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SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934 (Amendment No. )
Filed by the Registrant /X/
Filed by a party other than the Registrant / /
Check the appropriate box:
/ / Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Section 240.14a-11(c) or Section
240.14a-12
U.S. MEDICAL SYSTEMS, INC.
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(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
/X/ No fee required
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(1)
and 0-11
(1) Title of each class of securities to which transaction applies:
------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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/ / Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
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(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
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U.S. MEDICAL SYSTEMS, INC.
7600 BURNET ROAD, SUITE 350
AUSTIN, TEXAS 78734-6342
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NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON JULY 23, 1998
NOTICE IS HEREBY GIVEN that the 1997 Annual Meeting of Stockholders
(the "Annual Meeting") of U.S. Medical Systems, Inc., a Delaware corporation
(the "Company"), will be held on Thursday, July 23, 1998, at 2:00 p.m. local
time in the Waterloo Room of The Four Seasons Hotel, 98 San Jacinto Avenue,
Austin, Texas, for the purpose of considering and voting upon the following:
(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.
(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.
(3) A proposal to amend the Company's Certificate of Incorporation
to rename the Company Sharps Compliance Corp.
(4) A proposal to amend the Company's Certificate of Incorporation
to delete Article 10 relating to specific stockholders' rights.
(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).
(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.
(7) Such other business as properly may come before the Annual
Meeting or any adjournment(s) thereof. The Board of Directors
is presently unaware of any other business to be presented to a
vote of the stockholders at the Annual Meeting.
The items of business are more fully described in the Proxy
Statement accompanying this notice.
The Board of Directors has fixed June 15, 1998 as the record date
(the "Record Date") for the determination of stockholders entitled to notice
of and to vote at the Annual Meeting or any adjournment(s) thereof. Only
stockholders of record at the close of business on the Record Date are
entitled to notice of and to vote at the Annual Meeting. The stock transfer
books will not be closed. A list of stockholders entitled to vote at the
Annual Meeting will be available for examination at the offices of the
Company for ten days prior to the Annual Meeting.
By Order of the Board of Directors
Austin, Texas Sharri McAnally
June 29, 1998 CORPORATE SECRETARY
IMPORTANT
YOU ARE CORDIALLY INVITED TO ATTEND THE ANNUAL MEETING. HOWEVER,
WHETHER OR NOT YOU EXPECT TO ATTEND THE ANNUAL MEETING IN PERSON, YOU ARE
URGED TO PROMPTLY MARK, SIGN, DATE AND RETURN THE ACCOMPANYING PROXY IN THE
ENCLOSED, SELF-ADDRESSED, STAMPED ENVELOPE SO THAT YOUR SHARES OF STOCK MAY
BE REPRESENTED AND VOTED IN ACCORDANCE WITH YOUR WISHES AND IN ORDER THAT THE
PRESENCE OF A QUORUM MAY BE ASSURED AT THE ANNUAL MEETING. YOUR PROXY WILL BE
RETURNED TO YOU IF YOU SHOULD BE PRESENT AT THE ANNUAL MEETING AND SHOULD
REQUEST SUCH RETURN OR IF YOU SHOULD REQUEST SUCH RETURN IN THE MANNER
PROVIDED FOR REVOCATION OF PROXIES ON THE INITIAL PAGES OF THE ENCLOSED PROXY
STATEMENT. PROMPT RESPONSE BY OUR STOCKHOLDERS WILL REDUCE THE TIME AND
EXPENSE OF SOLICITATION.
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U.S. MEDICAL SYSTEMS, INC.
7600 BURNET ROAD, SUITE 350
AUSTIN, TEXAS 78734-6342
-------------------------
PROXY STATEMENT
FOR
ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD JULY 23, 1998
SOLICITATION AND REVOCABILITY OF PROXIES
This Proxy Statement (the "Proxy Statement") and the accompanying
materials are furnished in connection with the solicitation of proxies by the
Board of Directors of U.S. Medical Systems, Inc., a Delaware corporation (the
"Company"), to be used at the Annual Meeting of Stockholders of the Company
to be held on July 23, 1998 (the "Annual Meeting"), at the time and place and
for the purposes set forth in the accompanying Notice of Annual Meeting of
Stockholders and adjournment(s) or postponement(s) thereof.
The accompanying proxy is designed to permit each holder of the
Company's common stock, par value $0.01 per share (the "Common Stock"), and
the Company's Series A 10% Voting Convertible Preferred Stock, par value
$0.01 per share (the "Preferred Stock"), to vote for or withhold voting for
the nominees for election as directors of the Company set forth under
Proposal 1, to vote for or against or to abstain from voting on Proposals 2,
3, 4, 5 and 6 and to authorize the proxies to vote in their discretion with
respect to any other proposal brought before the Annual Meeting. When a
stockholder's executed proxy card specifies a choice with respect to a voting
matter, the shares will be voted accordingly. IF NO SUCH SPECIFICATIONS ARE
MADE, THE PROXIES FOR THE COMMON STOCK AND PREFERRED STOCK WILL BE VOTED BY
THOSE PERSONS NAMED IN THE PROXIES AT THE ANNUAL MEETING: FOR THE ELECTION OF
THE NOMINEES SPECIFIED UNDER THE CAPTION "ELECTION OF DIRECTORS;" FOR THE
AMENDMENT TO THE COMPANY'S CERTIFICATE OF INCORPORATION EFFECTING A REVERSE
STOCK SPLIT OF ONE SHARE OF COMMON STOCK FOR EVERY 5.032715 SHARES OF COMMON
STOCK OUTSTANDING; FOR APPROVAL OF THE AMENDMENT TO THE COMPANY'S CERTIFICATE
OF INCORPORATION CHANGING THE COMPANY'S NAME TO SHARPS COMPLIANCE CORP.; FOR
APPROVAL OF THE AMENDMENT TO THE COMPANY'S CERTIFICATE OF INCORPORATION
DELETING ARTICLE 10 RELATING TO SPECIFIC STOCKHOLDERS' RIGHTS; FOR THE
AMENDMENT TO INCREASE THE NUMBER OF SHARES OF COMMON STOCK SUBJECT TO
ISSUANCE UNDER THE COMPANY'S 1993 STOCK PLAN FROM 59,609 SHARES TO 1,000,000
SHARES (AFTER GIVING EFFECT TO THE REVERSE STOCK SPLIT UNDER PROPOSAL 2); AND
FOR RATIFICATION OF THE APPOINTMENT OF ARTHUR ANDERSEN LLP AS INDEPENDENT
PUBLIC ACCOUNTANTS FOR THE COMPANY. If any other matters properly come before
the Annual Meeting, the Proxies will vote upon such matters according to
their judgment.
The Company encourages the personal attendance of its stockholders
at the Annual Meeting, and execution of the accompanying proxy will not
affect a stockholder's right to attend the Annual Meeting and to vote his or
her shares in person. Any stockholder giving a proxy has the right to revoke
it by giving written notice of revocation to Sharri McAnally, Corporate
Secretary, U.S. Medical Systems, Inc., at the principal executive offices of
the Company, 7600 Burnet Road, Suite 350, Austin, Texas, 78757-1267, at any
time before the proxy is voted, by executing and delivering a later-dated
proxy, or by attending the Annual Meeting and voting his or her shares in
person. No such notice of revocation or later-dated proxy will be effective,
however, until received by the Company at or prior to the Annual Meeting.
Such revocation will not affect a vote on any matters taken prior to the
receipt of such revocation. Mere attendance at the Annual Meeting will not of
itself revoke the proxy.
All expenses of the Company in connection with this solicitation
will be borne by the Company. In addition to the solicitation of proxies by
use of the mail, officers, directors and regular employees of the Company may
solicit the return of proxies by personal interview, mail, telephone and/or
facsimile. Such persons will not be additionally compensated, but will be
reimbursed for out-of-pocket expenses. The Company also will request
brokerage houses and other custodians, nominees and fiduciaries to forward
solicitation material to the beneficial owners of shares held of record by
such persons and will reimburse such persons and its transfer agent for their
reasonable out-of-pocket expenses in forwarding such material.
This Proxy Statement, Proxy Card and the Company's audited
financial statements for the twelve-month period ended June 30, 1997 and
unaudited financial statements for the six-month period ended December 31,
1997, respectively, are
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first being mailed to the stockholders of the Company on or about June 29,
1998. The Company's Annual Report on Form 10-KSB/A1 for the fiscal year ended
June 30, 1997 was first mailed to the stockholders of the Company on or about
December 4, 1997.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Company's Annual Report on Form 10-KSB/A1 for the fiscal year
ended June 30, 1997, Quarterly Reports on Form 10-QSB/A1 for the fiscal
quarters ended September 30, 1997 and December 30, 1997, Form 10-QSB for the
fiscal quarter ended March 31, 1998, Current Report on Form 8-K dated March 5,
1998 and the amendment thereto, and Current Report on Form 8-K dated April 22,
1998 are incorporated by reference in this Proxy Statement.
Upon written or oral request, the Company will provide without
charge to each person to whom a copy of this Proxy Statement is delivered a
copy of any and all of the documents incorporated herein by reference (other
than exhibits to such documents, unless such exhibits are specifically
incorporated by reference into such documents). Requests should be directed
to U.S. Medical Systems, Inc., 7600 Burnet Road, Suite 350, Austin, Texas
78757, Attention: Lee Cooke, telephone (512) 458-3335.
THE DATE OF THIS PROXY STATEMENT IS JUNE 29, 1998
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THE ANNUAL MEETING
GENERAL
The Board has fixed the close of business on June 15, 1998 as the
record date (the "Record Date") for the Annual Meeting. Only holders of
record of the outstanding shares of Common Stock and Preferred Stock at the
close of business on the Record Date are entitled to notice of and to vote at
the Annual Meeting and any adjournment(s) thereof. At the close of business
on June 15, 1998, 2,938,823 shares of Common Stock and 1,000,000 shares of
Preferred Stock were outstanding and entitled to be voted at the Annual
Meeting. The Common Stock and the Preferred Stock are the only classes of
stock entitled to vote at the Annual Meeting. Each share of Common Stock is
entitled to one vote and each share of Preferred Stock is entitled to
35.190319 votes on each matter presented to the stockholders.
QUORUM AND VOTE REQUIRED
The presence, in person or by proxy, of the holders of shares of
Common Stock and Preferred Stock representing a majority of the outstanding
voting power of the Company is necessary to constitute a quorum at the Annual
Meeting. Abstentions and broker non-votes are counted as shares present for
the purpose of determining the presence or absence of a quorum for the
transaction of business. Assuming the presence of a quorum, the affirmative
vote of the holders on the Record Date of shares of Common Stock and
Preferred Stock representing a plurality of the voting power outstanding,
represented in person or by proxy at the Annual Meeting, is required to elect
directors; the affirmative vote of the holders on the Record Date of 66-2/3%
of the shares of Common Stock and 66-2/3% of the shares of Preferred Stock
outstanding, represented in person or by proxy at the Annual Meeting, is
required to approve the proposal to delete Article 10 of the Company's
Certificate of Incorporation; and the affirmative vote of the holders on the
Record Date of shares of Common Stock and Preferred Stock representing a
majority of the voting power of the Company outstanding, represented in
person or by proxy at the Annual Meeting, is required to approve or ratify
each of the other proposals to be presented at the Annual Meeting.
Four individuals holding a total of 68.9% of the voting power of
the Company are expected to vote for all of the proposals set forth in this
Proxy Statement, which would assure approval of the transactions contemplated
by such proposals.
DISSENTERS' RIGHTS OF APPRAISAL
In accordance with the Company's Certificate of Incorporation, as
amended (the "Certificate of Incorporation"), a holder of shares of Common
Stock or Preferred Stock is empowered to dissent, and thereafter exercise
their appraisal rights, in the framework of the Company's plan to restructure
its capital position and amend the Certificate of Incorporation. A holder of
the Company's Common Stock or Preferred Stock may apply to a court,
consistent with the laws of the State of Delaware, for an order to remedy a
result that unfairly disregards the interest of stockholders arising from (i)
any act or omission of the Company or (ii) the carrying on or conduct of the
business or affairs of the Company. The court may make any number of interim
or final orders, including (i) restraining conduct complained of, (ii)
purchase securities of the stockholder, (iii) setting aside a transition and
(iv) liquidating and dissolving the Company. Rights of the stockholder are
addressed under Section 262 of the Delaware General Corporation Law (the
"DGCL").
However, the Company shall not be compelled to make a payment to a
stockholder under item (ii) above if there are reasonable grounds for
believing that the Company is or would, after the payment, be made unable to
pay its liabilities as they come due, or that the realized value of the
Company's assets would thereby be less than the aggregate of its liabilities.
Item 4 of this Proxy Statement is a proposal to amend the Company's
Certificate of Incorporation to delete Article 10 relating to specific
stockholders' rights, including dissenters' rights as set forth above, except
as provided for under DGCL.
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PERFECTION OF DISSENTERS' RIGHTS
Holders of shares of Common Stock and Preferred Stock (together, as
used in this section, the "Common Stock") are entitled to appraisal rights in
connection with the Amendments of the Certificate of Incorporation under
Items 2, 3 and 4 of this Proxy Statement (as used in this section, the
"Amendment") and Section 262 of the DGCL. Regardless of the outcome of the
vote on Item 4 of this Proxy Statement, which is a proposal to amend the
Company's Certificate of Incorporation to delete Article 10 thereof,
stockholders of the Company have dissent and appraisal rights under both
Article 10 of the Certificate of Incorporation and Section 262 of the DGCL in
connection with Items 2, 3 and 4 of this Proxy Statement.
The following discussion is not a complete statement of the law
pertaining to appraisal rights under the DGCL and is qualified in its
entirety by the full text of Section 262 which is attached hereto as Exhibit
"A." All references in Section 262 and in this summary to a "stockholder"
are to the record holder of the shares of Common Stock as to which appraisal
rights are asserted. A person having a beneficial interest in shares of
Common Stock held of record in the name of another person, such as a broker
or nominee, must act promptly to cause the record holder to follow the steps
summarized below properly and in a timely manner to perfect appraisal rights.
Under the DGCL, holders of shares of Common Stock who follow the
procedures set forth in Section 262 will be entitled to have their shares of
Common Stock appraised by the Delaware Court of Chancery and to receive
payment of the "fair value" of such shares, exclusive of any element of value
arising from the accomplishment or expectation of the Amendment, together
with a fair rate of interest, as determined by such court.
Under Section 262, where an Amendment is to be submitted for
approval at a meeting of stockholders, as in the case of the Company, the
corporation, not less than 20 days prior to the meeting, must notify each of
its stockholders entitled to appraisal rights that such appraisal rights, are
available and include in such notice a copy of Section 262. Such notice is
being provided to the holders of shares of the Common Stock as of the Record
Date through the mailing on or before June 29, 1998 of a Notice of Dissent
and Appraisal Rights in Connection with Proposed Amendments to the Certificate
of Incorporation of U.S. Medical Systems, Inc., with the applicable statutory
provisions attached thereto. Any holder of Common Stock who wishes to
exercise such appraisal rights, or who wishes to preserve his, hers or its
right to do so, should review the following discussion and Exhibit "A"
carefully because failure to timely and properly comply with the procedures
specified will result in the loss of appraisal rights under the DGCL.
A holder of shares of Common Stock wishing to exercise his, hers or
its appraisal rights must deliver to the Company, before the vote on the
Amendment at the meeting of the Company's stockholders, a written demand for
appraisal of his, hers or its shares of Common Stock and must not vote in
favor of the Amendment. A vote against the Amendment, in person or by proxy,
will not in and of itself constitute a written demand for appraisal
satisfying the requirements of Section 262. In addition, a holder of shares
of Common Stock wishing to exercise his, hers or its appraisal rights must
hold of record such shares on the date the written demand for appraisal is
made and must continue to hold such shares until the effective date of the
Amendment (the "Effective Time"). If any holder of shares of Common Stock
fails to comply with any of these conditions and the Amendment becomes
effective, the holder of shares of Common Stock will be entitled to receive
the consideration receivable with respect to such shares in the absence
of a valid assertion of appraisal rights in accordance with the Amendment.
