord, subject to the terms and provisions
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of this Lease and any first mortgage; provided, however, that all proceeds
payable by any insurance company under such policy or policies shall be payable
to such mortgagee, if any, and shall be applied in accordance with the terms of
such mortgage; or, if there is no mortgage, the full amount of such proceeds
shall be payable to Landlord, and Tenant shall not be entitled to, and shall
have no interest in, such proceeds or any part thereof. Such policy or policies
shall contain a provision or endorsement with respect to mutual waiver of right
of subrogation. The premium on said insurance shall be paid at lease one (1)
year in advance, and Landlord shall, upon request, furnish Tenant proof of such
insurance.
TENANT'S LIABILITY FOR BUILDING INSURANCE COSTS. At the commencement of the
term of this Lease and within one hundred eighty (180) days after the
commencement of each calendar year (or partial calendar year) thereafter,
Landlord shall furnish Tenant a statement, together with a true copy of the
premium statement, showing the Building Insurance Costs for the calendar year in
which the term commences or the applicable calendar year thereafter and any
deductible amount incurred in any loss. Landlord's failure to provide the
statement shall not relieve Tenant of any liability hereunder. As used herein,
the term "Building Insurance Costs" shall mean the actual premium costs of
public liability and fire and extended coverage insurance, including rent
abatement insurance required by this Lease to be maintained by Landlord and any
deductible incurred in any loss. Tenant's Pro Rata Share of public liability
insurance shall be determined by multiplying the total cost of such insurance by
a fraction, the numerator of which is the square foot area of the Leased
Premises and the denominator of which is the gross leasable area of the
Building. Tenant's Pro Rata Share of fire and extended coverage insurance shall
be determined by multiplying said total cost of such insurance by a fraction,
the numerator of which is the square foot area of the Leased Premises and the
denominator of which is the gross leasable area of the Building. Tenant's Pro
Rata Share of Building Insurance Costs shall be paid as provided above.
ANNUAL ADJUSTMENT. Within ten (10) days after the receipt of Landlord's
statement showing the total amount paid in advance by Tenant and a copy of the
insurance bills showing the actual monies paid or to be paid by Landlord, there
shall be an adjustment between Landlord and Tenant. Tenant shall pay to
Landlord on demand the difference between the amount paid by Tenant and the
actual amount due. If the total amount paid by Tenant hereunder for any such
calendar year shall exceed such actual amount due from Tenant for such calendar
year, the excess shall be credited by Landlord against any amounts then due and
owing by Tenant to Landlord and any remaining net surplus shall then be refunded
by Landlord to Tenant. Failure of Tenant to pay Tenant's Insurance Costs in
the manner and time provided herein shall constitute an event of default
hereunder.
MUTUAL WAIVER OF SUBROGATION. Notwithstanding any provision in this Lease
to the contrary, Landlord and Tenant each hereby waive any and all rights of
recovery, claim, action or cause of action, against the other, its officers,
employees or agents, for any loss or damage that may occur to the Leased
Premises, or any improvements thereto, or the Building or any improvements
thereto, or any personal property of such party therein, by reason of fire, the
elements, or any other cause is insured against under the terms of standard fire
and extended coverage general liability insurance policies, regardless of cause
or origin, including negligence of the other party hereto, its officers,
employees or agents, and each covenants that no insurer shall hold any right of
subrogation against such other party.
9. USE.
The Leased Premises shall be used only for the purpose of receiving,
storing, shipping and selling (other than retail) products, materials and
merchandise made and/or distributed by Tenant and for such other lawful purposes
as may be incidental thereto. Outside storage, including, without limitation,
trucks and other vehicles, is prohibited without Landlord's prior written
consent. Tenant shall at its own costs and expense obtain any and all licenses
and permits necessary for any such use. Tenant shall comply with all
governmental orders and directives for the correction, prevention and abatement
of nuisances in or upon, or connected with, the Leased Premises all at Tenant's
sole expense. Tenant shall not permit any objectionable or unpleasant odors,
smoke, dust, gas, noise or vibrations to emanate from the Leased Premises, nor
take any other action which would constitute a nuisance or would disturb or
endanger any other tenants of the Building or Project or unreasonably interfere
with the use of their respective premises. Without Landlord's prior written
consent, Tenant shall not receive, store or otherwise handle any product,
material or merchandise which is explosive or highly inflammable. Tenant will
not permit the Leased Premises to be used for any purpose or in any manner
(including, without limitation, any method of storage) which would render the
insurance thereon void or the insurance risk more hazardous or cause the State
Board of Insurance or other insurance authority to disallow any sprinkler
credits. Landlord will not construct any structures or make any improvements to
the common areas that would adversely affect the ingress and egress to the
leased premises and the visability of the leased premises.
10. LANDLORD'S REPAIRS.
Landlord shall at its expense maintain only the roof, foundation and the
structural soundness of the exterior walls of the Building in good repair,
reasonable wear and tear excepted. Tenant shall repair and pay for any damage
caused by Tenant, or Tenant's employees agents or invitee, or caused by Tenant's
default hereunder. The term "walls" as used herein shall not include windows,
glass or plate glass, doors, special store fronts or office entries. Tenant
shall immediately give Landlord written notice of defect or need for repairs,
after which Landlord shall have reasonable opportunity to repair same or cure
such defect. Landlord's liability with respect to any defects, repairs or
maintenance for which Landlord is responsible under any of the provisions of
this Lease shall be limited to the cost of such repairs or maintenance or the
curing of such defect.
11. TENANT'S REPAIRS
a) Tenant shall at its own cost and expenses keep and maintain all parts
of the Leased Premises (except those for which Landlord is expressly responsible
under the terms of this Lease) in good condition, promptly making all necessary
repairs and replacements, including but not limited to, windows, glass, plate
glass doors, any special office entry, interior walls and finish work, floors
and floor covering, downspout, gutters, heating and air conditioning systems,
lighting, electrical systems, dock boards, truck doors, door bumpers, paving,
plumbing lines, equipment, and fixtures, termite and pest extermination, regular
removal of trash and debris, including rail spur areas, keeping the theses
areas, parking areas, driveways, alleys and the whole of the
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Leased Premises in a clean and sanitary condition, and maintaining any spur
track serving the Leased Premises (Tenant agrees to sign a joint maintenance
agreement with the railroad company servicing the Leased Premises, if requested
by the railroad company). Tenant shall not be obligated to repair any damage
caused by fire, tornado or other casualty covered by the insurance to be
maintained by Landlord except with respect to tornado or hurricane damage.
b) Tenant shall not damage any demising wall or disturb the integrity and
support provided by any demising wall and shall, at its sole cost and expense,
promptly repair any damage or injury to any demising wall caused by Tenant or
its employees, agents or invitee.
c) In the event the Leased Premises constitute a portion of a multiple
occupancy building. Tenant and its employees, customers and licensees shall
have the exclusive right to use the parking areas, if any, as may be designated
by Landlord in writing, subject to such reasonable rules and regulations as
Landlord may from time to time prescribe and subject to rights of ingress and
egress of other tenants. Landlord shall not be responsible for enforcing
Tenant's [exclusive parking rights] against any third parties. Further, in
multiple occupancy buildings, Landlord shall perform the paving and landscape
maintenance, and reserves the right to perform exterior painting and common
sewage line plumbing which are otherwise Tenant's obligations under subparagraph
(a) above with respect to such items, and Tenant shall be liable for its
proportionate share (as defined in subparagraph (a) above) of the cost and
expense of the care for the grounds around the Building, including but not
limited to the mowing of grass, care of shrubs, general landscaping, maintenance
of parking areas, driveways, and alleys, exterior repainting and common sewage
line plumbing; provided, however, that Landlord shall have the right to require
Tenant to pay such other reasonable proportion of said mowing, shrub care and
general landscaping costs as may be determined by Landlord in its sole
discretion; and further provided that if Tenant or any other particular tenant
of the Building can be clearly identified as being responsible for obstructions
or stoppage of the common sanitary sewage line, then Tenant, if Tenant is
responsible, or such other responsible tenant, shall pay the entire cost
thereof, upon demand, as additional rent. Tenant shall pay its share,
determined as aforesaid, of such costs and expenses in the event Landlord elects
to perform or caused to be performed such work which sum shall be due and
payable ten (10) days after receipt of a statement thereafter.
d) In the event the Leased Premises constitute a portion of a multiple
occupancy building, Landlord shall have the right to coordinate any repairs and
other maintenance of any rail tracks serving or to serve the Building, and if
Tenant uses the rail tracks, Tenant shall reimburse Landlord from time to time
upon demand, as additional rent, for a share of the costs of the repairs and
maintenance and any other sums specified in any agreement to which Landlord is a
party respecting the tracks, such share to be a fraction, the numerator of which
is the space contained in the Leased Premises, and the denominator of which is
the entire space occupied by rail users in the Building which sum shall be due
and payable ten (10) days after receipt of a statement thereafter.
e) Tenant shall, at its own costs and expense, enter into a regularly
scheduled preventive maintenance/service contract with a maintenance contractor
for servicing all hot water, heating and air conditioning systems and equipment
within the Leased Premises. The maintenance contractor and the contract must be
approved by Landlord and such approval shall not be unreasonably withheld. The
service contract must include all services suggested by the equipment
manufacturer within the operation/maintenance manual and must become effective
(and a copy thereof delivered to Landlord) within thirty (30) days of the date
Tenant takes possession of the Leased Premises.