Only a holder of record of shares of Common Stock is entitled to
assert appraisal rights for the shares of Common Stock registered in that
holder's name. A demand for appraisal should be executed by or on behalf of
the holder of record, fully and correctly, as his, hers or its name appears
on his, hers or its stock certificates, and must state that the stockholder
intends thereby to demand appraisal of his, hers or its shares in connection
with the Amendment. If the shares of Common Stock are owned of record in a
fiduciary capacity, such as by a trustee, guardian or custodian, execution of
the demand should be made in that capacity, and if the shares of Common Stock
are owned of record by more than one person, as in a joint tenancy and
tenancy in common, the demand should be executed by or on behalf of all joint
owners. An authorized agent, including two or more joint owners, may execute
a demand for appraisal on behalf of a holder of record; however, the agent
must identify the record owner or owners and expressly disclose the fact
that, in executing the demand, the agent is agent for such owner or owners.
A record holder such as a broker who holds shares of Common Stock as nominee
for several beneficial owners may exercise appraisal rights with respect to
the shares of Common Stock held for one or more
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beneficial owners while not exercising such rights with respect to the shares
of Common Stock held for other beneficial owners; in such case, however, the
written demand should set forth the number of shares of Common Stock as to
which appraisal is sought, and where no number of shares of Common Stock is
expressly mentioned, the demand will be presumed to cover all shares of
Common Stock held in the name of the record owner. Stockholders who hold
their shares of Common Stock in brokerage accounts or other nominee forms and
who wish to exercise appraisal rights are urged to consult with their brokers
to determine the appropriate procedures for the making of a demand for
appraisal by such a nominee.
All written demands for appraisal pursuant to Section 262 should be
sent or delivered to the Company at 7600 Burnet Road, Suite 350, Austin,
Texas 78757-1267, Attention: Lee Cooke.
Within 10 days after the Effective Time, the Company must notify
each holder of Common Stock who has complied with Section 262 and has not
voted in favor of or consented to the Amendment of the date that the
Amendment has become effective. Within 120 days after the Effective Time,
but not thereafter, the Company or any holder of Common Stock who is entitled
to appraisal rights under Section 262 may file a petition in the Delaware
Court of Chancery demanding a determination of the fair value of the shares
of Common Stock. The Company is under no obligation to and has no present
intention to file such a petition. Accordingly, it is the obligation of the
holders of Common Stock to initiate all necessary action to perfect their
appraisal rights within the time prescribed in Section 262.
Within 120 days after the Effective Time, any holder of Common
Stock who has complied with the requirements for exercise of appraisal rights
will be entitled, upon written request, to receive from the Company a
statement setting forth the aggregate number of shares of Common Stock not
voted in favor of the Amendment and with respect to which demands for
appraisal have been received and the aggregate number of holders of such
shares. Such statement must be mailed within ten days after a written request
therefor has been received by the Company or within ten days after the
expiration of the period for delivery of demands for appraisal, whichever is
later.
If a petition for an appraisal is timely filed by a holder of
shares of Common Stock and a copy thereof is served upon the Company, the
Company will then be obligated within 20 days to file with the Delaware
Register in Chancery a duly verified list containing the names and addresses
of all holders of Common Stock who have demanded an appraisal of their shares
and with whom agreements as to the value of their shares have not been
reached. After notice to such stockholders as required by the Court, the
Delaware Court of Chancery is empowered to conduct a hearing on such
petition to determine those holders of Common Stock who have complied with
Section 262 and who have become entitled to appraisal rights thereunder. The
Delaware Court of Chancery may require the holders of shares of Common Stock
who demanded payment for their shares to submit their stock certificates to
the Register in Chancery for notation thereon of the pendency of the appraisal
proceeding; and if any stockholder fails to comply with such direction, the
Court of Chancery may dismiss the proceedings as to such stockholder.
After determining the holders of Common Stock entitled to
appraisal, the Delaware Court of Chancery will appraise the "fair value" of
their shares of Common Stock, exclusive of any element of value arising from
the accomplishment or expectation of the Amendment, together with a fair rate
of interest, if any, to be paid upon the amount determined to be the fair
value. Holders of Common Stock considering seeking appraisal should be aware
that the fair value of their shares of Common Stock as determined by Section
262 could be more than, the same as or less than the current trading price of
the Common Stock. The Delaware Supreme Court has stated that "proof of value
by any techniques or methods which are generally considered acceptable in the
financial community and otherwise admissible in court" should be considered
in the appraisal proceedings. In addition, Delaware courts have decided that
the statutory appraisal remedy, depending on factual circumstances, may or
may not be a dissenter's exclusive remedy. The Court will also determine the
amount of interest, if any, to be paid upon the amounts to be received by
persons whose shares of Common Stock have been appraised. The costs of the
action may be determined by the Court and taxed upon the parties as the court
deems equitable. The Court may also order that all or a portion of the
expenses incurred by any stockholder in connection with an appraisal,
including, without limitation, reasonable attorney's fees and the fees and
expenses of experts utilized in the appraisal proceeding, be charged pro rata
against the value of all the shares of Common Stock entitled to be appraised.
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Any holder of shares of Common Stock who has duly demanded an
appraisal in compliance with Section 262 will not, after the Effective Time,
be entitled to vote the shares of Common Stock subject to such demand for any
purpose or be entitled to the payment of dividends or other distributions on
those shares of Common Stock (except dividends or other distributions payable
to holders of record of Common Stock as of a date prior to the Effective Time).
If any stockholder who demands appraisal of his, hers or its shares of
Common Stock under Section 262 fails to perfect, or effectively withdraws or
loses, his, hers or its right to appraisal, as provided in the DGCL, the shares
of Common Stock of such stockholder will continue to remain outstanding. A
stockholder will fail to perfect, or effectively lose or withdraw his, hers or
its right to appraisal, if no petition for appraisal is filed within 120 days
after the Effective Time, or if the stockholder delivers to the Company a
written withdrawal of his, hers or its demand for appraisal and an acceptance
of the Amendment, except that any such attempt to withdraw made more than 60
days after the Effective Time will require the written approval of the Company
and, once a petition for appraisal is filed, the appraisal proceeding may not
be dismissed as to any holder absent court approval.
Failure to follow the steps required by Section 262 of the DGCL for
perfecting appraisal rights may result in the loss of such rights.
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 8928 Kirby, Houston, Texas 77054. Sharps focuses on
developing mail disposal services for medical sharps, which are used (i.e.,
contaminated) syringes/needles and razors in commercial, industrial and home
health-care 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.
TERMS OF THE AGREEMENT AND PLAN OF REORGANIZATION
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 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 is entitled to 35.190319 votes. The Agreement and
Plan of Reorganization was subject to various conditions, including the
completion of an equity private placement by Sharps of $4 million, inclusion
of an independent fairness opinion, and the approval of the Company's Board
of Directors. Under the terms of the agreement, the Company committed at its
next stockholder meeting to seek approval to effect a one-for-five or greater
reverse stock split of its Common Stock. Immediately upon the consummation of
the reverse stock split, each share of the Preferred Stock will be converted
into seven (7) shares of Common Stock of the Company, at which time the
former stockholders of Sharps will own approximately 91% of the issued and
outstanding Common Stock of the Company on a fully diluted basis. Upon
completion of the conversion, the Company will have approximately 7,582,950
shares of Common Stock outstanding, of which the existing stockholders of the
Company will own approximately 582,950 shares and the former stockholders of
Sharps will own 7,000,000 shares.
Sharps now operates as a wholly owned subsidiary of the Company.
BACKGROUND
The process by the Board of Directors to increase value of the Company
for its stockholders began in May 1995. In December 1996, the Board and
management determined that a merger or acquisition program was the only viable
option for the Company's future. The Company had two independent audits with
"going concern" letters from Price Waterhouse and Faske Lay & Co., L.L.P. in
1995 and 1996, respectively. The products of the Company, without substantial
advertising due
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to lack of capital, were languishing at $300,000 to $500,000 in annual
sales. The stock also had languished below a dollar on the Vancouver Stock
Exchange and the OTC Bulletin Board for two years. Management reviewed over
26 companies from May 1995 through October 1997 for a possible business
opportunity. In December 1996, the Company closed a $270,000 private
placement to maintain operations through this search. In August 1997, a
former member of the Company's Board of Directors introduced management of
the Company to Sharps. After two months of financial, operational and legal
due diligence, management of the Company reached a tentative agreement with
the founder and owner of Sharps, Dr. Burt Kunik. The negotiations, which
took place over a two-month period, included Mr. Cooke (of the Company), Dr.
Kunik (of Sharps), members of the boards of directors of both companies and
the Company's former legal counsel from Vancouver, Canada.
In light of the equity interests of Messrs. Cooke and Gunderson,
the Company's Board of Directors reviewed the acquisition process with its
outside legal counsel. In addition, the transaction had the analysis of Ms.
Sharri McAnally, Assistant Comptroller of VTEL Corporation and a member of
the Company's Board of Directors with no equity interest in Sharps, and Faske
Lay & Co., L.L.P., the Company's independent auditors, reviewed the final
agreements in connection with the preparation of the Company's financial
statements.
SHARPS COMPLIANCE, INC.
Sharps was formed in May of 1994 by Dr. Burt Kunik. Sharps'
services are provided primarily to small waste generators to facilitate their
compliance with state and federal regulations by tracking, incinerating and
documenting the disposal of sharps (syringes, razors, needles, etc.). The
primary product offered by Sharps is the Sharps by Mail Disposal System (the
"Mail Disposal System"). Sharps occupies a 2,385 square foot office facility
in Houston, Texas, and employs approximately 13 employees, most located at the
principal place of business of Sharps, 8928 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 in Carthage, Texas. The incinerator is under
exclusive contract for medical waste to American 3CI, a medical waste disposal
company which has an exclusive contract with Sharps. After destruction of the
Mail Disposal System, the incinerator sends verification of such destruction to
the customer.
Sharps' target market segments include the home healthcare industry;
diabetic community that requires insulin injection; non-healthcare
institutional users; 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.
In 1998, home care will be impacted 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.
7
<PAGE>
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, big-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
big-hazard clean-up.
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. DOT enforcement of regulations on the transportation of medical
waste. In 1998, new regulations will levy heavy fines against
non-compliance of regulatory statutes.
2. 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).
3. 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.
4. 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 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
Mail Disposal System is the predominate mail 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-Registered Trademark- 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-Registered Trademark- has combined three complete programs for
return and disposal. All systems contain the two-gallon Sharps by Mail
Disposal System along with either (i) a prepaid pump return box, (ii) a
disposal IV pole or (iii) the 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 formula for dealing with
the disposal of the sharps encountered by the leading national homecare
companies. Sales of the SCI Trip LesSystem-Registered Trademark- recently
have begun to escalate and now account for approximately 20% of Sharps' sales.
DIABETIC COMMUNITY. A second 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.
8
<PAGE>
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 Sharps by Mail Disposal System to the
diabetic community.
NON-HEALTHCARE INSTITUTIONAL. The third 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 and 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.
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. Current 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.
MISCELLANEOUS. The Mail Disposal System is finding new
applications in many different areas. Small infectious waste generators can
be found in many industries. Companies are constantly required to comply
with OSHA regulations for disposal of potentially infectious waste and
attempting to reduce potential liability, and many companies do not wish to
sign long-term contracts for disposing of small amounts of waste.
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. Sharps is
currently negotiating with another manufacturer to exclusively manufacture
certain other sharps containers.
REASONS FOR THE AGREEMENT AND PLAN OF REORGANIZATION
The Company's Board of Directors unanimously approved the
Agreement and Plan of Reorganization and recommends the approval of the
one-for-5.032715 reverse stock split as being in the best interests of the
Company and its stockholders. In approving the Agreement and Plan of
Reorganization, the Company's Board considered a number of factors. These
factors include the following:
9
<PAGE>
(i) management's belief that the reorganization is the only
viable option to sustain the Company's operations past June
30, 1998 due to the fact that over the last two years, the
Company has had decreasing revenue, a going-concern opinion by
its auditors and required two equity and debt infusions to
sustain operations;
(ii) the review of the material terms and conditions of the
Agreement and Plan of Reorganization, including the
requirement that Sharps raise no less than $4 million from
an equity offering prior to the consummation of the
Agreement and Plan of Reorganization;
(iii) the investigation and review by the Company's Board;
(iv) the knowledge and review of Sharps' recent business operations,
including new agreements with major distribution companies,
the enhanced financial condition resulting from the pending
$4 million cash infusion from a successful private placement,
an analysis of the initial market acceptance of the medical
disposal products in the industry and the outlook for small
companies like Sharps. Sharps was one of 26 companies
analyzed by management and the Board and the only one which met
the Company's criteria, including (a) privately held going
concern generating revenue with high growth potential, (b)
ownership interested in the concept of reversing into a
public company, (c) product lines related to the medical field
and (d) a company which needed a capital infusion for
immediate market growth;
(v) the information provided to the Board of the Company by
management of Sharps and Howard Frazier Barker Elliott,
Inc., with respect to the market strategy and initial
revenue growth of Sharps and the resultant value each
stockholder of the Company could receive pursuant to the
Agreement and Plan of Reorganization (see "Fairness Opinion"
below), which in essence gave the Company's stockholders,
after dilution, a 9.1% interest in a future opportunity
versus a value of 3.2% (based on the market capitalization
of one times revenue, or $450,000, for the current value of
the Company divided by the estimated $14 million market value
of Sharps); in addition, the advantages of a business
combination between the Company and Sharps based on financial
strength and market acceptance and the Company's prospects of
ceasing operations if the Agreement and Plan of Reorganization
or a similar agreement were not to be effective in the near
future;
(vi) being faced with the prospect of being unable to raise
additional capital based on the current decline in revenue
from the Company's polymer products, specifically the
advanced denture products, the lack of cash flow to grow the
revenue of the existing products developed in 1993 and 1994
and the inability to sell existing products to create
liquidity for the Company, the alternatives to the
consummation of the Agreement and Plan of Reorganization,
as well as the risks inherent in the Company continuing to
operate as an independent public company and the impact to
the value of a dormant stock to the Company's stockholders
compared to the strengths of a combination between the Company
and Sharps;
(vii) the presentation of Howard Frazier Barker Elliott, Inc.,
delivered to the Board at its meeting on January 30, 1998,
in connection with the proposed agreement and
reorganization being fair to the stockholders of the
Company from a financial point of view; and
(viii) such other matters as the Company's Board deemed
appropriate or necessary in considering the Agreement and
Plan of Reorganization.
In its analysis of the proposed acquisition of Sharps as a
beneficial action for the stockholders of the Company, the Board concluded
that Sharps was in a growth mode, would be able to implement its market plan
for 1998 as a result of the $4 million private placement and concluded that
the opportunity for increased stockholder value for the Company's
stockholders was enhanced despite substantial dilution from the proposed
business combination. The Board realized that the Company's products had
stalled in the market and that after three debt and cash infusions by
stockholders since 1994, the Company would be unable to raise additional
working capital, and as a result, it was likely that the Company would cease
operations by the end of fiscal 1998 without an acquisition of growth
products such as those represented by Sharps.
10
<PAGE>
The transaction is being consummated at this time to give the
Company's stockholders an opportunity to participate in a new medical product
venture as an alternative to the Company's probable cessation of operations
by June 30, 1998 due to the lack of market acceptance of the Company's
polymer products for the dental industry. Should the Company cease
operations, the Board felt that the stockholders would have substantially
less value in a dormant public shell versus the acquisition of Sharps and its
product line.
FAIRNESS OPINION
Howard Frazier Barker Elliott, Inc., of Houston, Texas ("HFBE"),
delivered its written opinion as to the fairness, from a financial point of
view, to the Company and its stockholders, of the consideration to be paid
and received in the share exchange pursuant to the Agreement and Plan of
Reorganization among the Company, Sharps and the stockholders of Sharps. The
Company paid HFBE a fee of $22,000 for services rendered in connection with
the fairness opinion. HFBE did not participate in the negotiations of the
consideration to be paid by the Company for the acquisition of Sharps.
Management of the Company interviewed three companies to conduct a
fairness opinion related to a proposed agreement with Sharps, including CFO
Consulting Services of Austin, Texas, Fowler Valuation Services, LC, of Austin,
Texas and HFBE. After interviewing the three firms, the Company selected HFBE.
Mr. William H. Frazier was primarily responsible for the preparation of the
fairness opinion. Mr. Frazier, a principal in the firm of HFBE, has over 20
years of experience in matters relating to corporate finance and valuations of
closely-held businesses and the securities they issue. HFBE was formed in 1991
and is a Houston, Texas-based business valuation and financial advisory firm.