12. TENANT IMPROVEMENTS AND ALTERATIONS
Tenant shall not make any alterations, additions or improvements to the
Leased Premises (including but not limited to roof and wall penetrations) or
Building without the prior written consent of Landlord, and such consent shall
not be unreasonably withheld. All Tenant alterations, additions and/or
improvements shall comply with insurance requirements and with all applicable
laws, ordinances, and regulations. Additionally, all Tenant alterations,
additions and/or improvements shall be in accordance with Landlord's
specifications. All Tenant alterations, additions and/or improvements shall be
constructed in a good and workmanlike manner. All plans and specifications for
Tenant's alterations, additions and/or improvements shall be submitted to
Landlord for Landlord's written approval. Tenant agrees that Landlord may
monitor all phases of Tenant's construction. Tenant shall reimburse Landlord
for Landlord's reasonable expenses for reviewing plans and documents and in
monitoring construction. Landlord's review of plans and monitoring construction
shall be solely for Landlord's own benefit and shall impose no duty or
obligation on Landlord to confirm that the plans and specifications and/or
construction comply with applicable laws, codes, rules, or regulations. At
Landlord's request, Tenant shall obtain payment and performance bonds approved
by Landlord, for any Tenant construction which bonds shall be delivered to
Landlord prior to commencement of construction. Upon completion of Tenant's
construction, Tenant shall deliver to Landlord sworn statements setting forth
the names of all contractors and subcontractors who performed work along with
final lien waivers from such contractors and subcontractors. Tenant may,
without the consent of Landlord, but at its own cost and expense and in a good
workmanlike manner, erect such shelves, bins, machinery, and trade fixtures as
it may deem advisable, without altering the basic character of the Building or
improvements and without overloading or damaging such Building or improvements,
and in each case complying with all applicable governmental laws, ordinances,
regulations and other requirements. All alterations, additions, improvements
and partitions erected by Tenant shall be and remain the property of Tenant
during the term of this Lease and Tenant shall, unless Landlord otherwise elects
as hereinafter provided, remove all alterations, additions, improvements and
partitions erected by Tenant and restore the Leased Premises to its original
condition by the date of termination of this Lease or upon earlier vacating of
the Leased Premises; provided, however, that if Landlord so elects prior to
termination of this Lease or upon earlier vacating of the Leased Premises, such
alterations, additions, improvements and partitions shall become the property
of Landlord as of the date of termination of this Lease or upon earlier vacating
of the Leased Premises and shall be delivered up to the Landlord with the Leased
Premises. All shelves, bins, machinery and trade fixtures installed by Tenant
may be removed by Tenant prior to the termination of this Lease if Tenant so
elects, and shall be removed by the date of termination of this Lease or upon
earlier vacating of the Leased Premises if required shall be accomplished in a
good workmanlike manner so as not to damage the primary structure or structural
qualities of the buildings and other improvements situated on the Leased
Premises.
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<PAGE> 6
13. SIGNS
Tenant shall have the right to install signs upon the Leased Premises only
when first approved in writing by Landlord and subject to any applicable
governmental laws, ordinances, regulations, Landlord's or other architectural
controls, and other requirements. Tenant shall remove all such signs by the
termination of this Lease. Such installations and removals shall be made in
such manner as to avoid injury or defacement of the Building and other
improvements, and Tenant shall repair any injury or defacement, including,
without limitation, discoloration, caused by such installation and/or removal.
14. INSPECTION
Landlord and Landlord's agents and representatives shall have the right to
enter and inspect the Leased Premises and Building at any reasonable time, and
subject to advance notice to Tenant, during business hours, for the purpose of
ascertaining the condition of the Leased Premises or in order to made such
repairs as may be required or permitted to be made by Landlord under the terms
of this Lease. During the period that is six (6) months prior to the end of the
term hereof, Landlord and Landlord's agents and representatives shall have the
right to enter the Leased Premises at any reasonable time during business hours
for the purpose of showing the Leased Premises and shall have the right to erect
on the Leased Premises a suitable sign indicating the Leased Premises are
available. Tenant shall give written notice to Landlord at least thirty (30)
days prior to vacating the Leased Premises and shall arrange to meet with
Landlord for a joint inspection of the Leased Premises prior to vacating. In
the event of Tenant's failure to give such notice or arrange to meet with
Landlord for a joint inspection of the Leased Premises prior to vacating,
Landlord's inspection at or after Tenant's vacating the Leased Premises shall be
conclusively deemed correct for purposes of determining Tenant's responsibility
for repairs and restoration.
15. UTILITIES
Landlord agrees to provide at Landlord's cost water, electricity and
telephone service connections into the Leased Premises; but Tenant shall pay for
all water, gas, heat, light, power, telephone, sewer, sprinkler charges and
other utilities and services used on or from the Leased Premises, together with
any taxes, penalties, surcharges or the like pertaining thereto and any
maintenance changes for utilities, as well as shall furnish all electric light
bulbs and tubes. If any such services are not separately metered to Tenant,
Tenant shall pay Tenant's reasonable proportion, as determined by Landlord, of
all charges jointly metered with other premises. Landlord shall in no event be
liable for any interruption or failure of utility services on the Leased
Premises.
16. ASSIGNMENT AND SUBLETTING
a) Tenant will not assign this Lease, or allow same to be assigned by
operation of law or otherwise, or sublet the Leased Premises or any part thereof
without the prior written consent of Landlord, and such consent shall not be
unreasonably withheld. Notwithstanding any permitted assignment or subletting.
Tenant shall at all times remain directly, primarily and fully responsible and
liable for the payment of the rent herein specified and for compliance with all
of its other obligations under the terms, provisions and covenants of this
Lease. If the Leased Premises or any part thereof are then assigned or sublet,
Landlord, in addition to any other remedies herein provided or provided by law,
may at its option collect directly from such assignee or subtenant all rents
becoming due to Tenant under such assignment or sublease and apply such rent
against any sums due to Landlord from Tenant hereunder, and no such collection
shall be construed to constitute a novation or a release of Tenant from the
further performance of Tenant's obligations hereunder. For purpose of this Lease
and transfer of more than fifty percent (50%) of the beneficial interest in
Tenant or of the control of Tenant (if Tenant is a partnership, corporation,
limited liability, company, trust, or other type of business, organization or
entity) shall constitute an assignment of this Lease.
b) If Tenant shall propose to sublet or assign this Lease, it shall so
notify Landlord in writing not less than thirty (30) days prior to the date of
the proposed assignment or subletting. The notice shall set forth the name of
the proposed subtenant or assignee, the term, use, rental rate and other
particulars of the proposed subletting or assignment, including without
limitation, proof satisfactory to Landlord that the proposed subtenant or
assignee is financially responsible and will immediately occupy and hereafter
use the entire Leased Premises (or any sublet portion thereof) for the remaining
term of this Lease (or for the entire term of the sublease, if shorter).
d) Landlord agrees to approve any assignment by Tenant to any corporation
succeeding to substantially all the business and assets of Tenant by merger,
consolidation, purchase of assets or otherwise, or the any assignment or
subletting to a corporation which is an affiliate of tenant. In other cases,
provided that there is no event of default on the part of Tenant (or
circumstances which, with the passing of time, giving of notices, or both, would
constitute an event of default, Landlord agrees not to unreasonably withhold
approval of any proposed subletting or assignment as to which Landlord declines
its rights
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of cancellation hereunder provided the proposed transaction is consummated
within thirty (30) days after Landlord's approval, is upon the same terms and
conditions disclosed to Landlord in Tenant's notice, and the assignment or
subletting is with another financially responsible party whose use of the Leased
Premises will not depreciate the value of the Leased Premises, or the value of
the property adjacent thereto, or will not be extra hazardous with reference to
the risk of fire or other hazards, and shall not result in any additional
environmental risk for the Project. Any assignment or subletting without
Landlord's approval, where required hereunder, shall be void and of no effect.
e) Landlord shall have the right to transfer and assign, in whole or in
part, any of its rights under this Lease, and in the Building or Project
referred to herein; and to the extent that such assignee assumes Landlord's
obligations hereunder, Landlord shall by virtue of such assignment be released
from such obligation.
17. FIRE AND CASUALTY DAMAGE
a) If the Building should be damaged or destroyed by fire, tornado or
other casualty, Tenant shall give immediate written notice thereof to Landlord.
b) If the Building should be totally destroyed by fire, tornado or other
casualty, or if they should be so damaged, thereby that rebuilding or repairs
cannot in Landlord's estimation be completed within two hundred (200) days after
the date upon which Landlord is notified by Tenant of such damage, this Lease
shall terminate and the rent shall be abated during the unexpired portion of
this Lease, effective upon the date of the occurrence of such damage.
c) If the Building should be damaged by any peril covered by the insurance
to be provided by Landlord this Lease, but only to such extent that rebuilding
or repairs can in Landlord's estimation be completed within two hundred (200)
days after the date upon which Landlord is notified by Tenant of such damage,
this Lease shall not terminate, and Landlord shall at its sole costs and expense
thereupon proceed with reasonable diligence to rebuild and repair the Building
to substantially the condition in which it existed prior to such damage, except
that Landlord shall not be required to rebuild, repair or replace any part of
the partitions, fixtures, additions and other improvements which may have been
placed in, on or about the Leased Premises by Tenant. If the Leased Premises
are untenantable, the rent owed by Tenant shall not be abated but shall be
reduced to such extent as may be fair and reasonable under all of the
circumstances. In the event that Landlord shall fail to complete such repairs
and rebuilding within two hundred (200) days after the date upon which Landlord
is notified by Tenant of such damage, Tenant may at its option terminate this
Lease by delivering written notice of termination to Landlord within ten (10)
days after expiration of such two hundred (200) day period as Tenant's exclusive
remedy, whereupon all rights and obligations hereunder shall cease and
terminate. Failure by Tenant to timely terminate this Lease as set forth in the
preceding sentence shall be deemed a waiver by Tenant of its right to do so.
d) Notwithstanding anything herein to the contrary, in the event the
holder of any indebtedness secured by a mortgage or deed of trust covering the
Leased Premises requires that the insurance proceeds be applied to such
indebtedness, than Landlord shall have the right to terminate this Lease by
delivering written notice of termination to Tenant within fifteen (15) days
after such requirement is made by any such holder, whereupon all rights and
obligations hereunder shall cease and terminate.