The four principals in the firm, who were employed previously by the corporate
finance departments of investment banking firms, have an average of 20 years of
experience in financial advisory matters relating to corporate finance.
From 1975 to 1986, Mr. Frazier was involved in all aspects of general
corporate finance activities including public offerings of equity and debt
securities, private placements, mergers and acquisitions, venture capital and
valuation and financial advisory assignments. During this time he was employed
by the firms of Underwood, Neuhaus & Co., Inc. and Lovett Mitchell Webb &
Garrison, Inc., both regional investment banking firms headquartered in
Houston. In 1987 he formed the Valuation Group of the Corporate Finance
Department at Lovett Mitchell, which later became a unit of Kemper Securities,
Inc. (now Everin Securities). He received a B.S. degree in Commerce, cum
laude, from Spring Hill College, Mobile, Alabama, and a Master of International
Management from the American Graduate School of International Management in
Glendale, Arizona. Mr. Frazier is an Accredited Senior Appraiser of the
American Society of Appraisers.
There were no material relationships between the firm of HFBE, its
partners or associates and the Company, its management or Sharps and its
management prior to this engagement. The $22,000 fee paid by the Company for
this analysis and fairness opinion was based on three company bids, input from
the Company's outside counsel and negotiations between the parties. In the bid
analysis, the Company sought a firm with no historical ties to management,
valuation and fairness opinion experience exceeding ten years and a strong
track record of valuation of public companies. The local firms in Austin,
Texas, while experienced, were acquainted with the Company's CEO due to his
elected official background. Therefore, an out-of-city firm ultimately was
selected for its independency. Instructions and limitations of the fairness
opinion agreement are included in the engagement letter of December 1, 1998,
which is attached as Exhibit "B" to this Proxy Statement together with the
fairness opinion of HFBE dated February 28, 1998.
The bids received were (i) CFO Consulting Services, $15,000 plus
out-of-pocket expenses; (ii) HFBE, $22,000 plus out-of-pocket expenses; and
(iii) Fowler Valuation Services, $15,000 plus out-of-pocket expenses.
In rendering its January 1998 fairness opinion of the Company, HFBE
analyzed the Company's strategic market direction and success to date with
revenue from its commercial polymer products, financial position and
stockholder value. In the factors considered, it was noted that the Company's
market capitalization of $1.7 million was unsupportable considering the current
product sales, cash position of the Company and negative cash flow realized
from the previous 30 months of operations. The financial advisor noted that
the Company could be valued at below $450,000 market capitalization after an
analysis of the above fiscal/revenue condition. Likewise, they noted slowing
revenues
11
<PAGE>
and the need to receive additional outside equity/debt to remain operating,
as well as the issuance of "going concern" letters by two independent audit
firms in fiscal 1996 and 1997.
HFBE reviewed the information provided regarding Sharps and its
products. In addition, discussions were held with management of Sharps
regarding the market outlook for product sales, product development and
industry conditions. The prospective financial condition of Sharps after the
proposed equity offering (finalized in February 1998) was analyzed.
As mentioned previously, a similar review was conducted regarding the
financial condition and general business outlook for the Company. It was the
opinion of HFBE that, from a financial standpoint, the combination of the
Company and Sharps, as described in the Agreement and Plan of Reorganization,
presented a more favorable situation for the Company's stockholders than the
Company's unfavorable prospects without such a business combination. HFBE
noted that upon completion of the private placement, approximately $4 million
of equity funded by accredited investors through the purchase of 2 million
shares of common stock of Sharps purchased at $2.00 per share would be
available to the combined company. With 5 million shares already issued, the
value of Sharps could prospectively be approximately $14 million. Since the
proposed acquisition of Sharps ultimately would require a 7:1 rollback of the
Company's Common Stock at some point in 1998, the Company's stockholders would
own approximately 9.1% of the reorganized company on a fully diluted basis.
Based on a reduction of the Company's $1.7 million market capitalization
(unsupported by HFBE's financial valuation) to a more reasonable market
capitalization of $450,000, the Company stockholders' value would have been
about 3.2% (market capitalization of one times revenue, or $450,000, divided
by the estimated $14 million market value of Sharps). Since the proposal
provided for the Company's stockholders to receive approximately 9.1% of the
stock after the reorganization, it was the opinion of HFBE that this proposed
stock exchange with Sharps would be fair from a financial perspective to the
Company's stockholders. The Company's Board of Directors accepted the opinion
of HFBE and the methods utilized.
INTERESTS OF CERTAIN PERSONS IN THE AGREEMENT AND PLAN OF REORGANIZATION
Immediately prior to the closing of the Agreement and Plan of
Reorganization, Dr. Burt Kunik, John W. Dalton, and Parris H. Holmes, Jr.,
directors of Sharps, owned 0, 20,900 and 294,153 shares, respectively, of
Common Stock of the Company. In addition, Mr. Holmes held options to acquire
75,000 additional shares of Common Stock of the Company, and Mr. Dalton held
stock purchase warrants to acquire 10,450 additional shares of Common Stock of
the Company. Lee Cooke, Chairman of the Board, President and Chief Executive
Officer of the Company, owned 142,163 shares of Common Stock of the Company
with options and stock purchase warrants to acquire 168,539 and 25,500
additional shares of Common Stock of the Company, respectively. Subsequent to
the closing of the Agreement and Plan of Reorganization, Messrs. Kunik,
Dalton, Holmes and Cooke owned 428,571.43, 178,571.43, 119,285.71712 and
7,142.857 shares of Preferred Stock of the Company, respectively. Each share
of Preferred Stock is entitled to 35.190319 votes. Therefore, the
aforementioned individuals can collectively vote 68.9% of the issued and
outstanding capital stock of the Company. Immediately upon the Company
effecting the one-for-5.032715 reverse stock split of its Common Stock, each
share of Preferred Stock shall be converted into seven (7) shares of Common
Stock of the Company. Therefore, subsequent to the approval of the reverse
stock split, the aforementioned individuals will own the following number of
shares of Common Stock of the Company, respectively: 3,000,000, 1,254,152,
893,448 and 78,247. Mr. Dalton will resign as a member of the Board of
Directors of Sharps, and Messrs. Kunik, Holmes and Cooke are the Company's
nominees for election as directors of the Company at this Annual Meeting. It
is anticipated that Mr. Cooke will step down as Chairman, President and Chief
Executive Officer of the Company and that Dr. Kunik shall assume those
responsibilities.
The Company's outside counsel invested $50,000 for the purchase of
25,000 shares of common stock of Sharps in the private placement closed in
February 1998, immediately prior to the acquisition of Sharps by the Company.
All shares of Sharps common stock purchased in the private placement were
exchanged for shares of Series A Cumulative Voting Preferred Stock of the
Company upon closing of the acquisition, resulting in counsel's ownership of
3,571.4285 shares of such preferred stock. Counsel's services in connection
with the acquisition transaction are being provided on an hourly fee basis.
Effective August 27, 1997, the Company entered into an employment
agreement with Mr. Cooke. This agreement provides for a minimum annual base
salary (subject to adjustment) of $110,000. The employment agreement provides
that in the event of a termination without cause, Mr. Cooke is entitled to
two years of severance pay. The employment agreement expires August 27, 1999.
The Company will negotiate with Mr. Cooke as to his severance package.
12
<PAGE>
Effective January 1, 1998, Sharps entered into an employment
agreement with Dr. Kunik. This employment agreement was assumed by the
Company under the terms of the Agreement and Plan of Reorganization. This
agreement provides for a three-year term, unless terminated as provided
therein, an annual salary of $180,000 and an incentive bonus at the
discretion of the Compensation Committee. For a complete description of the
terms of Dr. Kunik's employment agreement, including severance provsions, see
"Executive Compensation--Employment Agreements."
Mr. Cooke has served as Chairman, President and CEO of the Company
since March 1992, and because his focus was to commercialize the polymer
technologies of the Company, with the change in product focus to a medical
sharps by mail disposal product line, Mr. Cooke has no interest or expertise
in such a product marketing effort and therefore expects to resign as an
officer and employee of the Company. Upon Mr. Cooke's resignation, Dr.
Kunik, who has been Chairman, President and CEO of Sharps since its
inception, will assume the position of Chairman, President and CEO of the
Company. As noted under "Interests of Certain Persons in the Agreement and
Plan of Reorganization," Mr. Cooke will be entitled to severance upon his
resignation, which severance has not yet been negotiated.
ANTICIPATED ACCOUNTING TREATMENT
The Company intends to treat the Agreement and Plan of
Reorganization as a reverse acquisition for accounting and financial
reporting purposes. As such, Sharps will be considered the acquiror for
accounting and financial reporting purposes and the net assets of the Company
will be combined with those of Sharps at their fair value which is the same
as their historical cost basis, on the effective date of the Agreement and
Plan of Reorganization. Sharps will reflect the ongoing results of operations
of the Company in their financial statements from the effective date of the
Agreement and Plan of Reorganization. The combined entity will carry forward
the Company's fiscal year end and has filed a transitional report on Form
10-QSB for the quarter ended March 31, 1998 and anticipates filing a
transitional report on Form 10-KSB for the year ending June 30, 1998.
SUMMARY AND PRO FORMA FINANCIAL DATA
The Summary and Pro Forma Financial Data below for the Company has
been taken or derived from the historical and pro forma financial statements
and other records of the Company. The statements of operations and balance
sheets for each of the three years ended June 30, 1997 have been audited by
Faske Lay & Co., L.L.P., independent public accountants, as indicated in
their reports on those statements. The Summary Financial Data should be read
in conjunction with the Financial Statements, Pro Forma Unaudited Financial
Statements and related notes incorporated by reference or included elsewhere
in this Proxy Statement.
The Summary Financial Data below for Sharps has been taken or
derived from the historical financial statements and other records of Sharps.
The statements of operations and balance sheets for each of the three years
ended December 31, 1997 have been audited by Arthur Andersen LLP, independent
public accountants, as indicated in their reports on those statements. The
Summary Financial Data should be read in conjunction with the Financial
Statements and related notes included elsewhere in this Proxy Statement.
13
<PAGE>
U.S. MEDICAL SYSTEMS, INC.
<TABLE>
Six Months Pro Forma
Ended Twelve Months Ended
Year Ended June 30, December 31, December 31,
--------------------------------------- --------------------- 1997 (1)
1995 1996 1997 1996 1997 -----------
----------- --------- --------- --------- -------- (Unaudited)
(Unaudited)
<S> <C> <C> <C> <C> <C> <C>
SUMMARY OF INCOME
STATEMENT DATA
Revenues $ 305,000 $ 504,000 $ 455,000 $ 216,000 $261,000 $1,334,000
Cost of products sold 250,000 429,000 225,000 132,000 109,000 827,000
Selling, general and
administrative expenses 2,071,000 652,000 335,000 211,000 158,000 774,000
Depreciation and
amortization expense 458,000 261,000 151,000 61,000 5,000 103,000
----------- --------- --------- --------- -------- ----------
Operating loss (2,501,000) (838,000) (256,000) (187,000) (11,000) (370,000)
Other income (expense) 17,000 (79,000) (17,000) (15,000) 4,000 3,000
----------- --------- --------- --------- -------- ----------
Net loss (2,484,000) (917,000) (273,000) (203,000) (7,000) (367,000)
----------- --------- --------- --------- -------- ----------
----------- --------- --------- --------- -------- ----------
Net loss per share $ (2.06) $ (.75) $ (.13) $ (.15) $ (--) $ (.05)
----------- --------- --------- --------- -------- ----------
----------- --------- --------- --------- -------- ----------
</TABLE>
<TABLE>
As of December 31, 1997
---------------------------
Actual Pro Forma (2)
-------- -------------
<S> <C> <C>
BALANCE SHEET DATA
Working capital $244,000 $3,379,000
Inventories 22,000 62,000
Total assets 357,000 4,501,000
Long-term debt,
including current portion 50,000 78,000
Stockholders' equity 255,000 3,864,000
</TABLE>
<TABLE>
SHARPS COMPLIANCE, INC.
-------------------------
Year Ended December 31,
---------------------------------
1995 1996 1997
-------- -------- ---------
<S> <C> <C> <C>
SUMMARY OF INCOME
STATEMENT DATA
Revenues $281,000 $650,000 $ 834,000
Cost of products sold 129,000 340,000 625,000
Selling, general and
administrative expenses 175,000 341,000 492,000
Depreciation and
amortization expense -- 9,000 8,000
Operating loss (23,000) (40,000) (291,000)
Other expense (1,000) (2,000) (4,000)
-------- -------- ---------
Net loss (24,000) (42,000) (295,000)
-------- -------- ---------
-------- -------- ---------
Net loss per share $ (.01) $ (.01) $ (.08)
-------- -------- ---------
-------- -------- ---------
</TABLE>
14
<PAGE>
<TABLE>
As of December 31, 1997
----------------------------
Actual Pro Forma (2)
--------- -------------
<S> <C> <C>
BALANCE SHEET DATA
Working capital $(668,000) $3,135,000
Inventories 40,000 40,000
Total assets 586,000 4,144,000
Long-term debt,
including current portion 428,000 28,000
Stockholders' equity (353,000) 3,610,000
</TABLE>
- ----------
(1) The unaudited pro forma income statement data assumes that the transaction
described below occurred on January 1, 1997. The pro forma financial
information presented is based on certain pro forma adjustments to reflect
(i) the issuance of 1,000,000 shares of convertible preferred stock of the
Company to stockholders of Sharps in exchange for all the outstanding
common stock of Sharps, and the conversion of the convertible preferred
stock into seven shares of the Company's Common Stock for each share of
convertible preferred stock, which conversion shall occur after the one-
for-5.032715 stock split of the Company's Common Stock as proposed in
Item 2 of this Proxy Statement; (ii) the effect of the one-for-5.032715
stock split of the Company's outstanding Common Stock, subject to
stockholder approval as proposed in Item 2 of this Proxy Statement; and
(iii) the reduction of interest expense related to the $400,000
stockholder note payable of Sharps which was assumed to be retired by the
net proceeds of approximately $3,829,000 of the offering of common stock
of Sharps in a private placement closed in February 1998 (the "Offering").
(2) The unaudited pro forma balance sheet data assumes that the transaction
described below occurred on December 31, 1997. The pro forma financial
information presented is based on certain pro forma adjustments to (i)
reflect the use of the net proceeds of the Offering to reduce the
principle and accrued interest related to the $400,000 stockholder note
payable of Sharps and (ii) the remaining net proceeds of the Offering to
be used to support the marketing and sales effort of Sharps and for other
working capital purposes. The Agreement and Plan of Reorganization had no
effect on total stockholders' equity of the Company or Sharps on a pro
forma basis.
The certificates presently representing shares of Common Stock
will be deemed to represent 1/5.032715th of the number of shares of Common
Stock after the reverse stock split. No fractional shares of Common Stock
will be issued, and in lieu thereof, stockholders holding a number of shares
of Common Stock not evenly divisible by 5.032715, and stockholders holding
fewer than such number of shares of Common Stock, upon surrender of their
certificates, will receive cash in lieu of fractional shares of Common Stock.
The price payable by the Company will be determined by multiplying the
fraction of a share by the equivalent of the average of the closing bid
prices for one share of Common Stock for the ten business days immediately
preceding the effective date (the date of filing of the Amended and Restated
Certificate of Incorporation with the Secretary of State of the State of
Delaware) for the reverse stock split for which transactions in the Common
Stock are reported, as reported by the OTC Bulletin Board. The closing
bid price for one share of Common Stock on June 10, 1998 was $0.87.
The Company's Common Stock has traded on the Vancouver Stock Exchange
since June 8, 1992. As of February 2, 1994, the Company's Common Stock has
been quoted on the OTC Bulletin Board, and the Company has averaged trading
approximately 79,000 shares per month on the OTC Bulletin Board.