18. CONDEMNATION
a) If the whole or any substantial part of the Leased Premises should be
taken from any public or quasi-public use under governmental law, ordinance or
regulation, or by right of eminent domain, or by private purchase in lieu
thereof and the taking would prevent or materially interfere with the use of the
Leased Premises for the purposes for which they are being used, this Lease shall
terminate and the rent shall be abated during the unexpired portion of this
Lease, effective when the physical taking of the Leased Premises shall occur.
b) If part of the Leased Premises shall be taken for any public or
quasi-public use under any governmental law, ordinance or regulation, or by
right of eminent domain, or by private purchase in lieu thereof, and this Lease
is not terminated as provided in the subparagraph above, this Lease shall not
terminate but the rent payable hereunder during the unexpired portion of this
Lease shall be reduced to such extent as may be fair and reasonable under all of
the circumstances.
c) In the event of any such taking or private purchase in lieu thereof,
Landlord and Tenant shall each be entitled to receive and retain such separate
awards and/or portions of lump sum awards as may be allocated to their
respective interests in any condemnation proceedings.
19. HOLDING OVER
Tenant agrees that at the termination of this Lease by lapse of time or
otherwise, yield up immediate possession to Landlord. If Tenant holds over
after the expiration or termination of this Lease, unless the parties hereto
otherwise agree in writing on the terms of such holding over, the hold over
tenancy shall be subject to termination by Landlord at any time upon not less
than five (5) days advance written notice, or by Tenant at any time upon not
less than thirty (30) days advance written notice. During the hold over, all of
the other terms and provisions of this Lease shall be applicable during that
period, except that Tenant shall pay Landlord from time to time upon demand, as
rental for the period of any holdover, an amount equal to two (2) times the rent
in effect on the termination date, computed on a daily basis for each day of the
hold over period. No holding over by Tenant, whether with or without consent of
Landlord, shall operate to extend this Lease except as otherwise expressly
provided. The preceding provisions of this paragraph shall not be construed as
Landlord's consent for Tenant to hold over.
20. QUIET ENJOYMENT
Landlord covenants that it now has, or will acquire before Tenant takes
possession of the Leased Premises, good title to the Leased Premises, free and
clear of all liens and encumbrances, excepting only the lien for current taxes
not yet due, such mortgage or mortgages as are permitted by the terms of this
Lease,
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<PAGE> 8
zoning ordinances and other building and fire ordinances and governmental
regulations relating to the use of such property, and easements, restrictions
and other conditions of record. In the event this Lease is a sublease, then
Tenant agrees to take the Leased Premises subject to the provisions of the prior
leases. Landlord represents and warrants that it has full right and authority
to enter into this Lease and that Tenant, upon paying the rentals herein set
forth and performing its other covenants and agreements herein set forth, shall
peaceably and quietly have, hold and enjoy the Leased Premises for the term
hereof without hindrance or molestation from Landlord, subject to the terms and
provisions of this Lease.
21. TENANT'S EVENTS OF DEFAULT
The following events shall be deemed to be events of default by Tenant
under this Lease:
a) Tenant shall fail to pay any installment of the rent herein reserved
when due, or any payment with respect to Tenant's pro rata share of Building
Costs hereunder when due, or any other payment or reimbursement to Landlord
required herein when, due, and such failure shall continue for a period of five
(5) days from the date such payment was due.
b) Tenant shall become insolvent, or shall make a transfer in fraud of
creditors, or shall make an assignment for the benefit of creditors.
c) Tenant shall be adjudged bankrupt or insolvent in proceedings filed
against Tenant.
d) A receiver or trustee shall be appointed for all or substantially all
of the assets of Tenant.
e) Tenant shall desert or vacate any substantial portion of the Leased
Premises.
f) Tenant shall fail to comply with any term, provision or covenant of
this Lease (other than the foregoing in this Paragraph), and shall not cure such
failure within twenty (20) days after written notice thereof to Tenant.
22. LANDLORD'S REMEDIES
Upon the occurrence of any such events of default described in Paragraph 19
hereof, Landlord shall have the option to pursue any one or more of the
following remedies without any notice or demand whatsoever:
a) Terminate this Lease, or terminate Tenant's rights to possession of the
Leased Premises under this Lease (but not the Lease, itself ), and in either
event Landlord shall have the right to immediate possession of the Leased
Premises and may reenter the Leased Premises, change the locks and remove all
persons and property therefrom using all force necessary for this purpose
without being guilty in any manner of trespass or otherwise; and any and all
damages to Tenant, or persons holding under Tenant, by reason of such re-entry
are hereby expressly waived; and any such termination or re-entry on the part of
Landlord shall be without prejudice to any remedy available to Landlord for
arrears of rent, breach of contract, damages or otherwise, nor shall the
termination of this Lease or of Tenant's rights of possession under this Lease
by Landlord acting under this subsection be deemed in any manner to relieve
Tenant from the obligation to pay the rent and all other amounts due or to
become due as provided in this Lease for and during the entire unexpired portion
then remaining of the Lease term. In the event of termination of this Lease or
of Tenant's rights of possession under this Lease by Landlord as provided in
this subparagraph, Landlord shall have the further right (but not the
obligation) to relet the Leased Premises upon such terms, conditions and
covenants as are deemed proper by Landlord for the account of Tenant, and in
such event, Tenant shall pay to Landlord all costs of renovating and altering
the Leased Premises for a new tenant or tenants in addition to all brokerage
and/or legal fees incurred in connection therewith. Landlord shall credit
Tenant only for such amounts as are actually received from such reletting during
the then remaining Lease term. Alternatively, at the election of Landlord,
Tenant covenants and agrees to pay as damages to Landlord, upon any such
termination by Landlord of this Lease or of Tenant's rights of possession under
this Lease, such sum as at the time of such termination equals the amount of the
excess, if any, of the then present value of all the rent which would have been
due and payable hereunder during the remainder of the full Lease term (had
Tenant kept and performed all agreements and covenants of Tenant set forth in
this Lease) over and above the then present rental value of the Leased Premises
for said remainder of the Lease term. For purposes of present value
calculations, Landlord and Tenant stipulate and agree to a discount rate of six
(6) percent per annum.
b) Without terminating this Lease, to enter upon the Leased Premises and
without being guilty in any manner of trespass or otherwise and without
liability for any damage to Tenant or persons holding under Tenant by reason of
such re-entry, all of which are hereby expressly waived, and to do or perform
whatever Tenant is obligated hereunder to do or perform under the terms of this
Lease; and Tenant shall reimburse Landlord on demand for any expenses or other
sums which Landlord may incur or expend plus fifteen percent (15% ) thereof to
cover Landlord's overhead and administrative cost, pursuant to this
subparagraph, and Landlord shall not be liable for any damages resulting to
Tenant from such action, whether caused by the negligence of Landlord or
otherwise; provided, however, nothing in this subsection shall be deemed an
obligation or undertaking by Landlord to remedy any such defaults of Tenant.
c) Without waiving such event of default, apply all or any part of the
security deposit to cure the event of default or to any damages suffered as a
result of the event of default to the extent of the amount of damages suffered.
Tenant shall reimburse Landlord for the amount of such depletion of the security
deposit on demand.
d) In addition to any of the remedies noted above or hereinafter, Landlord
is entitled and authorized to enter upon and take possession of the Leased
Premises and remove any property that may be found within the Leased Premises.
Landlord shall have the right to change any and all locks and other security
devices restricting access to the Leased Premises. To the extent permitted by
law, Tenant hereby waives: (i) any notices of Landlord's intent to re-enter or
re-take possession of the Leased Premises; (ii) any notice provided by statute
or otherwise of such re-entry or repossession or changing of locks; (iii) any
claim or cause of action, whether based on trespass, conversion, or otherwise,
against Landlord or Landlord's agents, employees, officers, or contractors for
any damages caused by the alteration of any locks or re-entry or repossession by
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Landlord, whether or not caused by the negligence of Landlord or otherwise; and
(iv) any right of redemption, re-entry, or repossession of Tenant and any notice
of legal proceeding for re-entry, including actions for forcible detainer and
entry.
Provided that Landlord has not terminated the Lease in writing or
permanently excluded Tenant from the Leased Premises, Landlord shall not be
obligated to provide a new key to Tenant except during Landlord's normal
business hours, and only after the following: (1) Tenant cures all events of
default existing at the time of lock-out, including payment of late charges and
reasonable expenses of lock-out (which shall include the cost of security
services and removal of old locks and installation of new locks), and (2) Tenant
has provided Landlord additional security or further assurances of Tenant's
future performance of all Tenant's obligations arising under the Lease, such
security or assurances to be satisfactory to Landlord in the exercise of
Landlord's sole and absolute discretion, which security may include, but is not
limited to, a requirement that the security deposit be increased to an amount
equal to three (3) months rent. Such lock-out should not be deemed to be a
termination of the Lease unless Landlord gives a written notice of termination
to Tenant. It is agreed that if Tenant abandons or vacates the Leased Premises,
Landlord may take such steps as Landlord deems necessary, appropriate, or
desirable to protect the Leased Premises and the property therein from
deterioration, including but not limited to, the lock-out of Tenant as described
herein.