15
<PAGE>
The following table shows the range of high and low closing bid
prices for the Common Stock for each quarterly period beginning July 1, 1996
(prior to any adjustment for the one for 5.032715 reverse stock split):
<TABLE>
Common Stock(1)
---------------------
High Low
----- -----
<S> <C> <C>
FISCAL 1996
First Quarter $0.60 $0.20
Second Quarter $0.15 $0.03
Third Quarter $0.16 $0.06
Fourth Quarter $0.24 $0.12
FISCAL 1997
First Quarter $1.31 $0.65
Second Quarter(2) $1.12 $0.375
Third Quarter $2.75 $0.375
Fourth Quarter $0.875 $0.375
FISCAL 1998
First Quarter $0.56 $0.37
Second Quarter $1.00 $0.56
Third Quarter $1.00 $0.59
Fourth Quarter
(through June 10, 1998) $1.12 $0.71
</TABLE>
- -------------
(1) The conversion rate used to calculate the above U.S. prices from the
Vancouver Stock Exchange closing trades is 1.36 Canadian dollars to 1.00
U.S. dollar during fiscal 1996, 1.37 Canadian dollars to 1.00 U.S. dollar
during fiscal 1997 and 1.41 Canadian dollars to 1.00 U.S.
dollar during fiscal 1998.
(2) A one-for-seven reverse stock split was effective December 19, 1996.
SOURCE OF FUNDS
The funds required to purchase the fractional shares will be paid
from the current cash reserves of the Company. The Company's stockholder list
indicates a portion of the outstanding Common Stock is registered in the
names of clearing agencies and broker nominees. It is, therefore, not
possible to predict with certainty the number of fractional shares and the
total amount that the Company will be required to pay to redeem such shares.
However, it is not anticipated that the Company will be required to borrow
any funds to effect the cancellation of fractional shares.
REQUIRED APPROVALS
Except for the filings with the Secretary of State of the State of
Delaware which will be required upon approval by the stockholders of Items 2,
3 and 4 of this Proxy Statement, no state or federal regulatory approvals are
required to finalize the Company's reorganization related to the acquisition
of Sharps.
SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL OWNERS
The following table and notes thereto set forth certain
information with respect to the shares of Common Stock and Preferred Stock
beneficially owned by (i) each director and nominee for director of the
Company, (ii) all executive officers of the Company, (iii) all directors,
nominees for director and all executive officers of the Company as a group
and (iv) each person known by the Company to be the beneficial owner of 5% or
more of the outstanding Common Stock or Preferred Stock, as of the Record
Date:
16
<PAGE>
<TABLE>
COMMON STOCK PREFERRED STOCK
------------------------------------ --------------------------------
AMOUNT AND AMOUNT AND
NATURE OF PERCENT OF NATURE OF PERCENT OF
BENEFICIAL CLASS OWNED BENEFICIAL CLASS OWNED
NAME OF BENEFICIAL OWNER OWNERSHIP(1) BENEFICIALLY(2) OWNERSHIP(1) BENEFICIALLY(3)
- ------------------------ ------------ --------------- ------------ ---------------
<S> <C> <C> <C> <C>
Lee Cooke(4) 336,202(5) 10.7% 7,142.857 *
John W. Dalton(6) 31,350(7) 1.1% 178,571.430 17.9%
Clark A. Gunderson, M.D.(8) 287,151(9) 9.5% 28,571.428 2.9%
Parris H. Holmes, Jr.(10) 369,153(11) 12.2% 119,285.717(12) 11.9%
Dr. Burt Kunik(13) 0 * 428,571.430 42.9%
Sharri McAnally 29,285(14) * 0 *
All executive officers and directors
as a group (5 individuals) 1,021,793(15) 30.8% 583,571.432 58.4%
</TABLE>
- ----------------
*Represents less than 1% of the issued and outstanding shares of Common Stock
or Preferred Stock, respectively.
(1) Each of the persons named in the table has sole voting and investment
power with respect the shares reported, subject to community property
laws where applicable and the information contained in this table and
these notes.
(2) The percentages indicated are based on outstanding stock options and
Warrants exercisable within 60 days for each individual and 2,938,823
shares of Common Stock issued and outstanding on the Record Date.
(3) The percentages indicated are based on 1,000,000 shares of Preferred
Stock issued and outstanding on the Record Date. The Preferred Stock will
be automatically converted into shares of Common Stock immediately after
approval of the one-for-5.032715 reverse split of the Common Stock under
Proposal 2 of this Proxy Statement, on the basis of seven shares of
Common Stock for every share of Preferred Stock held as of such date.
(4) Mr. Cooke's address is 7600 Burnet Road, Suite 350, Austin, Texas 78757.
(5) Includes 168,539 shares that Mr. Cooke has the right to acquire upon the
exercise of stock options, exercisable within 60 days, and 25,500 shares
that Mr. Cooke has the right to acquire upon the exercise of Warrants,
exercisable within 60 days.
(6) Mr. Dalton's address is 11325 Somerland Way, Houston, Texas 77024.
(7) Includes 10,450 shares that Mr. Dalton has the right to acquire upon the
exercise of Warrants, exercisable within 60 days.
(8) Dr. Gunderson's address is 2615 Enterprise Boulevard, Lake Charles,
Louisiana 70601.
(9) Includes 45,714 shares that Dr. Gunderson has the right to acquire upon
the exercise of stock options, exercisable within 60 days, 35,000 shares
that Dr. Gunderson has the right to acquire upon the exercise of
Warrants, exercisable within 60 days, and 2,857 shares held in a
children's educational account.
(10) Mr. Holmes's address is 7411 John Smith Drive, Suite 200, San Antonio,
Texas 78229.
(11) Includes 75,000 shares that Mr. Holmes has the right to acquire upon
the exercise of stock options, exercisable within 60 days.
(12) Includes 14,282.14322 shares held in trust accounts for Mr. Holmes's
children.
(13) Dr. Kunik's address is 8928 Kirby, Houston, Texas 77054.
17
<PAGE>
(14) Represents 29,285 shares that Ms. McAnally has the right to acquire upon
the exercise of stock options, exercisable within 60 days.
(15) Includes 318,538 shares that 5 directors, nominees for director and
executive officers have the right to acquire upon the exercise of stock
options, exercisable within 60 days, and 60,500 shares that such
directors, nominees for director and executive officers have the right to
acquire upon the exercise of Warrants, exercisable within 60 days.
PRO FORMA SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL OWNERS
The following table sets forth certain pro forma information with
respect to the shares of Common Stock beneficially owned by (i) each director
and nominee for director of the Company, (ii) all executive officers of the
Company, (iii) all directors, nominees for director and all executive
officers of the Company as a group and (iv) each person known by the Company
to be the beneficial owner of 5% or more of the outstanding Common Stock or
Preferred Stock, as of the Record Date and after giving effect to the
proposed reverse stock split and the automatic conversion of Preferred Stock
to Common Stock to be effected immediately thereafter (see "Item 2 on Proxy:
Approval of an Amendment to the Company's Certificate of Incorporation to
Effect One-for-5.032715 Reverse Stock Split"):
<TABLE>
COMMON STOCK
------------------------------------
AMOUNT AND
NATURE OF PERCENT OF
BENEFICIAL CLASS OWNED
NAME OF BENEFICIAL OWNER OWNERSHIP(1) BENEFICIALLY(2)
- ------------------------ ------------ ---------------
<S> <C> <C>
Lee Cooke(3) 116,801(4) 1.5%
John W. Dalton(5) 1,256,228(6) 16.5%
Clark A. Gunderson, M.D.(7) 257,056(8) 3.4%
Parris H. Holmes, Jr.(9) 908,350(10) 12.0%
Dr. Burt Kunik(11) 3,000,000 39.6%
Sharri McAnally 5,818(12) *
All executive officers and directors
as a group (5 individuals) 4,288,025(13) 56.0%
</TABLE>
- ----------------
*Represents less than 1% of the issued and outstanding shares of Common Stock.
(1) Each of the persons named in the table has sole voting and investment
power with respect the shares reported, subject to community property
laws where applicable and the information contained in this table and
these notes.
(2) The percentages indicated are based on outstanding stock options and
Warrants exercisable within 60 days for each individual, an estimated
583,940 shares of Common Stock issued and outstanding as of the Record
Date after giving effect to the proposed reverse stock split and the
issuance of 7,000,000 shares of Common Stock upon the automatic
conversion of Preferred Stock to Common Stock (on the basis of seven
shares of Common Stock for every share of Preferred Stock held as of such
date) immediately after such reverse stock split.
(3) Mr. Cooke's address is 7600 Burnet Road, Suite 350, Austin, Texas 78757.
(4) Includes 33,488 shares that Mr. Cooke has the right to acquire upon the
exercise of stock options, exercisable within 60 days, and 5,066 shares
that Mr. Cooke has the right to acquire upon the exercise of Warrants,
exercisable within 60 days.
(5) Mr. Dalton's address is 11325 Somerland Way, Houston, Texas 77024.
(6) Includes 10,450 shares that Mr. Dalton has the right to acquire upon the
exercise of Warrants, exercisable within 60 days.
18
<PAGE>
(7) Dr. Gunderson's address is 2615 Enterprise Boulevard, Lake Charles,
Louisiana 70601.
(8) Includes 9,083 shares that Dr. Gunderson has the right to acquire upon
the exercise of stock options, exercisable within 60 days, 6,954 shares
that Dr. Gunderson has the right to acquire upon the exercise of
Warrants, exercisable within 60 days, and 567 shares held in a children's
educational account.
(9) Mr. Holmes's address is 7411 John Smith Drive, Suite 200, San Antonio,
Texas 78229.
(10) Includes 14,902 shares that Mr. Holmes has the right to acquire upon the
exercise of stock options, exercisable within 60 days, and 100,000 shares
held in trust accounts for Mr. Holmes's children.
(11) Dr. Kunik's address is 8928 Kirby, Houston, Texas 77054.
(12) Represents 5,818 shares that Ms. McAnally has the right to acquire upon
the exercise of stock options, exercisable within 60 days.
(13) Includes 63,291 shares that 5 directors, nominees for director and
executive officers have the right to acquire upon the exercise of stock
options, exercisable within 60 days, and 12,020 shares that such
directors, nominees for director and executive officers have the right to
acquire upon the exercise of Warrants, exercisable within 60 days.
ITEM 1 ON PROXY
ELECTION OF DIRECTORS
NOMINEES
The By-laws of the Company provide that the Board of Directors
shall consist of not fewer than three nor more than fifteen members and that
the number of directors, within such limits, shall be determined by
resolution of the Board of Directors at any meeting or by the stockholders at
the Annual Meeting. The Board of Directors of the Company has set the number
of directors comprising the Board of Directors at three.
The Board of Directors has nominated for director the individuals
named below to be elected at the Annual Meeting. Each of the nominees has
agreed to stand for election as a director of the Company, to serve until the
1998 Annual Meeting or until their respective successors have been duly
elected and qualified.
The table below sets forth the names and ages of the nominees for
director and the year each nominee first became a director of the Company.
Lee Cooke is presently serving as a director of the Company. Biographical
information on the nominees is set forth below under "Management - Executive
Officers and Directors."
<TABLE>
YEAR FIRST BECAME A
NAME AND AGE DIRECTOR OF THE COMPANY
- ------------ -----------------------
<S> <C>
Lee Cooke (53) 1992
Parris H. Holmes, Jr. (54) N/A
Dr. Burt Kunik (59) N/A
</TABLE>
Unless otherwise indicated on any duly executed and dated proxy,
the persons named in the enclosed proxy intend to vote the shares that it
represents for the election of the nominees listed in the table above for the
term specified. Although the Company does not anticipate that the above-named
nominees will refuse or be unable to accept or serve as directors of the
Company for the term specified, the persons named in the enclosed form of
proxy intend, if either of such nominees is unable or unwilling to serve as a
director, to vote the shares represented by the proxy for the election of
such other person as may be nominated or designated by management, unless
they are directed by the proxy to do otherwise.
19
<PAGE>
Assuming the presence of a quorum, the affirmative vote of the
holders of shares of Common Stock and Preferred Stock constituting a
plurality of the voting power of the Company, represented in person or by
proxy at the Annual Meeting, is required for the election of directors.
Assuming the receipt by each such nominee of the affirmative vote of at least
a plurality of the voting power of the Company represented at the Annual
Meeting, such nominees will be elected as directors. Proxies will be voted in
accordance with the specifications marked thereon, and if no specification is
made, will be voted "FOR" the nominees.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR"
THE ELECTION OF EACH OF THE INDIVIDUALS
NOMINATED FOR ELECTION AS A DIRECTOR.
ITEM 2 ON PROXY
APPROVAL OF AN AMENDMENT TO THE COMPANY'S CERTIFICATE OF INCORPORATION
TO EFFECT ONE-FOR-5.032715 REVERSE STOCK SPLIT
GENERAL
The Board of Directors of the Company has proposed to amend the
Certificate of Incorporation of the Company to effect a reverse split of the
presently issued and outstanding shares of the Company's Common Stock on the
basis of one share for every 5.032715 shares. Under the proposal, the par
value of the Common Stock will not change. As a result, the Common Shares
account on the Company's Consolidated Balance Sheet will be reduced to
1/5.032715th its present amount with the Additional Paid-in Capital account
being credited with the amount by which the Common Shares account is reduced.
If the reverse stock split is approved by the stockholders, each holder of
record of Common Stock on the effective date of the reverse stock split will
thereafter be deemed to hold one share of Common Stock for every 5.032715
presently issued and outstanding shares of Common Stock held of record on
that date. In addition, immediately after the effective date of the reverse
stock split, each share of Preferred Stock will automatically be converted
into seven shares of Common Stock.
EFFECT OF THE REVERSE STOCK SPLIT
Other than as set forth above, the reverse stock split will not
change the net stockholders' equity of the Company or alter the number of
authorized shares. The principal effects of the proposed reverse stock split
will be (i) to decrease the number of outstanding shares of Common Stock from
2,938,823 shares to approximately 583,940 shares and to decrease the number of
shares underlying outstanding stock options and Warrants from 378,180 and
205,900 shares to 75,139 and 40,904 shares, respectively, with a corresponding
increase in the exercise price per share, and (ii) to have enough shares of
Common Stock available to permit the automatic conversion of the Preferred
Stock on the basis of seven shares of Common Stock for each share of Preferred
Stock. The Common Stock issued pursuant to the reverse stock split will be
fully paid and nonassessable. The voting rights and other rights that
accompany Common Stock will not be altered by the change. It is not
anticipated that the number of stockholders of record of Common Stock will be
reduced in any material respect by this transaction and in fact is expected to
increase upon the automatic conversion of the Preferred Stock held by former
stockholders of Sharps.
Any tax liability to stockholders resulting from the reverse stock
split likely will be insubstantial. The receipt of Common Stock in the
reverse stock split should not result in any taxable gain or loss to
stockholders for federal income tax purposes. If the proposed reverse stock
split is approved, the tax basis of Common Stock received in the reverse
stock split (including any fractional share interests to which a stockholder
is entitled) will be equal, in the aggregate, to the basis of the shares
exchanged for Common Stock. For tax purposes, the holding period of the
shares immediately prior to the effective date of the reverse stock split
will be included in the holding period of Common Stock received in the
reverse stock split (including any fractional share interests to which a
stockholder is entitled). Stockholders who receive cash in lieu of
fractional shares of Common Stock will be treated as receiving cash as
payment in exchange for their fractional shares of Common Stock, and they
will recognize capital gain or loss in an amount equal to the difference
between the amount of cash received and the adjusted basis of the shares
surrendered for cash.
20
<PAGE>
PURPOSE OF THE REVERSE STOCK SPLIT
The Company, Sharps and all of the stockholders of Sharps
entered into an Agreement and Plan of Reorganization as of February 27, 1998.
On the effective date of the acquisition, 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 and Plan of Reorganization, the Company acquired all
of the issued and outstanding 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. Under the terms of
the Certificate of Designation, Powers, Preferences and Rights of the Series
of the Preferred Stock filed with the Secretary of State of the State of
Delaware on February 23, 1998, each share of Preferred Stock is entitled to
35.190319 votes and is to be automatically and immediately converted into
seven shares of Common Stock upon effectiveness of the proposed reverse split
of the Common Stock. For a description of the terms of the Agreement and Plan
of Reorganization and the reasons therefor, see "The Annual
Meeting--Acquisition of Sharps Compliance, Inc."
RECOMMENDATION FOR THE REVERSE STOCK SPLIT AND REASONS FOR APPROVAL
In making the determination to recommend approval of the
one-for-5.032715 reverse stock split, the Company's Board considered a number
of factors. These factors include the following:
(i) the Company's existing Certificate of Incorporation limits
the issuance of Common Stock to 20,000,000 shares, and the
proposed reverse stock split is necessary in order for
enough shares of Common Stock to be available to effect the
conversion of the Preferred Stock into Common Stock, as
discussed above.