In the event Tenant fails to pay any installment of rent or any
reimbursement, additional rental, or any other payment hereunder as and when
such payment is due, to help defray the additional cost to Landlord for
processing such late payments Tenant shall pay to Landlord on demand a late
charge in an amount equal to five percent (5%) of such installment,
reimbursement, additional rental or any other payment and the failure to pay
such late charge within ten (10) days after demand therefor shall be an event of
default hereunder. The provision for such late charge shall be in addition to
all of Landlord's other rights and remedies hereunder or at law and shall not be
construed as liquidated damages or as limiting Landlord's remedies in any
manner.
Pursuit of any of the forgoing remedies shall not preclude pursuit of any
of the other remedies herein provided or any other remedies provided by law, nor
shall pursuit of any remedy herein provided constitute a forfeiture or waiver of
any rent due to Landlord hereunder or of any damages accruing to Landlord by
reason of the violation of any of the terms, provisions and covenants herein
contained. No act or thing done by the Landlord or its agents during the term
hereby granted shall be deemed a termination of this Lease or an acceptance of
the surrender of the Leased Premises, and no agreement to terminate this Lease
or accept a surrender of the Leased Premises shall be valid unless in writing
signed by Landlord. No waiver by Landlord of any violation or breach of any of
the terms, provisions and covenants herein contained. Landlord's acceptance of
the payment of rental or other payments hereunder after the occurrence of an
event of default shall not be construed as a waiver of such default, unless
Landlord so notifies Tenant in writing. Forbearance by Landlord to enforce one
or more of the remedies herein provided upon an event of default shall not be
deemed or construed to constitute a waiver of such default or of Landlord's
right to enforce any such remedies with respect to such default or any
subsequent default. If, on account of any breach or default by Tenant in
Tenant's obligations under the terms and conditions of this Lease, it shall
become necessary or appropriate for Landlord to employ or consult with any
attorney concerning or to enforce of defend any of Landlord's rights or remedies
hereunder, Tenant agrees to pay any reasonable attorney's fees so incurred.
All sums due and owing by Tenant to Landlord under this Lease shall bear
interest from the date due until paid at the lesser of (a) the maximum
non-usurious rate permitted by law or (b) the greater of (i) two percent (2%)
above the "prime rate" per annum of Texas Commerce Bank National Association or
its successor in effect on said due date or (ii) eighteen percent (18%) per
annum. In either case, such interest to be compounded daily; provided, however,
in no event shall the rate of interests hereunder exceed the maximum
non-usurious rate of interest (hereinafter called the "Maximum Rate") permitted
by the applicable laws of the State of Texas or the United States of America,
whichever shall permit the higher non-usurious rate, and as to which Tenant
could not successfully assert a claim or defense of usury. To the extent that
the Maximum Rate is determined by reference to the laws of the State of Texas,
the Maximum Rate shall be the indicated rate ceiling (as defined and described
in Texas Revised Civil Statutes, Article 5069-1.04, as amended at the applicable
time in effect.
23. LANDLORD'S LIEN
Any statutory lien for rent is not hereby waived, the express contractual
lien herein granted being in addition and supplementary thereto.
24. SUBORDINATION
This Lease and all rights of Tenant hereunder are subject and subordinate
(i) to any mortgage or deed of trust, blanket or otherwise, which does now or
may hereafter affect the Building (and which may also affect other properties)
and (ii) to any and all increases, renewals, modifications, consolidations,
replacements and extensions of any such mortgage or deed of trust. This
provision is hereby declared by Landlord and Tenant to be self-operative and no
further instruments shall be required to effect such subordination of this
Lease. Tenant shall, however, upon demand at any time or times execute,
acknowledge and deliver to Landlord any and all instruments and certificates
that may be necessary or proper to more effectively subordinate this Lease and
all rights of Tenant hereunder to any such mortgage or deed of trust or to
confirm or evidence such subordination. In the event Tenant shall fail or
neglect to execute, acknowledge and deliver any subordination agreement or
certificate, Landlord in addition to any other remedies it may have, as the
agent and attorney in fact of Tenant, execute, acknowledge and deliver the same
and Tenant hereby irrevocably nominates, constitutes
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and appoints Landlord Tenant's proper and legal agent and attorney in fact for
such purposes. Such power of attorney shall not terminate on disability of the
principal. Tenant covenants and agrees, in the event any proceedings are
brought for the foreclosure of any such mortgage or if the Building is sold to
any purchaser, to attorn to and recognize such purchaser as the Landlord under
this Lease. Tenant agrees to execute and deliver at any time and from time to
time, upon the request of Landlord or of any holder(s) of any of the
indebtedness or other obligations secured by any of the mortgages or deeds of
trust be necessary or appropriate in any such foreclosure proceeding or
otherwise to evidence such attornment. Tenant hereby irrevocably appoints
Landlord and the holders of the indebtedness or other obligations secured by the
aforesaid mortgages and/or deeds of trust jointly and severally the agent and
attorney shall not terminate on disability of the principal. Tenant further
waives the provisions of any statute or rule of law, now or hereafter in
effect, which may give or purport to give Tenant any right or election to
terminate or otherwise adversely affect this Lease and the obligation of Tenant
hereunder in the event any such foreclosure proceedings is brought or trustee's
sale occurs and agrees that this Lease shall not be affected in any way
whatsoever by any such foreclosure proceeding or trustee's sale unless the
holder(s) of the indebtedness or other obligations secured by said mortgages
and/or deeds of trust shall declare otherwise. In the event Landlord places a
mortgage, deed of trust or otherwise on the building or project, Landlord shall
provide Tenant a non-disturbance agreement in a form reasonably satisfactory to
Landlord, Tenant and Landlord's creditor.
25. LANDLORD'S DEFAULT
Landlord shall only be deemed to be in default on the terms of the Lease in
the event Landlord shall violate, neglect, or fail to observe, keep or perform
any covenant or agreement which is not observed, kept, or performed by Landlord
within thirty (30) days after the receipt by Landlord of Tenant's written notice
of such breach which notice shall specifically set out the breach. Landlord
shall not be considered in default so long as Landlord commences to cure the
breach in a diligent and prudent manner and is allowed such additional time as
reasonably necessary to correct the breach. Notwithstanding any provisions to
the contrary contained in this Lease, no personal liability of any kind or
character whatsoever shall attach or at any time hereafter attach under any
conditions to Landlord or any subsidiary, affiliate or partner of Landlord or
their respective officers, directors, stockholders, or employees for payments of
any amounts due under this Lease or for the performance of any obligation under
this Lease. The exclusive remedies of Tenant for failure of Landlord to perform
any of its obligations under this Lease shall be to proceed against the interest
of Landlord in and to the Leased Premises it being understood that in no event
shall a judgment for any deficiency or monetary claim be sought, obtained or
enforced against Landlord or any subsidiary, affiliate or partner of Landlord or
their respective officers, directors, stockholders or employees. In no event
shall Landlord be liable for any consequential, special, punitive or exemplary
damages.
26. MECHANIC'S LIENS
Tenant shall have no authority, express or implied, to create or place any
lien or encumbrance of any kind or nature whatsoever upon, or in any manner to
bind, the interest of Landlord in the Leased Premises or to charge the rentals
payable hereunder for any claim in favor of any person dealing with Tenant,
including those who may furnish materials or perform labor for any construction
or repairs, and each such claim shall affect and each such lien shall attach to,
if it all, only the leasehold interest granted to Tenant by this instrument.
Tenant covenants and agrees that it will pay or cause to be paid all sums
legally due and payable by it on account of any labor performed or materials
furnished in connection with any work performed on the Leased Premises on which
any lien is or can be validly and legally asserted against its leasehold
interest in the Leased Premises or the improvements thereon and that it will
indemnify, defend and save and hold Landlord harmless from any and all loss,
cost or expense based on or arising out of asserted claims or liens against the
leasehold estate or against the right, title and interest of the Landlord in the
Leased Premises or under the terms of this Lease.