(ii) the proposed reverse stock split will result in enhanced
liquidity for the Common Stock;
(iii) a variety of brokerage house policies and practices tend to
discourage individual brokers within those firms from
dealing with low prices;
(iv) some policies and practices of brokerage houses pertain to
the payment of brokerage commissions and to time consuming
procedures that function to make the handling of low price
stock economically unattractive to brokers;
(v) the structure of trading commissions also tends to have an
adverse impact upon holders of low priced stock because the
brokerage commission on the sale of low priced stock
generally represents a higher percentage of the sales price
than the commission on a relatively higher price issue;
(vi) the proposed reverse stock split should result in a price
level for the shares that will reduce, to some extent, the
effect of the policies and practices of brokerage firms
referred to above and diminish the adverse impact of
trading commissions on the market for the shares; and
(vii) the increased per share value may encourage interest in
trading in the Company's Common Stock and promote greater
liquidity for the Company's stockholders, although such
liquidity could be adversely affected by the reduced number
of shares outstanding after the proposed reverse stock
split.
The Board did not assign relative weights to the factors discussed
above.
APPROVAL
If the proposal is approved by the stockholders, the Company will
file with the Secretary of State of the State of Delaware promptly after such
approval, an Amended and Restated Certificate of Incorporation which includes
an amendment to Article 4 adding a new paragraph which incorporates the
reverse stock split. The proposed reverse stock split will become effective
on the date of that filing, and immediately thereafter, the Preferred Stock
will be converted into Common Stock. Such new paragraph of Article 4 would
read in its entirety as follows:
21
<PAGE>
"On ______________, 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."
Assuming the presence of a quorum, the proposal to approve the
reverse split of the Common Stock requires the affirmative vote of the holders
of shares of Common Stock and Preferred Stock constituting a majority of the
outstanding voting power of the Company represented at the Annual Meeting in
person or by proxy. Proxies will be voted for or against such approval in
accordance with the specifications marked thereon, and if no specification is
made, will be voted "FOR" such approval.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR"
APPROVAL OF THE PROPOSAL TO EFFECT A ONE-FOR-5.032715
REVERSE SPLIT OF THE COMPANY'S COMMON STOCK.
ITEM 3 ON PROXY
AMENDMENT OF THE COMPANY'S CERTIFICATE OF INCORPORATION
TO RENAME THE COMPANY SHARPS COMPLIANCE CORP.
GENERAL
The Board of Directors has unanimously adopted a resolution
declaring it advisable to amend the Company's Certificate of Incorporation,
as previously amended, to change the name of the Company from U.S. Medical
Systems, Inc. to Sharps Compliance Corp. (the "Name Change Amendment"). The
Board of Directors further directed that the Name Change Amendment be
submitted for consideration by the stockholders at the Company's Annual
Meeting. In the event the Name Change Amendment is approved by the
stockholders, the Company will thereafter amend its Certificate of
Incorporation with the Secretary of State of the State of Delaware with a
filing reflecting such Name Change Amendment, which will become effective at
the close of business on the date such filing is accepted by the Secretary of
State.
PURPOSE AND EFFECT OF THE COMPANY NAME CHANGE
The Board of Directors of the Company believes it is in the best
interests of the Company and its stockholders to change the name of the
Company (i) in order to eliminate any potential confusion that could arise by
attempted trading of shares of the Company's Common Stock issued prior to any
approval of the reverse stock split of the Common Stock described in Proposal
2 of this Proxy Statement and (ii) to more closely identify with the nature
of the Company's business operations.
APPROVAL
If the proposal is approved by the stockholders, the Company will
file with the Secretary of State of the State of Delaware promptly after such
approval, an Amended and Restated Certificate of Incorporation which includes
an amendment to Article 1 changing the Company's name. The name change will
become effective on the date of filing. As amended, such Article 1 would read
in its entirety as follows:
22
<PAGE>
"1. The name of the corporation (the "corporation") is
Sharps Compliance Corp."
Assuming the presence of a quorum, the affirmative vote of the
holders of shares of Common Stock and Preferred Stock constituting a majority
of the outstanding voting power of the Company represented at the Annual
Meeting in person or by proxy is required for the adoption of the proposal.
Proxies will be voted in accordance with the specifications marked thereon,
and if no specification is made, will be voted "FOR" such approval.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" APPROVAL
OF THE PROPOSAL TO AMEND THE CERTIFICATE OF INCORPORATION
TO CHANGE THE NAME OF THE COMPANY
ITEM 4 ON PROXY
AMENDMENT OF THE COMPANY'S CERTIFICATE OF INCORPORATION
TO DELETE ARTICLE 10 RELATING TO
SPECIFIC STOCKHOLDERS' RIGHTS
GENERAL
At the time of the Company's transfer of its domestication from the
Canadian Federal jurisdiction to the State of Delaware, the Director,
Corporations Branch of Industry Canada required that specific provisions
relating to specific stockholders' rights, including rights of dissention and
intervention, be included in the Certificate of Incorporation, which was filed
with the Secretary of State of the State of Delaware on November 17, 1992. The
rules and regulations of the Director, Corporations Branch required that these
provisions, which were included as Article 10 of the Certificate of
Incorporation, remain a part of the Company's Certificate of Incorporation for
a minimum of five years from the date of domestication. The Board of Directors
of the Company believes that the provisions Section 262 of the DGCL provide
adequate protection for its stockholders and that it is in the best interests
of the Company and its stockholders to delete Article 10 of the Certificate of
Incorporation.
TEXT OF ARTICLE 10
Article 10 of the Certificate of Incorporation reads as follows:
"10A. In addition to the rights granted under Section 262 of the
Delaware General Corporation Law, and subject to the provisions of
Section C of this Article 10, a holder of shares of any class or
series of stock of the corporation is hereby empowered to dissent,
and thereafter exercise the appraisal rights contemplated in Section
262, in the event that the corporation resolves (i) to amend its
Certificate of Incorporation to add, change or remove any provisions
restricting or constraining the issue, transfer, or ownership of
shares of that class or series; (ii) to amend its Certificate of
Incorporation in any manner which would require a vote of holders of
the outstanding shares of such class or series under Section 242 of
the Delaware General Corporation Law; (iii) to amend its articles to
add, change or remove any restriction upon the business or businesses
that the corporation may carry on; (iv) to sell, lease or exchange
all or substantially all of its assets; (v) to amend the provisions
of this Article 10; or (vi) to effect any merger or consolidation in
which the corporation is a constituent corporation, whether or not
any appraisal rights are otherwise available under Section 262 of the
Delaware General Corporation Law. Upon the passage of any such
resolution, the procedures of Section 262 of the Delaware General
Corporation Law shall apply as nearly as is practicable, with the
provisions of Section 262(d)(1) being applicable if the proposed
action is to be submitted for approval at a meeting of stockholders,
and the provisions of Section 262(d)(2) being applicable if no such
meeting or vote of stockholders is required to implement such action.
"10B. A stockholder or beneficial or equitable owner of shares of
stock of the corporation may apply to a court for leave to institute
a cause of action in the name and on behalf of the corporation, or to
intervene in an action to which the corporation is a party for the
purpose of prosecuting, defending or discontinuing the action on
behalf of the corporation, provided that no such action may be
brought and no intervention in
23
<PAGE>
any action may be made unless the court is satisfied that (i) the
complainant has given reasonable notice to the board of directors of
the corporation of its intention to apply to the court to bring a
derivative action if the corporation does not itself bring,
diligently prosecute or defend or discontinue the action; (ii) the
complainant is acting in good faith; and (iii) it appears to be in
the interest of the corporation that the action be brought, prosecuted,
defended or discontinued.
"10C. A stockholder or beneficial or equitable owner of shares of the
corporation is hereby empowered to apply, consistent with the laws of
the State of Delaware, to a court of appropriate jurisdiction for an
order to remedy a result that is oppressive or unfairly prejudicial
to or that unfairly disregards the interest of any security holder,
director or officer of the corporation arising from (i) any act or
omission of the corporation; (ii) the carrying on or conduct of the
business or affairs of the corporation; or (iii) the exercise of the
powers of the board of directors of the corporation. In connection
with an action brought pursuant to rights granted under this section,
the court may make any interim or final order it thinks fit including,
without limiting the generality of the foregoing:
(a) an order restraining the conduct complained of;
(b) an order appointing a receiver or receiver manager;
(c) an order directing an issue or exchange of securities;
(d) an order directing a corporation, subject to the last
paragraph of this Section 10C, or any other person,
to purchase securities of a security holder;
(e) an order directing a corporation, subject to the last
paragraph of this Section 10C, or any other person,
to pay a security holder any part of the monies paid
by him for securities;
(f) an order varying or setting aside a transaction or
contract to which a corporation is a party and
compensating the corporation or any other party of
the transaction or contract;
(g) an order requiring a corporation, within a time
specified by the court, to produce to the court or an
interested person financial statements or accounting
in such other form as the court may determine;
(h) an order compensating an aggrieved person;
(i) an order directing rectification of the registers or
other records of the corporation;
(j) an order liquidating and dissolving the corporation;
(k) an order directing an investigation into the affairs of
the corporation;
(l) an order requiring the trial of any issue;
provided, however, that the corporation shall not be compelled to
make a payment to a stockholder under paragraph (d) or (e) above if
there are reasonable grounds for believing that the corporation is or
would after that payment be unable to pay its liabilities as they
become due, or that the realizable value of the corporation's assets
would thereby be less than aggregate of its liabilities.
"10D. The corporation shall remain incorporated under the Delaware
General Corporation Law or any statutory modification or replacement
thereof and shall not merge or consolidate with any entity except as
provided in this Article 10.
"10E. The provisions of this Article 10 may only be amended:
24
<PAGE>
(a) Where the effective date of such amendment occurs on
or before a specified date which is 5 years from the
date of issue of the Director's Letter of
Satisfaction, by a resolution passed by the
affirmative vote of stockholders holding not less than
90% of the shares of each class or series of stock,
whether or not such class or series of stock
otherwise has voting rights;
(b) Where the effective date of such amendment occurs
after a specified date which is 5 years from the date
of issue of the Director's Letter of Satisfaction, by
a resolution passed by the affirmative vote of
stockholders holding not less than 66 2/3% of the
shares of each class or series of stock, whether or
not such class or series of stock otherwise has
voting rights.
"10F. Notwithstanding subsections 10D and 10E of this Article 10, the
corporation may merge or consolidate with another entity if:
(a) the entity surviving such merger or consolidation is
a corporation subject to the Delaware General
Corporation Law and its Certificate of Incorporation
includes all of the provisions of this Article 10; or
(b) such entity owns or operates a significant business
and is not controlled by, or under common control
with, the corporation, and such merger or
consolidation does not have as its primary purpose,
the avoidance of this Article 10;
and, in either case:
(c) such merger or consolidation is approved in the same
manner and by the same majority of stockholders as is
required by the Delaware General Corporation Law; and
(d) dissent and appraisal rights are provided to
stockholders on the same basis in respect of such
merger or consolidation as is set forth in Section
10A of this Article 10."
DISSENT AND APPRAISAL RIGHTS
The current Certificate of Incorporation of the Company provide that
stockholders are entitled to exercise dissent and appraisal rights in addition
to the rights granted under Section 262 of the DGCL. These additional rights
of dissent and appraisal are set forth in Article 10A of the current
Certificate of Incorporation and were added to the Certificate of
Incorporation at the time the Company was domesticated as a Delaware
corporation. This addition of dissent and appraisal rights was a requirement
imposed by the Director, Corporations Branch of Industry Canada on the
continuation of the Company from the Canadian federal jurisdiction to the
State of Delaware. The additional dissent and appraisal rights are those
dissent and appraisal rights which stockholders of the Company were entitled
to under the CANADA BUSINESS CORPORATIONS ACT, the corporation statute which
governed the Company at the time it was incorporated under the Canadian
federal jurisdiction. The Director, Corporations Branch is the government
authority which administers the CANADA BUSINESS CORPORATIONS ACT. The
Director, Corporations Branch also imposed the requirements regarding
amendment to the Certificate of Incorporation to remove the additional dissent
and appraisal rights, as set forth in Article 10E of the Certificate of
Incorporation.
Stockholders are being asked to consider and approve a proposal to
amend the Company's Certificate of Incorporation which would delete Article
10 of the Certificate of Incorporation, including Article 10A respecting
stockholders' dissent rights. Amendment to the Certificate of Incorporation
requires the affirmative vote of stockholders holding not less than 66-2/3%
of the shares of each class or series of stock of the Company, whether or
not such class or series of stock otherwise has voting rights.
Regardless of the outcome of the vote on Item 4 of this Proxy Statement,
stockholders of the Company have dissent and appraisal rights under both
Article 10 of the Certificate of Incorporation and Section 262 of the DGCL in
connection with Item 2, 3 and 4 of this Proxy Statement. Upon removal of
Article 10A from the Certificate of
25
<PAGE>
Incorporation, the sole dissent rights of stockholders will be as set forth
in the DGCL. Stockholders would no longer have dissent and appraisal rights
upon the occurrence of any of the events listed in Article 10A, except where
appraisal rights exist under DGLC.
Under the DGCL, a stockholder generally is entitled to demand appraisal
of and obtain payment of the fair value of the shares that the person holds in
a Delaware corporation, if the corporation is party to a plan of merger or
consolidation. However, the right to demand appraisal does not apply to
stockholders if:
(a) they are stockholders of a surviving corporation and a vote of the
corporation's stockholders is not necessary to authorize the merger or
consolidation;
(b) the shares held by the stockholders are of a class or series
registered on the New York Stock Exchange or the American Stock
Exchange, designated as a national market system security on an
interdealer quotation system by the National Association of
Securities Dealers, Inc., or are held of record by more than
2,000 stockholders on the date set to determine the stockholders
entitled to vote on the merger or consolidation.
Notwithstanding the above, appraisal rights are available for the
shares of any class or series of stock of a Delaware corporation if the
holders are required by the terms of an agreement of merger or
consolidation to accept for their stock anything except:
(a) shares of stock of the corporation surviving or resulting from the
merger or consolidation;
(b) shares of stock of any other corporation which, at the effective date
of the merger or consolidation, will be listed on the New York Stock
Exchange or the American Stock Exchange, designated as a national
market system security on an interdealer quotation system by the
National Association of Securities Dealers, Inc., or held of record
by more than 2,000 stockholders;
(c) cash in lieu of fractional shares of the corporations described in
(a) and (b); or
(d) any combination of the shares of stock and cash in lieu of fractional
shares described in (a), (b) and (c).
In a short-form merger under Section 253 of the DGCL, a parent
corporation and one or more subsidiary corporations of which the parent owns
at least 90% of the outstanding shares may merge into the parent corporation
or one of the subsidiaries. Stockholders of the parent corporation in the
short-form merger are not entitled to appraisal rights, whether the parent
corporation survives the merger or not. Dissenting minority stockholders of a
disappearing subsidiary in a short-form merger under the Delaware Corporation
Law are entitled to appraisal rights.
A Delaware corporation may provide in its certificate of incorporation
that appraisal rights shall be available for the shares of any class or series
of its stock as the result of an amendment to its certificate of incorporation,
any merger or consolidation to which the corporation is a party, or a sale of
all or substantially all of the assets of the corporation. Upon amendment, the
Company's Certificate of Incorporation will not expand the appraisal rights to
which its stockholders otherwise are entitled under the DGCL.
APPROVAL
If the proposal is approved by the stockholders, the Company will
file an Amended and Restated Certificate of Incorporation, deleting Article
10, with the Secretary of State of the State of Delaware promptly after such
approval. Such amendment will become effective on the date of filing.
Assuming the presence of a quorum, the affirmative vote of the
holders of 66-2/3% of the shares of Common Stock and 66-2/3% of the shares of
Preferred Stock, represented at the Annual Meeting in person or by proxy, is
necessary for the adoption of the proposal. Proxies will be voted in
accordance with the specifications marked thereon, and if no specification is
made, will be voted "FOR" such approval.