27. NOTICES
Each provision of this instrument or of any applicable governmental laws,
ordinances, regulations and other requirements with reference to the sending,
mailing or delivery of any notice or the making of any payment by Landlord to
Tenant or with reference to the sending, mailing or delivery of any notice or
the making of any payment by Tenant to Landlord shall be deemed to be complied
with when and if the following steps are taken:
a) All rent and other payments required to be made by Tenant to Landlord
hereunder shall be payable to Landlord at the address hereinbelow set forth or
at such other address as Landlord may specify from time to time by written
notice delivered in accordance herewith. Tenant's obligation to pay rent and
any other amounts to Landlord under the terms of this Lease shall not be deemed
satisfied until such rent and other amounts have been actually received by
Landlord.
b) All payments required to be made by Landlord to Tenant hereunder shall
be payable to Tenant at the address hereinbelow set forth, or at such other
address within the continental United States as Tenant may specify from time to
time by written notice delivered in accordance herewith.
c) Any notice or document required or permitted to be delivered hereunder
shall be deemed to be delivered whether actually received or not, when deposited
in the United States Mail, postage prepaid, Certified or Registered Mail,
addressed to the parties hereto at the respective addresses set out below, or at
such other address as they have heretofore specified by written notice delivered
in accordance herewith:
<TABLE>
<CAPTION>
Landlord: Tenant:
--------- -------
<S> <C>
Lakes Technology Center, Ltd. Sharps Compliance, Inc.
c/o Transwestern Property Company 9050 Kirby Drive
6671 Southwest Fwy #200 Houston, TX 77054
Houston, TX 77074
</TABLE>
If and when included within the term "Landlord", as used in this instrument,
there are more than one person, firm or corporation, all shall jointly arrange
among themselves for their joint execution of such a notice
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specifying some individual at some specific address for their receipt of notices
and payments to Landlord; if and when included within the term "Tenant" as used
in this instrument, there are more than one person, firm or corporation, all
shall jointly arrange among themselves for their joint execution of such a
notice specifying some individual at some specific address within the
continental United States for the receipt of notices and payments to Tenant.
All parties included within the terms "Landlord" and "Tenant", respectively,
shall be bound by notices given in accordance with the provisions of this
paragraph to the same effect as if each had received such notice.
28. MISCELLANEOUS
a) Words of any gender used in this Lease shall be held and construed to
include any other gender, and words in the singular number shall be held to
include the plural, unless the context otherwise requires.
b) The terms, provisions and covenants and conditions contained in this
Lease shall apply to, inure to the benefit of, and be binding upon, the parties
hereto and upon their respective heirs, legal representatives, successors and
permitted assigns, except as otherwise herein expressly provided. Each party
agrees to furnish to the other, promptly upon demand, a corporate resolution,
proof of due authorization by partners, or other appropriate documentation
evidencing the due authorization of such party to enter into this Lease.
c) The captions inserted in this Lease are for convenience only and in no
way define, limit or otherwise describe the scope or intent of this Lease, or
any provision hereof, or in any way affect the interpretation of this Lease.
d) Tenant agrees from time to time within ten (10) days after request of
Landlord, to deliver to Landlord, or Landlord's designee, an estoppel
certificate stating that this Lease is in full force and effect, the date to
which rent has been paid, the unexpired term of this Lease and such other
matters pertaining to this Lease as may be requested by Landlord. It is
understood and agreed that Tenant's obligation to furnish such estoppel
certificates in a timely fashion is a material inducement for Landlord's
execution of this Lease.
e) This Lease may not be altered, changed or amended except by an
instrument in writing signed by both parties hereto.
f) All obligations of Tenant hereunder not fully performed as of the
expiration or earlier termination of the term of this Lease shall survive the
expiration or earlier termination of the term hereof, including, without
limitation, all payments obligations with respect to taxes and insurance and all
obligations concerning the condition of the Leased Premises. Upon the
expiration or earlier termination of the term hereof, and prior to Tenant
vacating the Leased Premises, Tenant shall pay to Landlord any amount reasonably
estimated by Landlord as necessary to put the Leased Premises, including without
limitation all heating and air conditioning systems and equipment therein, in
good condition and working order. Tenant shall also, prior to vacating the
Leased Premises, pay to Landlord the amount, as estimated by Landlord, of
Tenant's obligation hereunder for Tenant's pro rata share of Building Costs for
the year in which the Lease expires or terminates. All such amounts shall be
used and held by Landlord for payment of such obligations of Tenant hereunder,
with Tenant being liable for any additional costs therefor upon demand by
Landlord, or with any excess to be returned to Tenant after all such obligations
have been determined and satisfied, as the case may be. Any security deposit
held by Landlord shall be credited against the amount payable by Tenant under
this Paragraph.
g) If any clause or provision of this Lease is illegal, invalid or
unenforceable under present or future laws effective during the term of this
Lease, then and in that event, it is the intention of the parties hereto that
the remainder of this Lease shall not be affected thereby, and it is also the
intention of the parties to this Lease that in lieu of each clause or provision
of this Lease that is illegal, invalid or unenforceable, there be added as a
part of this Lease contract a clause or provision as similar in terms to such
illegal, invalid or unenforceable clause or provision as may be possible and be
legal, valid and enforceable.
h) Because the Leased Premises are on the open market and are presently
being shown, this Lease shall be treated as an offer with the Leased Premises
being subject to prior lease and such offer to withdrawal or non-acceptance by
Landlord or to other use of the Leased Premises without notice, and this Lease
shall not be valid or binding unless and until accepted by Landlord in writing.
i) All referenced in this Lease to "the date hereof" or similar referenced
shall be deemed to refer to the last date, in point of time, on which all
parties hereto have executed this Lease.
j) It is expressly stipulated and agreed that none of the obligations to
be undertaken by Landlord hereunder shall constitute any form of warranty,
express or implied, all such obligations being contractual covenants of
performance. Without limiting the generality of the foregoing, THERE IS NO
WARRANTY AS TO SUITABILITY, HABITABILITY, MERCHANTABILITY OR FITNESS FOR ANY
PARTICULAR PURPOSE GIVEN IN CONNECTION WITH THIS LEASE. This disclaimer of
express and implied warranties and the provisions of Paragraph 8 under which
Tenant assumes responsibility for repairs, are provisions bargained for by the
parties entering into this Lease. Were warranties undertaken by the Landlord
hereunder or were the Landlord agrees to perform repairs beyond that
contemplated to be performed by Landlord hereunder, the economics of this Lease
would have been affected and it would require an increase in Minimum Rent from
that payable hereunder.
29. EXHIBITS AND ATTACHMENT
All Exhibits, attachments, riders and addenda referred to in this Lease are
incorporated in this Lease and made a part hereof for all intents and purposes.
30. TENANT'S INDEMNITY
Tenant covenants and agrees to indemnify and hold Landlord harmless from
and against any and all costs, liability or expense arising out of any claims of
any person or persons, or imposed by reason of any violation of law or ordinance
on account of any occurrence in, upon or at the Leased Premises, or resulting
from the
11
<PAGE> 12
occupancy or use thereof by Tenant or by any person or persons holding
thereunder, or by reason of the use or misuse of the parking area of any other
common facility in the Building by Tenant or by any person or persons holding or
using the Leased Premises, or any part thereof, under Tenant, including, without
limitation, Tenant's customers, invitees, agents, contractors, employees,
servants, subtenants, assignees, licensees or concessionaires.
31. HAZARDOUS MATERIALS
a) Tenant shall not, without Landlord's prior written consent, cause or
permit any Hazardous Materials (hereinafter defined) to be stored, used or
disposed of in or about the Leased Premises or Project by Tenant, its agents,
employees, contractors or invitees, nor shall the use which Tenant makes of the
Leased Premises result in any Hazardous Materials Contamination (hereinafter
defined). For purposes of this Lease, the following terms shall have the
meanings herein specified:
(1) "Hazardous Materials" shall mean (i) any "hazardous waste" as defined
by the Resource Conservation and Recovery Act of 1976 (42 U.S.C.A. Sections
6901 et seq.), as amended from time to time, and regulations promulgated
thereunder ("RCRA"); (ii) any "hazardous substance" as defined by the
Comprehensive Environmental Response, Compensation and Liability Act of
1980 (42 U.S.C.A. Sections 9601 et seq.), as amended from time to time, and
regulations promulgated thereunder ("CERCLA") ; (iii) any hazardous
substances as defined by the Texas Natural Resource Conservation Commission
("TNRCC"); (iv) asbestos, polychlorinated biphenyls or other substances
specifically regulated under the Toxic Substances Control Act
(15 U.S.C. Sections 2601 et seq.), as amended from time to time, and
regulations promulgated thereunder ("TSCA"); (v) pesticides specifically
regulated under the Federal Insecticide, Fungicide and Rodenticide Act (7
U.S.C.A. Sections 135 et seq.), as amended from time to time, and
regulations promulgated thereunder ("FIFRA"); (vi) storage tanks, whether
or not underground and whether empty, filled or partially filled with any
substance; (vii) the presence of oil, petroleum products, and their
by-products; (viii) any substance the presence of which in or about the
Property is prohibited by any governmental authority or which is hereafter
classified by any governmental authority as a hazardous or toxic waste,
material, substance or similar phraseology; and (ix) any other substance
which by any governmental authority requires special handling or
notification of any governmental authority in its collection, storage,
treatment, or disposal.
(2) "Hazardous Materials Contamination" shall mean the spillage, leakage,
emission or disposal of Hazardous Materials (whether presently existing or
hereafter occurring) in or about the buildings, facilities, soil,
groundwater, air or other elements in or about the Property or any other
property as a result of Hazardous Materials at any time emanating from the
Leased Premises.
b) Notwithstanding the foregoing, Tenant shall be permitted to store, use
and dispose of deminimis amounts of Hazardous Materials which are incidental to
Tenant's business so long as such amounts does not increase the Landlord's
insurance or change the occupancy class of the Building. Such Hazardous
Materials and all containers therefore, shall be stored, used and disposed of in
a manner that complies with all federal, state and local laws or regulations
applicable to such Hazardous Materials. Tenant shall be liable for all costs
and expenses related to the storage, use and disposal of such deminimis amounts
of Hazardous Materials incidental to Tenant's business and shall indemnify,
defend and hold Landlord harmless from any claims or liabilities relating
thereto.
c) At the commencement of each "Lease Year" (the term "Lease Year" as used
in this Lease shall mean any twelve (12) month period beginning with the
Commencement Date and each twelve (12) month period beginning on any anniversary
date thereof), Tenant shall disclose to Landlord the names and approximate
amounts of all Hazardous Materials which Tenant intends to store, use or dispose
of in or about the Leased Premises in the coming Lease Year. In addition, at
the commencement of each Lease Year (beginning with the second Lease Year),
Tenant shall disclose to Landlord the names and amounts of all Hazardous
Materials that to Tenant's knowledge were actually stored, used or disposed of
in or about the Leased Premises, if such materials were not previously
identified to Landlord at the commencement of the previous Lease Years.
d) Tenant shall give written notice to Landlord immediately upon Tenant's
acquiring knowledge of the presence of any Hazardous Materials in or about the
Leased Premises (subject to the provisions of paragraph b. hereof) or of any
Hazardous Materials Contamination with a full description thereof. Landlord
shall have the right, but not the obligation, without in any way limiting
Landlord's other rights and remedies under the Lease, to enter onto the Leased
Premises or to take such other actions as it deems necessary or advisable to
cleanup, remove, resolve or minimize the impact of, or otherwise deal with, any
Hazardous Materials or Hazardous Materials Contamination on the Project
following receipt of any notice from any person or entity asserting the
existence of any Hazardous Materials or Hazardous Materials Contamination
pertaining to the Leased Premises or any part of the Project which, if true,
could result in an order, suit, imposition of a lien on the Project, or other
action and/or which, in Landlord's sole opinion, could jeopardize Landlord's
security under the Lease.
e) TENANT HEREBY AGREES THAT TENANT SHALL DEFEND, INDEMNIFY AND HOLD
HARMLESS LANDLORD, ITS AGENTS AND EMPLOYEES FROM AND AGAINST ANY CLAIMS,
DEMANDS, PENALTIES, FINES, LIABILITIES, SETTLEMENTS, DAMAGES, COSTS OR EXPENSES
(INCLUDING WITHOUT LIMITATION, ATTORNEYS' AND CONSULTANTS' FEES, COURT COSTS AND
LITIGATION EXPENSES) OF WHATEVER KIND OR NATURE, KNOWN OR UNKNOWN, CONTINGENT OR
OTHERWISE, ARISING OUT OF OR IN ANY WAY RELATED TO (A) THE PRESENCE, DISPOSAL,
RELEASE OR THREATENED RELEASE AND SUBSEQUENT REMEDIATION OF ANY HAZARDOUS
MATERIALS OR ANY HAZARDOUS MATERIALS CONTAMINATION FROM THE LEASED PREMISES; (B)
ANY PERSONAL INJURY (INCLUDING WRONGFUL DEATH) OR PROPERTY DAMAGE (REAL OR
PERSONAL) ARISING OUT OF OR RELATED TO SUCH HAZARDOUS MATERIALS OR HAZARDOUS
MATERIALS CONTAMINATION; OR (C) THE APPLICABILITY OF ANY LAWS RELATING TO
HAZARDOUS MATERIALS ON THE LEASED PREMISES OR CAUSED BY TENANT. THE PROVISIONS
OF THIS PARAGRAPH E. SHALL BE IN ADDITION TO ANY OTHER OBLIGATIONS AND
LIABILITIES TENANT MAY HAVE TO LANDLORD AT LAW OR IN EQUITY AND SHALL SURVIVE
THE EXPIRATION OF THIS LEASE OR THE TERMINATION THEREOF.
12
<PAGE> 13
32. MITIGATION OF DAMAGES
a) GENERAL DUTY TO MITIGATE. Both Landlord and Tenant shall each use
commercially reasonable efforts to mitigate any damages resulting from a default
of the other party under this Lease.
b) LANDLORD'S DUTY TO MITIGATE DAMAGES. Landlord's obligation to mitigate
damages after a default by Tenant under this Lease shall be satisfied in full if
Landlord undertakes to lease the Leased Premises to another tenant (a
"Substitute Tenant") in accordance with the following criteria:
(i) Landlord shall have no obligation to solicit or entertain
negotiations with any other prospective tenants for the Leased
Premises until Landlord obtains full and complete possession of
the Leased Premises including, without limitation, the final and
unappealable legal right to relet the Leased Premises free of any
claim of Tenant.
(ii) Landlord shall not be obligated to offer the Leased Premises to a
prospective tenant when other premises in the Project suitable
for that prospective tenant's use are (or soon will be)
available.
(iii) Landlord shall not be obligated to lease the Leased Premises to a
Substitute Tenant for a rental less than the current fair market
rental then prevailing for similar office space in comparable
office/warehouse buildings in the same market area as the
Project, nor shall Landlord be obligated to enter into a new
lease under other terms and conditions that are unacceptable to
Landlord under Landlord's then current leasing policies for
comparable space in the Project.
(iv) Landlord shall not be obligated to enter into a lease with any
proposed tenant whose use would:
a. Violate any restriction, covenant, or requirement contained
in the lease of another tenant of the Project;
b. Adversely affect the reputation of the Project; or
c. Be incompatible with the operation of the Project as a
first-class office/warehouse building.
(v) Landlord shall not be obligated to enter into a lease with any
proposed Substitute Tenant which does not have, in Landlord's
reasonable opinion, sufficient financial resources or operating
experience to operate the Leased Premises in a first-class
manner.
(vi) Landlord shall not be required to expend any amount of money to
alter, remodel, or otherwise make the Leased Premises suitable
for uses by a proposed Substitute Tenant unless:
a. Tenant pays any such sum to Landlord in advance of
Landlord's execution of a Substitute Lease with such
Substitute Tenant (which payment shall not be in lieu of any
damages or other sums to which Landlord may be entitled as a
result of Tenant's default under this Lease); or
b. Landlord, in Landlord's sole discretion, determines that any
such expenditure is financially justified in connection with
entering into any such Substitute Lease.
c. EFFECT OF RELEASING. Upon compliance with the above criteria
regarding the releasing of the Leased Premises after a default by Tenant,
Landlord shall be deemed to have fully satisfied Landlord's obligation to
mitigate damages under this Lease and under any law or judicial ruling in effect
on the date of this Lease or at the time of Tenant's default, and Tenant waives
and releases, to the fullest extent legally permissible, any right to assert in
any action by Landlord to enforce the terms of this Lease, any defense,
counterclaim, or rights of set off or recoupment respecting the mitigation of
damages by Landlord, unless and to the extent Landlord maliciously or in bad
faith fails to act in accordance with the requirements of this Paragraph 32.
d. TENANT'S RIGHTS. Tenant's right to seek damages from Landlord as
a result of a default by Landlord under this Lease, shall be conditioned on
Tenant taking all actions reasonably required, under the circumstances, to
minimize any loss or damage to Tenant's property or business, or to any of
Tenant's officers, employees, agents, invitees, or other third parties that may
be caused by any such default of Landlord.
THE PARTIES EXECUTING this Lease represent and warrant that each such party
possesses all lawful rights and authority to enter into this Lease; that there
are no judgments, decrees, or outstanding orders of any court prohibiting the
execution of this Amendment; and that all required approvals, consents and
resolutions necessary to effectuate the terms and provisions of this Lease have
been obtained.
Executed on the dates indicated below. Effective on the latter of the
dates indicated below.
LANDLORD: LAKES TECHNOLOGY CENTER, LTD.
Transwestern Investment Company, L.L.C. as Agent
Attest/Witness By: /s/ DIRK DEGENAARS
-------------------------------------------
/s/ Rosa Betty Villarreal Its: Vice President
- ------------------------------ -------------------------------------------
Date: 7/1/98
-------------------------------------------
TENANT: SHARPS COMPLIANCE, INC.
Attest/Witness By: /s/ John W. Dalton
-------------------------------------------
/s/ [ILLEGIBLE] Its: Director
- ------------------------------ -------------------------------------------
Date: 6/24/98
-------------------------------------------
13
<PAGE> 14
Addendum One to Lease Agreement
by and between
Lakes Technology Center, Ltd.
and
Sharps Compliance, Inc.
1. Landlord shall provide the building standard leasehold improvements
outlined on the architectural plan attached hereto as Exhibit "C". The
building standard leasehold improvements shall include the following:
a. New ceiling tile in the area outlined in yellow on Exhibit "C".
b. Building standard "cut pile" 30 oz. carpet in the areas outlined in
yellow on Exhibit "C". The balance of the office space shall have
"level loop" 26 oz. carpet as indicated in red on Exhibit "C".
c. New building standard paint in existing office areas.
d. All lights and electrical and plumbing systems shall be in good
working order prior to commencement date.
e. The existing heating and air-conditioning systems shall be in good
working condition prior to the commencement date.
f. Three (3) 3' x 9' glass panels shall be provided in three (3) offices
outlined on Exhibit "C".
g. Landlord shall have the right to relocate two (2) existing 3' x 9'
doors at the existing "storage" offices for new offices to be
constructed in the premises.
h. Landlord and Tenant acknowledge that the leasehold improvement cost
preliminary pricing outlined as Exhibit "D" and attached hereto was
prepared as a guideline for the leasehold improvements. Tenant
acknowledges and agrees that the attached construction pricing is not
an allowance and any cost savings shall be retained only by Landlord.
Except as provided herein, Tenant agrees to accept the premises in its "as
is", "where is" condition.