26
<PAGE>
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" APPROVAL
OF THE PROPOSAL TO AMEND THE CERTIFICATE OF INCORPORATION
TO DELETE ARTICLE 10 THEREOF
ITEM 5 ON PROXY
APPROVAL OF INCREASE IN NUMBER OF SHARES SUBJECT TO ISSUANCE
UNDER THE U.S. MEDICAL SYSTEMS, INC. 1993 STOCK PLAN
OVERVIEW
The Board of Directors proposes that the Company's 1993 Stock Plan
(the "Stock Plan") be amended to increase the aggregate number of shares
subject to issuance under the Stock Plan from 59,609 shares to 1,000,000
shares (after giving effect to the reverse stock split under Proposal 2 of
this Proxy Statement). As of May 31, 1998, the Company had granted options
to purchase all of the 300,000 shares of Common Stock (pre-split) authorized
under the Stock Plan. In addition, as of May 31, 1998, the Company had
granted options to purchase an additional 78,180 shares of Common Stock
(pre-split) subject to stockholder approval of an increase in authorized
shares under the Stock Plan. Effective January 21, 1997, the Board of
Directors approved an amendment to the Stock Plan to increase the number of
shares of Common Stock authorized under the Stock Plan from 300,000 shares,
pre-split, to 1,000,000 shares, post-split (the "Stock Plan Amendment").
PURPOSE AND TERMS OF THE STOCK PLAN
The purpose of the Stock Plan is to advance the best interests of
the Company by providing incentives to officers, key employees, consultants
and affiliates (each an "Optionee") of the Company and its parent (if any)
and subsidiaries and by increasing their proprietary interest in the success
of the Company, thereby encouraging them to remain in its employ or service.
By amending the Stock Plan to provide for the granting of incentive stock
options and nonqualified stock options ("Options") and awards of Common
Stock, stock appreciation rights, performance awards representing phantom
shares of stock and direct purchases of Common Stock (collectively, "Stock
Rights") to purchase an additional 1,000,000 shares (post-split) of Common
Stock, the Company will continue the purposes of the Stock Plan. Without such
amendment, the Company's ability to utilize Options and Stock Rights as forms
of incentive compensation would be substantially limited, especially after
giving effect to the reverse stock split under Proposal 2 of this Proxy
Statement. Proceeds from the exercise of such Options and Stock Rights will
be used for general corporate purposes. For a description of the principal
features of the Stock Plan, see "Executive Compensation Employee Benefit
Plans - Stock Plan."
NEW PLAN BENEFITS
It is not possible to determine the number of shares that will be
subject to Options and Stock Rights awarded under the Stock Plan to any group
or individual. However, set forth below are the number of nonqualified
Options that were granted to the named individuals and groups during fiscal
1997. These grants have an exercise price of $0.60 ($3.02 after giving effect
to the reverse stock split under Proposal 2 of this Proxy Statement), a term
of five years and vest over a three-year period. No awards of Stock Rights
were made during fiscal 1997. The closing price per share of Common Stock on
June 10, 1998 was $0.87.
<TABLE>
1993 STOCK PLAN
NAME AND POSITION NUMBER OF SHARES(1)
----------------- -------------------
<S> <C>
LEE COOKE(2) 28,521
Chairman of the Board, President and
Chief Executive Officer
CLARK GUNDERSON 9,083
Director
SHARRI MCANALLY 5,818
Corporate Secretary, Controller and Director
</TABLE>
27
<PAGE>
- -------------
(1) Represents the number of Options granted in fiscal 1997, after giving
effect to the reverse stock split under Proposal 2 of this Proxy
Statement, and is not necessarily indicative of the number of shares
subject to Options that will be issued in the future.
(2) In fiscal 1998, Mr. Cooke was granted Options for the purchase of
4,967 shares, after giving effect to the reverse stock split under
Proposal 2 of this Proxy Statement.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is intended only as a general guide as to certain
federal income tax consequences under current law for participation in the
Stock Plan and does not attempt to describe all potential tax consequences.
Furthermore, tax consequences are subject to change, and a taxpayer's
particular situation may be such that some variation of the described rules
is applicable. Accordingly, each participant has been advised to consult his
or her own tax Adviser with respect to the tax consequences of participating
in the Stock Plan.
No tax obligation will arise for the Optionee or the Company upon
the granting of either incentive stock options, nonqualified stock options,
stock appreciation rights or phantom stock under the Stock Plan. Generally,
upon exercise of a nonqualified stock option, an Optionee will recognize
ordinary income in an amount equal to the excess, if any, of the fair market
value on the date of exercise of the stock acquired over the exercise price
of the Option. The Company will be entitled to a deduction for federal income
tax purposes in an amount equal to the ordinary income recognized by the
Optionee upon exercise of a nonqualified stock option. An Optionee who
exercises stock appreciation rights or a phantom stock unit and receives cash
will recognize ordinary income equal to the cash received. Any additional
gain or loss realized by an Optionee on disposition of the shares generally
will be capital gain or loss to the Optionee and will not result in any
additional tax deduction to the Company. Because a nonqualified stock option
cannot be exercised prior to six months from the date of grant, the taxable
event arising from exercise of nonqualified stock options by officers of the
Company subject to Section 16(b) of the Exchange Act occurs on the date the
Option is exercised. The income recognized at the end of any deferred period
will include any appreciation in the value of the stock during that period,
and the capital gain holding period of the stock for purposes of obtaining
long-term capital gain treatment will not begin until the completion of such
period.
Upon the exercise of an incentive stock Option, an Optionee
generally recognizes no immediate taxable income. The tax cost is deferred
until the Optionee ultimately sells the shares of stock. If the Optionee does
not dispose of the option shares within two years from the date the Option was
granted and within one year after the exercise of the Option ("holding
periods"), and the Option is exercised no later than three months after the
termination of the Optionee's employment, the gain on the sale will be treated
as long-term capital gain. Subject to the limitations in the Stock Plan,
certain of these holding periods and employment requirements are liberalized
in the event of the Optionee's death or disability while employed by the
Company. The Company is not entitled to any tax deduction, except that if the
stock is disposed of prior to satisfying the holding periods described above,
the gain on the sale of such stock equal to the lesser of (i) the fair market
value of the stock on the date of exercise minus the Option price or (ii) the
amount realized on disposition minus the Option price will be taxed to the
Optionee as ordinary income and the Company will be entitled to a deduction
for federal income tax purposes in the same amount. Any additional gain or
loss recognized by an Optionee upon disposition of shares prior to the
expiration of the holding periods outlined above generally will be capital
gain or loss to the Optionee and will not result in any additional tax
deduction to the Company. The "spread" between the fair market value of the
Option stock and the Option price upon exercise of an incentive stock Option
is an item of adjustment used in the computation of the "alternative minimum
tax" of the Optionee under the Internal Revenue Code of 1986, as amended (the
"Code"). The tax benefits which might otherwise accrue to an Optionee may be
affected by the imposition of such tax if applicable in the Optionee's
individual circumstances.
The Company generally will not be entitled to a deduction for
federal income tax purposes upon the granting of an award of Common Stock
under the Stock Plan (an "Award") but generally will be entitled to a
deduction when the vesting restrictions on an Award lapse. The granting of an
Award under the Stock Plan generally will not be a taxable event to an
Optionee unless the Award is nontransferable and subject to substantial risk
of forfeiture and the Optionee elects to be taxed on the grant date under
Section 83(b) of the Code. If an Optionee files an election under Section
83(b) of the Code, the Optionee will have ordinary income on the difference
between the fair market value of the shares received on the grant date
28
<PAGE>
and the amount paid, if any. In such an event, the Company will be entitled
to a deduction for federal income tax purposes in the same amount as the
ordinary income recognized by the Optionee, assuming that such income
satisfies the rules regarding reasonable compensation. Upon the vesting of an
Award whereby the restrictions on the Award lapse, assuming that no election
was made under Section 83(b) of the Code, the Optionee will recognize
ordinary income on the difference between the fair market value of the shares
on the vesting date and the amount paid, if any. Upon disposition, the
Optionee will receive long-term or short-term capital gain or loss to the
extent of the difference between the proceeds from the disposition and the
amount computed for purposes of calculating ordinary income in accordance
with the preceding sentence.
APPROVAL
The Board of Directors has retained the right to amend and
terminate the Stock Plan as it deems advisable, except that no amendment
requiring stockholder approval under the Code and related regulations
relating to incentive stock options will be effective without stockholder
approval as required and within the times set by the rules.
Assuming the presence of a quorum, the proposal to approve the
foregoing Option Plan Amendment requires the affirmative vote of the holders
of shares of Common Stock and Preferred Stock constituting a majority of the
outstanding voting power of the Company represented at the Annual Meeting in
person or by proxy. Proxies will be voted for or against such approval in
accordance with the specifications marked thereon and, if no specification is
made, will be voted "FOR" such approval.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE
PROPOSAL TO INCREASE THE NUMBER OF SHARES SUBJECT
TO ISSUANCE UNDER THE STOCK PLAN.
ITEM 6 ON PROXY
RATIFICATION OF THE APPOINTMENT OF INDEPENDENT AUDITORS
The Board of Directors of the Company has appointed the firm of
Arthur Andersen LLP to serve as independent public accountants of the Company
for the fiscal year ending June 30, 1998. Although stockholder ratification
is not required, the Board of Directors has directed that such appointment be
submitted to the stockholders of the Company for ratification at the Annual
Meeting. If the stockholders do not ratify the appointment of Arthur Andersen
LLP, the Board of Directors may reconsider the appointment.
Faske Lay & Co., L.L.P., an Austin, Texas-based accounting firm,
served as independent public accountants of the Company with respect to the
Company's financial statements for the fiscal year ended June 30, 1997. Since
the Company's headquarters will be moving from Austin, Texas to Houston,
Texas, the Company has chosen Arthur Andersen LLP, a national accounting firm
with offices in Houston, to audit its financial statements for fiscal year
1998. The report of Faske Lay & Co., L.L.P. on the Company's consolidated
financial statements for the year ended June 30, 1997 contained no adverse
opinion or disclaimer of opinion and was not qualified or modified as to
uncertainty, audit scope or accounting principle, except that Faske Lay & Co.,
L.L.P.'s report on the consolidated financial statements for the year ended
June 30, 1997 included an explanatory paragraph with respect to the Company
having suffered recurring losses which raise substantial doubt about its
ability to continue as a going concern.
Representatives of both Arthur Andersen LLP and Faske Lay & Co.,
L.L.P. will be present at the Annual Meeting. They will have an opportunity
to make a statement if they desire to do so and will be available to respond
to appropriate questions from stockholders.
Assuming the presence of a quorum, the affirmative vote of the
holders of shares of Common Stock and Preferred Stock constituting a majority
of the outstanding voting power of the Company represented at the Annual
Meeting in person or by proxy is necessary for the adoption of the proposal.
Proxies will be voted for or against such approval in accordance with the
specifications marked thereon, and if no specification is made, will be voted
"FOR" such ratification.
29
<PAGE>
THE BOARD OF DIRECTORS RECOMMENDS
A VOTE "FOR" THE PROPOSAL TO RATIFY THE APPOINTMENT OF
ARTHUR ANDERSEN LLP AS INDEPENDENT PUBLIC ACCOUNTANTS
OF THE COMPANY FOR THE FISCAL YEAR ENDING JUNE 30, 1998
ITEM 7 ON PROXY
OTHER MATTERS THAT MAY COME BEFORE THE ANNUAL MEETING
The Board of Directors of the Company does not know of any other
matters which properly may come before the Annual Meeting. However, if any
other matter should be properly presented for consideration and voting at the
Annual Meeting or any adjournment(s) thereof, it is the intention of the
persons named in the accompanying proxy to vote, or otherwise act, in
accordance with their judgment on such issues.
MANAGEMENT
On the Record Date, the executive officers and directors of the
Company were as follows:
<TABLE>
NAME AGE POSITION
- ----------------------------- ----- --------------------------------------
<S> <C> <C>
LEE COOKE 53 Chairman of the Board, Chief Executive
Officer and President
CLARK A GUNDERSON, M.D.(1) 49 Director
SHARRI MCANALLY(1) 52 Corporate Secretary, Controller and
Director
</TABLE>
- ---------------
(1) Member of the Audit Committee, Compensation Committee and Stock Option
Committee
The following is a description of the biographies of the Company's
executive officers and directors and nominees for director for the past five
years.
LEE COOKE has served as Chairman of the Board and Chief Executive
Officer of the Company since March 1992. Mr. Cooke served several roles in
marketing, manufacturing and human resources at Texas Instruments from 1972
to 1983. He served as Chief Executive Officer of The Greater Austin Chamber
of Commerce from 1983 to 1987. From 1988 to 1991 he served as Mayor of
Austin, Texas. Mr. Cooke is a director of Billing Concepts Corp., an
information systems provider.
CLARK A. GUNDERSON, M.D. became a director of the Company in April
1993. Dr. Gunderson is an orthopedic surgeon in Lake Charles, Louisiana, where
he has practiced since 1977. He has been Clinical Associates Professor at
Louisiana State University School of Medicine, and has served as the Chief of
Surgery at Lake Charles Memorial Hospital, where he is currently President of
the medical staff. Dr. Gunderson received his M.D. from the Baylor College of
Medicine in 1973.
SHARRI MCANALLY served the Company as Controller from November
1992 to December 1996 and became a director in November 1996. In August 1994,
the Board of Directors appointed her Corporate Secretary. From 1989 to 1992,
she served Mission Cable Co. as Assistant Controller. Currently, she is
Assistant Controller for VTEL Corporation, a video conferencing company.
PARRIS H. HOLMES, JR. is a nominee for director under Proposal 1
of this Proxy Statement. Mr. Holmes previously served on the Company's Board
of Directors from March 1992 until April 1996. Mr. Holmes has served as
Chairman of the Board and Chief Executive Officer of Billing Concepts Corp.
since May 1996. He served as both Chairman of the Board and
30
<PAGE>
Chief Executive Officer of USLD Communications Corp. ("USLD") from September
1986 until August 1996 and served as Chairman of the Board of USLD until
June 2, 1997. Prior to March 1993, Mr. Holmes also served as President of USLD.
Mr. Holmes is also Chairman of the Board of Tanisys Technology, Inc., a
developer, manufacturer and marketer of computer peripheral equipment. Mr.
Holmes also served as a director of Sharps prior to its acquisition by the
Company in February 1998. Sharps is a provider of mail disposal services for
certain types of medical sharps products (needles, syringes and razors). On
December 18, 1996, the Securities and Exchange Commission (the "Commission")
filed a civil injunctive action in the United States District Court for the
District of Columbia alleging that Mr. Holmes failed to file timely 12
reports regarding certain 1991 and 1992 transactions in the stock of USLD as
required by Section 16(a) of the Securities and Exchange Act of 1934, as
amended (the "Exchange Act"). Section 16(a) requires officers and directors
of such companies to file reports with the Commission regarding their
personal transactions in the securities of their company. Mr. Holmes settled
this action on December 18, 1996, without admitting or denying the
allegations of the complaint, by consenting to the entry of an injunction
with respect to these requirements and paying a civil penalty of $50,000. The
Commission Staff also has notified Mr. Holmes of its decision to terminate
its investigation of trading in the securities of USLD and the securities of
Value-Added Communications, Inc. (In the Matter of Trading in the Securities
of Value-Added Communications, Inc. (HO-2765)).
DR. BURT KUNIK is a nominee for director under Proposal 1 of this
Proxy Statement. Dr. Kunik founded Sharps in May 1994 and has served as a
director and Chief Executive Officer since that time. Dr. Kunik has 24 years
of experience as an endodontist, including management experience of three
successful start-up companies in the medical waste and insurance industries.
Prior to starting Sharps, Dr. Kunik spent five years with 3CI Complete
Compliance Corporation, which he co-founded. Its successor, American 3CI
(Nasdaq: TCCC), currently is engaged in the business of medical waste
services in the southeastern/southwestern United States. Other previous
business experience includes management roles in real estate, oil and gas,
cattle ranching and the travel industry. Dr. Kunik has been very active in
the medical waste industry for nine years. He served as Chairman of the
Medical Waste Institute in 1992 and has served on the board of the
Environmental Industry Association.
COMMITTEES, MEETINGS AND BOARD COMPENSATION
The Board of Directors conducts its business through meetings of
the Board of Directors and through its committees. In accordance with the
By-laws of the Company, the Board of Directors has established an Audit
Committee, a Compensation Committee and a Stock Option Committee. The Board
of Directors does not currently utilize a nominating committee or committee
performing similar functions. Nominations for candidates for election may be
made by the Board or by any stockholder entitled to vote at a meeting of
stockholders called for the election of directors. Nominations made by the
Board are made at the same time at which the date is set for a meeting of
stockholders called for the election of directors. Nomination made by a
stockholder must be made by giving notice of such in writing to the Corporate
Secretary of the Company before the latter to occur of (i) 60 days prior to
the date of the meeting of stockholders called for the election of directors
or (ii) 10 days after the Board first publishes the date of such meeting.
Such notice shall include all information concerning each nominee as would be
required to be included in a proxy statement soliciting proxies for the
election of such nominee under the Securities Exchange Act of 1934, as
amended. Such notice shall also include a signed consent of each nominee to
hold office until the next Annual Meeting of Stockholders or until his or her
successor is elected or appointed.
AUDIT COMMITTEE. In fiscal 1992, the Board created an Audit
Committee. Dr. Gunderson and Sharri McAnally currently serve on this
Committee. This Committee met once during fiscal 1997 and has met once
through the third quarter of fiscal 1998.
COMPENSATION COMMITTEE. The Board of Directors created a
Compensation Committee in fiscal 1992. The duties of this Committee include
the approval of officers' salaries, and currently consists of Dr. Gunderson
and Sharri McAnally. The Compensation Committee met twice during fiscal 1997
and has met once through the third quarter of fiscal 1998.
STOCK OPTION COMMITTEE. The Board of Directors created the Stock
Option Committee in 1994 in connection with the Company's 1993 Stock Plan.
The Stock Option Committee is comprised of the "disinterested" directors, as
defined under Section 16 of the Securities Exchange Act of 1934, and
currently consists of Dr. Gunderson and Sharri McAnally. The Stock Option
Committee met once during fiscal 1997 and has met once through the third
quarter of fiscal 1998.
31
<PAGE>
BOARD OF DIRECTOR AND COMMITTEE MEETINGS. The Board of Directors met
four times in the 12 months ended June 30, 1997 and has met five times
during fiscal 1998. During such 12-month period and 9-month period,
respectively, the incumbent director of the Company attended 75% or more of
the aggregate number of (a) meetings of the Board of Directors held during
his tenure and (b) meetings held by Committees of the Board on which he or
she served.
DIRECTORS' COMPENSATION
MEETING FEES. The Company reimburses its directors for travel
expenses to attend Board meetings but does not provide any other cash
compensation.
STOCK OPTIONS. Pursuant to the Stock Plan, each non-employee
director has been granted a nonqualified stock Option to purchase 40,000
shares of Common Stock. These options vest over a three-year period beginning
with the date of service as a director. At June 30, 1997, the non-employee
directors of the Company held the following number and value of options
granted under the Stock Plan, after giving effect to the reverse stock split
under Proposal 2 of this Proxy Statement:
<TABLE>
SECURITIES UNDERLYING UNREALIZED VALUE OF OPTIONS
OPTIONS EXERCISE PRICE AT JUNE 30, 1997 ($) (2)
DIRECTOR EXERCISABLE UNEXERCISABLE PER SHARE(1) EXERCISABLE UNEXERCISABLE
- -------- ----------- ------------- -------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
LEE COOKE 14,051 14,470 $3.02 N/A N/A
CLARK A. GUNDERSON 1,135 7,948 $3.02 N/A N/A
SHARRI MCANALLY 1,844 3,974 $3.02 N/A N/A
</TABLE>
- ----------------
(1) Represents the exercise price after giving effect to the reverse stock
split under Proposal 2 of this Proxy Statement.
(2) Reflects the aggregate market value of the underlying securities as
determined by reference to the closing price of the Common Stock on the
Vancouver Stock Exchange (Cdn) on June 30, 1997 ($0.50 (Cdn) per share)
minus the aggregate exercise price for each option. Market value of the
underlying securities at June 30, 1997 was less than the exercise price.
EXECUTIVE COMPENSATION
The following table sets forth certain information regarding
compensation paid during each of the Company's last three fiscal years to the
Company's Chief Executive Officer. No executive officer of the Company
received salary and bonus exceeding $100,000 in fiscal 1997. Mr. Lee Cooke
became an employee of the Company during fiscal 1992 and did not receive
perquisites exceeding 10% of his salary and bonus in fiscal year 1993, 1994,
1995, 1996 or 1997. As a result of the repayment of $23,166 in deferred salary
and vacation owed Mr. Cooke due to voluntary reductions in fiscal 1995, he
received $111,500 in fiscal 1996. Mr. Cooke further agreed to a 30% reduction
in compensation for fiscal 1997.
<TABLE>
SUMMARY COMPENSATION TABLE
NAME AND PRINCIPAL POSITION FISCAL YEAR SALARY BONUS
--------------------------- ----------- ------ -----
<S> <C> <C> <C>
LEE COOKE, CHAIRMAN, PRESIDENT 1997 $ 76,700 none
AND CHIEF EXECUTIVE OFFICER 1996 111,500 none
1995 81,000 none
</TABLE>
32
<PAGE>
STOCK OPTION GRANTS IN FISCAL 1997
The following table provides information related to options granted
to the named executive officers during fiscal 1997, after giving effect to the
reverse stock split under Proposal 2 of this Proxy Statement. The Company has
never granted stock appreciation rights.
<TABLE>
INDIVIDUAL GRANTS
--------------------------- POTENTIAL REALIZABLE
% OF TOTAL VALUE AT ASSUMED
NUMBER OF OPTIONS ANNUAL RATES OF STOCK
SECURITIES GRANTED TO EXERCISE PRICE APPRECIATION FOR
UNDERLYING EMPLOYEES OR BASE OPTION TERM(3)
OPTIONS IN FISCAL PRICE EXPIRATION ----------------------
NAME GRANTED(#)(1) 1997 ($/SH)(2) DATE 5%($) 10%($)
- ------------ ------------- ------------- --------- ---------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
LEE COOKE(4) 28,521 100% $3.02 1/21/02 $23,797 $52,585
</TABLE>
- -------------
(1) Represents the number of Options granted in fiscal 1997, after giving
effect to the reverse stock split under Proposal 2 of this Proxy Statement.
(2) Represents the exercise price after giving effect to the reverse stock
split under Proposal 2 of this Proxy Statement.
(3) Calculation based on stock option exercise price over the exercise period
of the option assuming annual compounding. The columns present estimates
of potential values based on certain mathematical assumptions. The actual
value, if any, that an executive officer may realize is dependent upon
the market price on the date of option exercise.
(4) In fiscal 1998, Mr. Cooke was granted Options for the purchase of 4,967
shares, after giving effect to the reverse stock split under Proposal 2
of this Proxy Statement.
AGGREGATED OPTION EXERCISES IN FISCAL 1997 AND FISCAL YEAR-END OPTION VALUES
There were no option exercises by executive officers during the 1997
fiscal year. The following table provides the number and value of options held
at fiscal year end, after giving effect to the reverse stock split under
Proposal 2 of this Proxy Statement. The Company does not have any outstanding
stock appreciation rights.
<TABLE>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS AT FY-END(#) OPTIONS AT FY-END($)(1)
SHARES ACQUIRED VALUE --------------------------- ---------------------------
NAME UPON OPTION EXERCISE(#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------ ---------------------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
LEE COOKE(4) 0 N/A 14,051 14,470 N/A N/A
</TABLE>
- ----------------
(1) Market value of the underlying securities at June 30, 1997 ($0.50 Cdn)
was less than the exercise price.
EMPLOYEE BENEFIT PLANS
U.S. MEDICAL SYSTEMS, INC. 1993 STOCK PLAN
GENERAL. Effective November 16, 1993, the stockholders of the
Company approved the Stock Plan. Under the Stock Plan, (a) employees of the
Company and any subsidiary of the Company may be awarded incentive stock
options ("ISOs"), as defined in Section 422A(b) of the Internal Revenue Code
of 1986, as amended (the "Code"), and (b) employees, consultants and
affiliates or any other person or entity, as determined by the Administrators
to be in the best interests of the Company, may be granted (i) stock options
which do not qualify as ISOs ("Non-qualified Options"), (ii) awards of stock
in the Company ("Awards"), (iii) stock appreciation rights ("SARs") in
conjunction with, or independently of, options granted thereunder, (iv)
performance awards in the form of units ("Units") representing phantom shares
of stock, (v) non-employee
33
<PAGE>
director options and (vi) opportunities to make direct purchases of stock in
the Company ("Purchases"). ISOs and Non-qualified Options are collectively
referred to as "Options," and together with Awards, SARs, Units, Purchases
and non-employee director options are collectively referred to as "Stock
Rights."
SHARES SUBJECT TO THE STOCK PLAN. The Stock Plan authorizes the
issuance of up to 300,000 shares, after giving effect to the one-for-seven
reverse stock split effective December 19, 1996. If the stockholders of the
Company approve the one-for 5.032715 reverse stock split under Proposal 2 of
this Proxy Statement, there will be 59,609 shares authorized under the Stock
Plan. Item 3 of this Proxy Statement is a proposal to increase the number of
shares available for the granting of Stock Rights under the Stock Plan from
59,609 shares to 1,000,000 shares (after giving effect to the reverse stock
split under Item 2 of this Proxy Statement). At March 31, 1998, options to
purchase all of the 300,000 shares of Common Stock (pre-split) authorized
under the Stock Plan had been granted. In addition, as of March 31, 1998, the
Company had granted options to purchase an additional 78,180 shares of Common
Stock (pre-split), subject to stockholder approval of an increase in
authorized shares under the Stock Plan as proposed under Item 3 of this Proxy
Statement. If any Stock Right granted under the Stock Plan terminates,
expires or is surrendered, new Stock Rights may thereafter be granted
covering such shares.
ADMINISTRATION. The Stock Plan is administered by non-employee
members of the Board of Directors. The Stock Plan currently is administered
by Clark A. Gunderson, M.D., and Sharri McAnally. Subject to the terms of the
Stock Plan, the Administrators have the authority to determine the persons to
whom Stock Rights (except non-employee director options) shall be granted,
the number of shares covered by each such grant, the exercise or purchase
price per share, the time or times at which Stock Rights shall be granted,
whether each option granted shall be an ISO or a Non-qualified Option,
whether restrictions such as repurchase options are to be imposed on shares
subject to Stock Rights and the nature of such restrictions, if any. The
interpretation or construction by the Administrators of the Stock Plan or
with respect to any Stock Rights granted thereunder shall, unless otherwise
determined by the Board of Directors, be final. The option price for ISOs may
not be less than 100% of the fair market value of the Common Stock on the
date of grant, or 110% of the fair market value with respect to any ISO
issued to a holder of 10% or more of the Company's shares. There is no price
requirement for Non-qualified Stock Options. In no event may the aggregate
fair market value (determined on the date of the grant of an ISO) of Common
Stock for which ISOs granted to any employee under the Stock Plan are
exercisable for the first time by such employee during any calendar year
exceed $100,000. The Stock Plan further directs the Administrator to set
forth provisions in Option agreements regarding the exercise and expiration
of Options according to stated criteria. The Administrators oversee the
methods of exercise of Options, with attention being given to compliance with
appropriate securities laws and regulations. The Stock Plan permits the use
of already owned Common Stock as payment for the exercise price of Stock
Rights.
ELIGIBILITY FOR GRANTING OF STOCK RIGHTS. ISOs may be granted under
the Stock Plan only to employees of the Company. Non-qualified Options, SARs
and Units may be granted to any officer, employee, consultant or affiliate of
the Company, or any other person or entity, as determined by the
Administrators to be in the best interests of the Company.
NON-EMPLOYEE DIRECTOR OPTIONS. Under the Stock Plan, any director
who is not an officer or full-time employee of the Company or a related
company is granted a five-year option to purchase 25,000 shares of Common
Stock at the then fair market value upon joining the Board of Directors. The
Options vest one-third a year for three years. Non-employee director Options
are not subject to the discretion of the Administrators, except that when a
director resigns, the Non-employee director Option may be continued as a
Non-qualified Option under the Stock Plan if the director continues to be
affiliated with the Company.
AWARDS. Restricted stock awards may be granted under the Stock Plan
at the discretion of the Administrators. The grantee purchases the number of
shares subject to the Award, usually for a nominal price such as the par
value. The shares, however, are held in escrow and may not be sold until they
are vested in accordance with the terms of the grant, such as continued
employment for a specific period of time, accomplishment by the Company of
certain goals, or a combination of criteria. Upon termination of the Award,
all unvested shares are repurchased by the Company for the same nominal
purchase price originally paid for the stock. As of March 31, 1998, the
Company had not granted any Awards under the Stock Plan.
STOCK APPRECIATION RIGHTS. Options (except non-employee director
options) granted under the Stock Plan may be granted in tandem with SARs
("tandem SARs") or independently of with an Option ("naked SARs"). SARs will
become exercisable at such time or times, and on such conditions, as
specified in the grant. Any tandem SAR granted with an ISO may be granted
only at the date of grant of such ISO. Any tandem SAR granted with a
Non-qualified Option may be granted
34
<PAGE>
either at or after the time such Option is granted. As of March 31, 1998, the
Company had not granted any SARs under the Stock Plan.
A tandem SAR is the right of an optionee, without payment to the
Company (except for applicable withholding taxes), to receive the excess of
the fair market value per share on the date which such SAR is exercised over
the option price per share as provided in the related underlying Option. A
tandem SAR granted with an Option shall pertain to, and be exercised only in
conjunction with, the related underlying Option granted under the Stock Plan
and shall be exercisable and exercised only to the extent that the underlying
Option is exercisable. The tandem SAR shall become either fully or partially
non-exercisable and shall then be fully or partially unexercisable and fully
or partially forfeited if the exercisable portion, or any part thereof, of
the underlying Option is exercised, and vice versa.
A naked SAR may be granted irrespective of whether the recipient
holds, is being granted or has been granted any Options under any stock plan
of the Company. A naked SAR may be granted irrespective of whether the
recipient holds, is being granted or has been granted any tandem SARs. A
naked SAR may be made exercisable without regard to the exercisability of any
Option.
UNITS. The Stock Plan provides that performance awards in the form
of Units may be granted either independently of or in tandem with a Stock
Right, except that such Units shall not be granted in tandem with ISOs. Units
granted shall be based on various performance factors and have such other
terms and conditions at the discretion of the Administrators. As of March 31,
1998, the Company had not granted any Units under the Stock Plan.
TERMINATION AND AMENDMENT OF THE STOCK PLAN. The Board of Directors
may terminate or amend the Stock Plan in any respect or at any time, except
that (i) no amendment requiring stockholder approval under the provisions of
the Code and related regulations relating to ISOs or under Rule 16b-3 will be
effective without approval of stockholders as required and within the times
set by such rules, and (ii) no amendment may be made more than once every six
months to the provisions of the Stock Plan dealing with, relating to,
affecting or governing director Options (other than those required to comport
with changes in the Code, the Employee Retirement Income Security Act or the
rules thereunder).
EMPLOYMENT AGREEMENTS
Effective August 27, 1997, the Company entered into an employment
agreement with Mr. Cooke. This agreement expires on August 26, 1999 and
provides for a minimum annual base salary (subject to adjustment) of
$110,000. The employment agreement provides that in the event of a
termination without cause, Mr. Cooke is entitled to two years of severance
pay.
Under the terms of the Agreement and Plan of Merger entered into by
and between the Company, Sharps and the stockholders of Sharps effective
February 27, 1998, the Company assumed the obligations of the employment
agreement entered into effective January 1, 1998 by Sharps with Dr. Burt
Kunik. This agreement provides for a three-year term, unless terminated as
provided therein, an annual salary of $180,000 and an incentive bonus at the
discretion of the Compensation Committee.
The employment agreement with Dr. Kunik provides that if he is
terminated without "cause" (as defined in the employment agreement) or if he
resigns his employment for "good reason" (as defined in the employment
agreement), he will be entitled to, at his election, either (i) a lump-sum
payment in the amount equal to his base salary for the unexpired term of the
agreement or (ii) continuation of his base salary and benefits, including the
loan repayment bonuses, through the unexpired term of the agreement, and
(iii) pursuant to the Agreement Regarding Vesting of Stock Options entered
into by Dr. Kunik and the Company effective January 1, 1998, any outstanding
stock options held by Dr. Kunik shall become fully vested and exercisable.