2. While this Lease is in full force and effect, provided that Tenant is not
in default of any of the terms, covenants and conditions thereof, Tenant
shall have the right or option to extend the original term of this Lease
for one further term of sixty (60) months. Such extension or renewal of
the original term shall be on the same terms, covenants and conditions as
provided for in the original term except that the rental during the
extended term shall be at the fair market rental then in effect on
equivalent properties, of equivalent size, in equivalent areas. Notice of
Tenant's intention to exercise the option must be given to Landlord in
writing at least one hundred eighty (180) days prior to the expiration of
the original term of this Lease.
3. Landlord is the owner of the herein demised premises, (outlined in red on
Exhibit "A" attached hereto), as well as the adjacent 7,390 square foot
space (outlined in green on said Exhibit "A"). In the event that the
existing tenant, Lincare, Inc., or its assigns, does not renew the Lease
with Landlord in such adjacent space, it is agreed that, for a term of 48
months from the date hereof, Tenant shall have the right of first refusal
to lease the adjacent space from the Landlord, which Lease shall be at the
same price and on the same terms as contained in any bona fide offer for
the lease of the adjacent space received by Landlord, which Landlord
desires to accept. Upon receipt of such an offer, Landlord shall notify
Tenant thereof, in the manner provided herein for notice, whereupon Tenant
shall have five (5) days after receipt of such notice in which to elect to
exercise Tenant's right of first refusal. In the event Tenant fails to
give Landlord written notice of Tenant's election to lease said adjacent
space within said five (5) day period, Tenant shall have no further right,
title or interest in the said adjacent space and this right of first
refusal shall terminate and be of no further force and effect. If, on the
other hand, Tenant exercises its right of first refusal in the manner
provided above, then the Lease of the said adjacent space shall be
consummated, in accordance with the terms set forth in said bona fide
offer. It is understood and agreed that this right of first refusal shall
become null and void at the expiration from the date hereof of the number
of months recited above.
4. Provided Tenant is not in default of any terms and conditions of the Leas
Agreement, Landlord shall warrant the good working conditions of only the
existing compressors that are a part of the existing heating and
air-conditioning units for a period not to exceed six (6) months from the
commencement date. In consideration for this six (6) month warranty for
compressors, it is agreed and understood that Tenant shall maintain the
heating and air-conditioning units as outlined and required in paragraph
11(e) of the Lease Agreement. After such six (6) month period, Tenant shall
be responsible for all obligations of the existing heating and
air-conditioning systems as outlined in the Lease Agreement.
5. In regard to Paragraph 13 of the Lease Agreement, it is agreed by Landlord
and Tenant that the sign on the leased premises shall be approximately 3' x
6' in size and subject to the terms and conditions of such Paragraph 13.
14
<PAGE> 1
EXHIBIT 10.34
SEVERANCE AGREEMENT
This Severance Agreement is entered into between C. Lee Cooke, Jr. ("Cooke")
and Sharps Compliance Corp. (formerly known as U.S. Medical Systems, Inc.)
("Sharps") and sets forth the Agreement as to the terms and conditions for
severance of Cooke's employment as Chief Executive Officer and President, the
termination of Cooke's Employment Agreement dated August 27, 1997 and all
benefits, rights and obligations arising from this Agreement.
In consideration of the mutual promises, covenants and agreements set forth
below, the adequacy and sufficiency of which are hereby acknowledged, the
parties agree as follows:
1. Cooke will cease employment with Sharps for all purposes
effective at the end of business July 22, 1998. Cooke will
submit the attached letter of resignation from his position as
Chief Executive Officer/President of Sharps. Cooke agrees to
be available to management for consulting on matters of Sharps
through September 5, 1998.
2. Cooke will receive the following compensation:
(a) All cash in U.S. Medical Systems, Inc. ("Medical") at
July 31, 1998 ("Valuation Date"), that being
approximately $50,000, after giving effect to a
$40,000 payment to Sharps.
(b) All accounts receivable in Medical at the Valuation
Date, that being approximately $14,000 and as more
specifically set forth on Schedule A attached hereto.
(c) Personal property located at the offices of Medical
in Austin at the Valuation Date and as more
specifically described on Schedule B attached hereto,
said value being approximately $4,000.
(d) All patents and trademarks of Medical as they exist
at the Valuation Date and as more specifically
described on Schedule C attached hereto, said patents
and trademarks to be conveyed to Cooke pursuant to
the terms of the Assignment of Patent and Trademarks
attached hereto as Exhibit 1 and incorporated herein
for all purposes.
(e) Rights to the products of Medical as they exist at
the Valuation Date and as more specifically described
on Schedule D attached hereto.
(f) Rights to the customer list as the customer list of
Medical exists at the Valuation Date and as more
specifically listed on Schedule E.
(g) Rights to the corporate name U.S. Medical Systems,
Inc.
(h) All of the capital stock of Medical Polymers, Inc.
<PAGE> 2
The rights entitled to the cash, accounts receivable, personal
property, products, customer list and corporate name and capital stock
of Medical Polymers, Inc. will be conveyed to Cooke pursuant to the
terms of the Bill of Sale attached hereto as Exhibit 2 and
incorporated herein for all purposes.
3. Cooke hereby agrees to assume and pay all of the liabilities
and obligations of Medical, including existing accounts
payable and contingent liabilities of Medical as such
contingent liabilities pertain to unknown accounts payable or
contingent liabilities pertaining to products of Medical, as
such products exist at the Valuation Date, including those set
forth on Schedules F and G attached hereto.
4. After the Valuation Date, the parties agree that Sharps and
its 401(k) Retirement Plan, Executive Deferred Compensation
Plan or other existing plans have no further obligation or
liability to Cooke and his beneficiaries under any such plans,
any such liability or obligation being hereby expressly waived
by Cooke.
5. Notwithstanding anything to the contrary contained in
paragraph 3 herein, Cooke agrees to cooperate fully with
Sharps, its accountants and legal counsel, in investigating,
analyzing or defending any pending or future claims against or
litigation involving Sharps. Cooke agrees to maintain in
strict confidence any information or knowledge he has
regarding pending or future claims against or litigation
involving Sharps.
6. Subject to Cooke's obligations created in Paragraph 3 herein,
Sharps hereby releases and forever discharges Cooke from any
and all claims or causes of action it has against or may have
against Cooke for his actions or failure to act while employed
in his capacity as an employee, officer and director of Sharps
occurring prior to the Valuation Date of this Agreement.
7. Cooke hereby releases and forever discharges Sharps and all
predecessor, related and affiliated entities and all officers,
directors, employees, representatives and agents thereof (in
all capacities, including individually) from any claims,
demands, actions or causes of action which he may have had or
now has, whether known or unknown, contingent or otherwise,
whether at law or in equity, including, without limitation,
any and all claims relating to his employment with and
separation from Sharps; any compensation or benefits relating
to his employment; any claim of discrimination based upon his
race, color, creed, sex, age, national origin, disability or
handicap, if any; any claims relating to the discussions
between Sharps and its representatives regarding elimination
of his position or any other separation of the parties'
employment relationship; any claim that Sharps has violated
any federal, state or local statute, regulation or ordinance
with respect to his employment or separation thereof,
including without limitation, Title VII of the Civil Rights
Act of 1964, the Americans With Disabilities Act or the Texas
Commission on Human Rights Act.
8. Cooke hereby indemnifies and holds Sharps harmless from and
against, and shall promptly reimburse Sharps for any and all
loss, expense, damage, deficiency, liability or obligation,
including investigative and settlement costs and attorney's
fees, arising out of or in connection with the loss by Sharps
of any accounts payable or liabilities associated with the
products of Medical and conveyed to Cooke as such payables and
contingent liabilities pertaining to the products exist at the
Valuation Date.
Page 2
<PAGE> 3
9. This Agreement shall be governed by the substantive laws of
the State of Texas without regard to conflict of laws
principles. If any provision is determined to be invalid or
unenforceable by a court of competent jurisdiction, the
remaining provisions shall continue in full force and effect.
10. Any dispute between the parties concerning the interpretation,
application or claimed breach of this Agreement shall be
submitted to confidential, binding arbitration in Travis
County, Texas, before an arbitrator appointed by the American
Arbitration Association in accordance with its published rules
and regulations. Prior to submitting the matter to
arbitration, the parties shall first attempt to resolve the
matter by the claimant notifying the other party in writing of
the claim, by giving the other party the opportunity to
respond in writing to the claim within ten (10) days of
receipt of the claim, and by giving the other party the
opportunity to meet and confer. If the matter is not resolved
in this manner, the dispute then may proceed to arbitration at
the request of either party. The parties shall bear equally
the arbitrator's fees and expenses, as well as the
administrative costs assessed by the American Arbitration
Association. The prevailing party shall be entitled to
reasonable actual damages, specific performance, costs and
attorney's fees. This agreement to arbitrate and the
arbitrator's award shall be enforceable in any court of
competent jurisdiction pursuant to the Texas General
Arbitration Act.
11. In entering into the Severance Agreement, both parties have
relied on the valuation appraisal opinion of CFO Services,
Inc., dated March 20, 1998, as such opinion pertained to the
valuation of the products of Medical, a copy of which is
attached hereto as Exhibit 3.
12. Cooke's right, title and interest in and under this Agreement
and all transaction documents may be subsequently assigned
and/or conveyed by Cooke.
13. The Closing of this transaction shall take place at the office
of the Company on or after September 2, 1998.
SHARPS COMPLIANCE CORP.
(Formerly known as U.S. Medical Systems, Inc.)
By: /s/ BURT KUNIK /s/ C. LEE COOKE, JR.
---------------------------------- ------------------------------
Burt Kunik C. Lee Cooke, Jr.
Chairman of the Board Date: 9-14-98
and Chief Executive Officer ------------------------
Date: 9-8-98
---------------------------------
Page 3
<PAGE> 4
Schedule A
-------------------
Accounts Receivable
7/31/98
<TABLE>
<CAPTION>
<S> <C>
Albertsons $ 3,627.88
American Sales 1,365.12
Bathurst Sales 3,724.80
Fleming Companies, Inc. 2,398.56
Genovese Drugs 1,128.96
H.E. Butt Grocery Co. 1,893.60
----------
Total 14,138.92
</TABLE>
<PAGE> 5
Schedule B
--------------------
Real Property Assets
<TABLE>
<CAPTION>
Book Value
----------
<S> <C>
AT&T Phone System 1,962.86
Printing Dies - Miracle Grip(2) 492.95
Rotary Dies - Mark Andy 298.33
Art Work - Miracle Grip 1,631.37
----------
Total $ 4,385.51
</TABLE>
<PAGE> 6
Schedule C
------------------
Patents/Trademarks
Patents
<TABLE>
<CAPTION>
Patent Date of
Name Number Patent
---- ------ -------
<S> <C> <C>
1. Disinfectant Mixture Containing 5,326,492 July 5, 1994
Water Soluble Lubricating and
Cleaning Agents and Methods
2. Water-Based Human Tissue 5,342,617 Aug 30, 1994
Lubricant
3. Polymer-Based Cleaning and 5,348,678 Sept 20, 1994
Lubricating Composition
4. Stick Formulations for 5,597,849 January 28, 1997
Topical Drug Delivery of
Therapeutic Agents and Uses
Thereof
5. Stick Formulations for 5,622,993 Apr 22, 1997
Topical Drug Delivery of
Therapeutic Agents and Uses
Thereof
</TABLE>
<TABLE>
<CAPTION>
Registration Date of
Trademark Number Registration
- --------- ------------ -------------
<S> <C> <C>
1. PDS 1,912,066 Aug 15, 1995
2. Miracle Grip 2,018,144 Nov 19, 1996
</TABLE>
<PAGE> 7
Schedule D
------------------------
Product Description
(commercial products)
1. PDS Clean, a dental handpiece cleaner.
2. Miracle Grip, a polymer-based denture adhesive.
3. QUITCH, a 1% hydrocortisone Anti-Itch product.
4. QUITCH-D, a 2% diphenhydramine itch and pain relief product.
<PAGE> 8
Schedule E
--------------
Customer Lists
Midwest Dental Products, Inc
Albertsons, Inc
H.E. Butts Grocery Co
American Sales Stores
Bathurst Sales (Canada)
Fleming Companies, Inc.
Genovese Drug Stores
McKeeson Drug Company
Texas A&M University
<PAGE> 9
Schedule F
----------------------
CONTINGENT LIABILITIES
7/31/98
<TABLE>
<S> <C>
American Drug Stores $ 14,500.00
Eckerd Drug Stores $ 38,418.00
Walgreens Drug Stores $ 20,000.00
Shop-N-Save $ 3,400.00
Phar-Mor Drug Stores $ 700.00
Wal-Mart $ 6,800.00
Bank One $ 1,600.00
Sharps Compliance $ 40,000.00
Pitney Bowes Credit Corp. $ 398.00
Snyder Drug Stores $ 2,200.00
Payco $ 700.00
TOTAL $128,716.00
</TABLE>
<PAGE> 10
Schedule G
-------------------------------
Operational Payables at 7/31/98
<TABLE>
<CAPTION>
Vendor Balance Due
------ -----------
<S> <C>
Ameripac $ 822.80
Bank One 1,623.75
Burnet Storage 130.00
Martin Cook (Accounting) 1,155.00
Dahill Industries, Inc 81.19
Faske, Lay & Co, LLP. 604.00
Fedex 186.64
Gold Family Trust (Royalty) 3,675.11
Robert Hodan (Royalty) 3,675.11
Lewis Label 1,000.00
Kimberly Lyon (Office Mgr) 784.00
Phoenix Home Life 398.20
TX Workers Compensation Fund 590.00
USLD Communications 141.72
----------
Total $14,867.32
</TABLE>
<PAGE> 11
BILL OF SALE
THE STATE OF TEXAS )
) KNOW ALL MEN BY THESE PRESENTS
COUNTY OF HARRIS )
THAT SHARPS COMPLIANCE CORP. (formerly U.S. Medical Systems, Inc.), a
Delaware corporation ("Seller"), for and in consideration of the purchase price
provided for in, and the other terms and conditions of, that certain Severance
Agreement dated September 2, 1998, by and between C. LEE COOKE, JR. ("Buyer")
and Seller (the "Agreement") (capitalized terms used and not otherwise defined
herein shall have the meanings ascribed to them in the Agreement) has bargained
and sold, and by these presents Seller does sell, assign, transfer and convey
unto Buyer all of Seller's right, title and interest in the following
(collectively, the "Assets"):
(a) All cash in U.S. Medical Systems, Inc. ("Medical") at July 31,
1998, (the "Valuation Date"), after giving effect to a $40,000
payment to Seller.
(b) All accounts receivable in Medical at the Valuation Date, as
more specifically set forth on Schedule A attached hereto.
(c) Personal property located at the offices of Medical in Austin
at the Valuation Date and as more specifically described on
Schedule B attached hereto.
(d) All patents and trademarks of Medical as they exist at the
Valuation Date and as more specifically described on Schedule
C attached hereto, said patents and trademarks to be conveyed
to Buyer pursuant to the terms of the Assignment of Patent and
Trademarks attached hereto as Exhibit 1 and incorporated
herein for all purposes.
(e) Rights to the products of Medical as they exist at the
Valuation Date and as more specifically described on Schedule
D attached hereto.
(f) Rights to the customer list as the customer list of Medical
exists at the Valuation Date and as more specifically listed
on Schedule E.
(g) Rights to the corporate name U.S. Medical Systems, Inc.
(h) All of the capital stock of Medical Polymers, Inc.
Seller hereby acknowledges and agrees that this Bill of Sale is made
pursuant to and subject to all the terms and conditions of the Agreement,
including without limitation, Buyer's rights of indemnification under the
Agreement.
<PAGE> 12
ASSIGNMENT OF PATENTS AND TRADEMARKS
THE STATE OF TEXAS )
)
COUNTY OF HARRIS )
WHEREAS, SHARPS COMPLIANCE CORP. (formerly U.S. Medical Systems,
Inc.), a Delaware corporation with offices at 9050 Kirby, Houston, Texas 77054
("Seller"), is the owner of the entire right, title and interest to United
States Patent Nos. 5,326,492 registered July 5, 1994; 5,342,617 registered
August 30, 1994; 5,348,678 registered September 20, 1994; 5,597,849 registered
January 28, 1997; and 5,622,993 registered April 22, 1997 (the "Patents"), the
inventions covered by the Patents (the "Inventions") and United States
Trademark Nos. 1,912,066 registered August 15, 1995 and 2,018,144 registered
November 19, 1996 (the "Trademarks") and Internet copyrights related to the
Trademarks; and
WHEREAS, C. LEE COOKE, JR., a resident of Austin, Travis County, Texas
whose mailing address is Post Office Box 50442, Austin, Texas 78763
("Assignee"), is desirous of acquiring the entire right, title and interest in
and to the Patents, Inventions and Trademarks;
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, and intending to be legally bound
hereby, Assignor hereby assigns and transfers to Assignee the entire right,
title and interest in and to the Patents, Inventions and Trademarks, including
but not limited to all reissues, divisions, continuations and extensions of the
Patents and Trademarks, all rights of action arising from the Patents and
Trademarks, all claims for damages by reason of past infringement of the
Patents and Trademarks and the right to sue and collect damages for such
infringement, to be held and enjoyed by the Assignee for his own use and
benefit and for his successors and assigns as the same would have been held by
Assignor had this assignment not been made.
DATED this 8th day of September, 1998.
ASSIGNOR:
SHARPS COMPLIANCE CORP.
a Delaware corporation
By: /s/ BURT KUNIK
---------------------------
Burt Kunik
Chairman of the Board
and Chief Executive Officer
SUBSCRIBED and SWORN TO before me this 8th day of September, 1998.
/s/ PHYLLIS S. ROSS
--------------------------------
[NOTARY]
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A)
THE BALANCE SHEET AS OF JUNE 30, 1998 AND THE STATEMENT OF OPERATIONS FOR
THE SIX MONTHS THEN ENDED AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH (B) FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 3,044,498
<SECURITIES> 0
<RECEIVABLES> 203,608
<ALLOWANCES> 0
<INVENTORY> 171,506
<CURRENT-ASSETS> 3,500,870
<PP&E> 245,827
<DEPRECIATION> 123,476
<TOTAL-ASSETS> 4,124,446
<CURRENT-LIABILITIES> 1,105,747
<BONDS> 0
0
10,000
<COMMON> 5,839
<OTHER-SE> 2,962,880
<TOTAL-LIABILITY-AND-EQUITY> 4,124,446
<SALES> 730,034
<TOTAL-REVENUES> 730,034
<CGS> 560,071
<TOTAL-COSTS> 1,752,924
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,061
<INCOME-PRETAX> (956,038)
<INCOME-TAX> 0
<INCOME-CONTINUING> (956,038)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (956,038)
<EPS-PRIMARY> (.14)
<EPS-DILUTED> (.14)
</TABLE>