Dr. Kunik's employment agreement is subject to early termination as
provided therein, including termination by the Company for "cause" (as
defined in the employment agreement) or termination by the employee for "good
reason" (as defined in the employment agreement). The employment agreement
also provides that if, at any time within 12 months of a change of control,
the employee ceases to be an employee by reason of (i) termination by the
employer without "cause" (as defined in the employment agreement) or (ii)
voluntary termination by the employee for "good reason upon change of
35
<PAGE>
control" (as defined in the employment agreement), in addition to the
severance stated above, he shall receive an additional payment that, when
added to all other payments received in connection with a change of control,
will result in the maximum amount allowed to be paid to an employee without
triggering an excess parachute payment (as defined by the Internal Revenue
Code), and all benefits (as defined by the employment agreement) shall
continue throughout the remainder of the term of the agreement. In the event
the employer is merged or acquires a company in a field outside of the
current product alignment, the employer and the employee could consider the
assignment of existing product lines and technology to the employee or his
assignee as part of or in lieu of the above severance pay.
A change of control is deemed to have occurred if (i) more than 30%
of the combined voting power of the employer's then outstanding securities is
acquired, directly or indirectly, or (ii) at any time during the 24-month
period after a tender offer, merger, consolidation, sale of assets or
contested election, or any combination of such transactions, at least a
majority of the employer's Board of Directors shall cease to consist of
"continuing directors" (meaning directors of the employer who either were
directors prior to such transaction or who subsequently became directors and
whose election, or nomination for election by the employer's stockholders,
was approved by a vote of at least two-thirds of the directors then still in
office who were directors prior to such transaction), or (iii) the
stockholders of the employer approve a merger or consolidation of the
employer with any other corporation, other than a merger or consolidation
that would result in the voting securities of the employer outstanding
immediately prior thereto continuing to represent (either by remaining
outstanding or by being converted into voting securities of the surviving
entity) at least 60% of the total voting power represented by the voting
securities of the employer or such surviving entity outstanding immediately
after such merger or consolidation, or (iv) the stockholders of the employer
approve a plan of complete liquidation of the employer or an agreement of
sale or disposition by the employer of all or substantially all of the
employer's assets.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
None.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Immediately prior to the closing of the Agreement and Plan of
Reorganization pursuant to which all of the capital stock of Sharps was
acquired by the Company, Dr. Burt Kunik, John W. Dalton, and Parris H. Holmes,
Jr., directors of Sharps, owned 0, 20,900 and 294,153 shares, respectively, of
Common Stock of the Company. In addition, Mr. Holmes held options to acquire
75,000 additional shares of Common Stock of the Company, and Mr. Dalton held
stock purchase warrants to acquire 10,450 additional shares of Common Stock of
the Company. Lee Cooke, Chairman of the Board, President and Chief Executive
Officer of the Company, owned 142,163 shares of Common Stock of the Company
with options and stock purchase warrants to acquire 168,539 and 25,500
additional shares of Common Stock of the Company, respectively. Subsequent to
the closing of the Agreement and Plan of Reorganization, Messrs. Kunik,
Dalton, Holmes and Cooke owned 428,571.43, 178,571.43, 119,285.71712 and
7,142.857 shares of Preferred Stock of the Company, respectively. Each share
of Preferred Stock is entitled to 35.190319 votes. Therefore, the
aforementioned individuals can collectively vote 68.9% of the issued and
outstanding capital stock of the Company. Immediately upon the Company
effecting the one-for-5.032715 reverse stock split of its Common Stock, each
share of Preferred Stock shall be converted into seven (7) shares of Common
Stock of the Company. Therefore, subsequent to the approval of the reverse
stock split, the aforementioned individuals will own the following number of
shares of Common Stock of the Company, respectively: 3,000,000, 1,254,152,
893,448 and 78,247. Mr. Dalton will resign as a member of the Board of
Directors of Sharps, and Messrs. Kunik, Holmes and Cooke are the Company's
nominees for election as directors of the Company at this Annual Meeting. It
is anticipated that Mr. Cooke will step down as Chairman, President and Chief
Executive officer of the Company and that Dr. Kunik shall assume those
responsibilities.
Effective August 27, 1997, the Company entered into an employment
agreement with Mr. Cooke. This agreement provides for a minimum annual base
salary (subject to adjustment) of $110,000. The employment agreement provides
that in the event of a termination without cause, Mr. Cooke is entitled to
two years of severance pay. The employment agreement expires August 26, 1999.
The Company will negotiate with Mr. Cooke as to his severance package.
Effective January 1, 1998, Sharps entered into an employment
agreement with Dr. Kunik. This employment agreement was assumed by the
Company under the terms of the Agreement and Plan of Reorganization. This
agreement
36
<PAGE>
provides for a three-year term, unless terminated as provided therein, an
annual salary of $180,000 and an incentive bonus at the discretion of the
Compensation Committee. For a complete description of the terms of Dr.
Kunik's employment agreement, including severance provisions, see "Executive
Compensation--Employment Agreements."
Dr. Kunik has executed a personal liability promissory note dated
November 14, 1997 in the principal amount of $400,000 payable to Sharps. The
principal amount bears interest at the rate of 8% per annum and is payable in
five equal principal installments, with the first installment due and payable
November 17, 1998 and a like installment due and payable each year
thereafter. The note is a full recourse obligation of Dr. Kunik.
SECTION 16(a) REPORTING
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,
1997, all Section 16(a) filing requirements applicable to its officers,
directors and greater than 10% beneficial owners were complied with, except
that Clark A. Gunderson, M.D., filed a late report covering the granting of a
stock option in January 1997 and issuance of a Warrant in December 1996.
STOCKHOLDERS' PROPOSALS FOR 1998 ANNUAL MEETING
Proposals of stockholders intending to be present at the 1998 Annual
Meeting of Stockholders should be submitted by certified mail, return receipt
requested, and must be received by the Company at its principal executive
offices in Austin, Texas on or before July 24, 1998, to be eligible for
inclusion in the Company's proxy statement and form of proxy relating to that
meeting.
By Order of the Board of Directors
Sharri McAnally
CORPORATE SECRETARY
Austin, Texas
June 29, 1998
-----------------------------------
IT IS IMPORTANT THAT PROXIES BE RETURNED PROMPTLY. STOCKHOLDERS WHO
DO NOT EXPECT TO ATTEND THE SPECIAL MEETING AND WISH THEIR STOCK TO BE VOTED
ARE URGED TO DATE, SIGN AND RETURN THE ACCOMPANYING PROXY OR PROXIES IN THE
SELF-ADDRESSED ENVELOPE.
37
<PAGE>
SHARPS COMPLIANCE, INC.
FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1997
TOGETHER WITH AUDITORS' REPORT
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Sharps Compliance, Inc.:
We have audited the accompanying balance sheet of Sharps Compliance, Inc., a
Texas corporation, as of December 31, 1997, and the related statements of
operations, stockholders' deficit and cash flows for the years ended December
31, 1996 and 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Sharps Compliance, Inc., as of
December 31, 1997, and the results of its operations and its cash flows for the
years ended December 31, 1996 and 1997, in conformity with generally accepted
accounting principles.
/s/ ARTHUR ANDERSEN LLP
Houston, Texas
April 2, 1998
<PAGE>
SHARPS COMPLIANCE, INC.
BALANCE SHEET--DECEMBER 31, 1997
ASSETS
<TABLE>
<S> <C>
CURRENT ASSETS:
Cash $ 67,114
Accounts receivable 111,682
Inventory 40,316
Other current assets 2,893
---------
Total current assets 222,005
PROPERTY AND EQUIPMENT, net 38,790
OTHER ASSETS:
Note receivable from stockholder 300,000
Deferred issuance costs 158,600
---------
Total assets $ 719,395
---------
---------
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable $ 69,116
Accrued disposal costs 441,728
Current maturities of long-term debt 4,997
Note payable to stockholder 400,000
---------
Total current liabilities 915,841
LONG-TERM DEBT, net of current maturities 23,047
---------
Total liabilities 938,888
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT:
Common stock, $.01 par value per share;
10,000,000 shares authorized;
5,000,000 shares issued and outstanding 50,000
Additional paid-in capital 98,900
Accumulated deficit (368,393)
---------
Total stockholders' deficit (219,493)
---------
Total liabilities and stockholders' deficit $ 719,395
---------
---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
SHARPS COMPLIANCE, INC.
STATEMENTS OF OPERATIONS
<TABLE>
For the Year Ended
December 31
----------------------
1996 1997
-------- ---------
<S> <C> <C>
REVENUES:
Sales, net $591,353 $ 830,211
Consulting services and other 59,093 4,225
-------- ---------
Total revenues 650,446 834,436
COSTS AND EXPENSES:
Cost of revenues 340,370 625,238
Selling, general and administrative 340,692 492,126
Depreciation and amortization 8,515 7,751
-------- ---------
Operating loss (39,131) (290,679)
INTEREST EXPENSE (2,516) (7,570)
INTEREST INCOME - 2,967
-------- ---------
Net loss $(41,647) $(295,282)
-------- ---------
-------- ---------
BASIC AND DILUTED NET LOSS PER SHARE $ (.01) $ (.08)
-------- ---------
-------- ---------
SHARES USED IN COMPUTING BASIC AND DILUTED
NET LOSS PER SHARE
3,000,000 3,494,520
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
SHARPS COMPLIANCE, INC.
STATEMENTS OF STOCKHOLDERS' DEFICIT
<TABLE>
Common Stock Additional Total
---------------------- Paid-In Accumulated Stockholders'
Shares Amount Capital Deficit Deficit
---------- --------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1995 3,000,000 $ 1,000 $ - $ (31,464) $ (30,464)
Contribution of fixed assets - 2,900 - - 2,900
Net loss - - - (41,647) (41,647)
---------- --------- ----------- ------------- -------------
BALANCE, December 31, 1996 3,000,000 3,900 - (73,111) (69,211)
Issuance of common stock for
consulting services 2,000,000 20,000 125,000 - 145,000
Stock split - 26,100 (26,100) - -
Net loss - - - (295,282) (295,282)
---------- --------- ----------- ------------- -------------
BALANCE, December 31, 1997 5,000,000 $ 50,000 $ 98,900 $ (368,393) $ (219,493)
---------- --------- ----------- ------------- -------------
---------- --------- ----------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of
these financial statements.
<PAGE>
SHARPS COMPLIANCE, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
For the Year Ended
December 31
------------------------
1996 1997
---------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (41,647) $(295,282)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities-
Depreciation and amortization 8,515 7,751
Changes in operating assets and liabilities-
Increase in accounts receivable (83,561) (13,310)
Increase in inventory (11,425) (21,190)
Decrease in other current assets - 1,471
Increase in accounts payable 175 31,829
Increase in accrued disposal costs 151,679 252,726
---------- -----------
Net cash provided by (used in) operating activities 23,736 (36,005)
---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Note receivable from stockholder - (300,000)
Purchase of property and equipment (9,496) (4,739)
---------- -----------
Net cash used in investing activities (9,496) (304,739)
---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable to stockholders - 430,000
Payments on notes payable (5,056) (34,703)
---------- -----------
Net cash provided by (used in) financing activities (5,056) 395,297
---------- -----------
NET INCREASE IN CASH 9,184 54,553
CASH, beginning of year 3,377 12,561
---------- -----------
CASH, end of year $ 12,561 $ 67,114
---------- -----------
---------- -----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for interest $ 2,499 $ 3,706
Contribution of fixed assets by stockholder 2,900 -
NONCASH FINANCING AND INVESTING ACTIVITY:
Deferred issuance costs - 158,600
Trade-in of automobile and reduction of note payable - 17,409
</TABLE>
The accompanying notes are an integral part of
these financial statements.
<PAGE>
SHARPS COMPLIANCE, INC.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND BACKGROUND:
Sharps Compliance, Inc. (Sharps), was incorporated on May 20, 1994, as a
provider of mail disposal products and services for certain medical sharps
(i.e., needles, syringes and razors) products. Sharps' service is primarily
provided to small waste generators to facilitate their compliance with state
and federal regulations by tracking, incinerating and documenting the waste
disposal at a facility in Carthage, Texas (see Note 8). In 1996 and 1997,
Sharps also provided consulting services to other entities related to medical
sharps products.
Although Sharps has experienced growth in revenues over the past few years,
there is an inherent concentration of credit risk associated with accounts
receivable arising from sales to its major customers. During 1996, one
customer represented approximately 50 percent of sales and, during 1997,
three customers represented approximately 74 percent of sales. At December
31, 1996, two customers comprised approximately 85 percent (or $83,500) of
the total accounts receivable balance, and at December 31, 1997, three
customers comprised approximately 80 percent (or $89,741) of the total
accounts receivable balance. As Sharps has historically funded its operations
with cash flows from operations, Sharps may be impacted by its dependence on
a limited number of customers. Management believes the risk is mitigated by
the long-standing business relationships with and reputation of Sharps' major
customers.
Sharps has sole-sourced each of its manufacturing, assembly, transportation
and disposal functions. Sharps may be impacted by its dependence on the
suppliers of these functions. The risk is mitigated by the long-standing
business relationships with and reputation of Sharps' suppliers. Although
there are no assurances with regard to the future business associations,
after expirations of certain agreements between Sharps and its suppliers,
management believes that alternative sources would be available at similar
costs.
Sharps has a working capital deficit at December 31, 1997, has received
limited revenues to date and has incurred cumulative losses since its
inception. The future success of Sharps is dependent upon many factors,
including environmental regulation, continuity of its license agreements,
successful completion of its product development activities, the
identification and penetration of markets for its products and services, and
the obtaining of the funds necessary to complete these activities (see Note 9).
2. SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES:
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent liabilities at the date of the financial statements and the
reported amounts of revenue and expense during the reporting period. Actual
results could differ from those estimates.
<PAGE>
-2-
Specifically, Sharps has estimated the costs and related liabilities for
postage and incineration associated with the mail-back of full sharps
containers for disposal. These estimates are based on Sharps' experience to
date and are reflected in accrued disposal costs on the accompanying balance
sheet. Future results may differ from these estimates.
INVENTORY
Inventory primarily represents containers and assembly supplies and is stated
at the lower of cost or market using the specific-identification method.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost less accumulated depreciation.
Depreciation is computed using the straight-line method based on the
estimated useful lives of the assets. Additions, improvements and renewals
significantly adding to the asset value or extending the life of the asset
are capitalized. Ordinary maintenance and repairs, which do not extend the
physical or economic life of the property or equipment, are charged to
expense as incurred.
REVENUE RECOGNITION
Product sales are recognized as revenue when the finished product is shipped
to customers. Sales are presented net of refunds to customers for returned
merchandise. Sharps also recognizes costs, including estimated disposal costs
for incineration and postage, at the time the product is shipped. Consulting
revenue is recognized as the related services are performed.
INCOME TAXES
Through December 31, 1997, Sharps' stockholders elected to have Sharps taxed
as an S Corporation for federal and state tax purposes, whereby the
stockholders are liable for the entity's taxable income on their individual
federal and state income tax returns. Accordingly, the historical financial
statements do not include provisions for income taxes.
On February 18, 1998, Sharps changed its federal tax status from an S
Corporation to a C Corporation and, accordingly, will be subject to federal
and certain state income taxes. (See Note 6)
NET LOSS PER SHARE
Earnings per share data for all periods presented has been computed pursuant
to Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per
Share," that requires a presentation of basic earnings per share (basic EPS)
and diluted earnings per share (diluted EPS). Basic EPS excludes dilution and
is determined by dividing income or loss available to common stockholders by
the weighted average number of common shares outstanding during the period.
Diluted EPS reflects the potential dilution that could occur if securities
and other contracts to issue common stock were exercised or converted into
common stock. There are no differences in basic EPS and diluted EPS for all
periods presented.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Sharps considers the fair value of all financial instruments not to be
materially different from their carrying values at year-end based on
management's estimate of Sharps' ability to borrow funds under terms and
conditions similar to those of Sharps' existing debt.
3. NOTE RECEIVABLE FROM STOCKHOLDER
In November 1997, Sharps entered into a note receivable with a stockholder
and officer of Sharps. The note receivable allows the officer to borrow up to
$400,000 from Sharps. The note accrues interest at 8% per annum and payments
are due over five annual installments equal to one-fifth of the outstanding
balance of principal and accrued
<PAGE>
-3-
interest. All unpaid principal and accrued interest is due in November, 2002.
In November 1997, the stockholder borrowed $300,000 from Sharps. Subsequent
to December 31, 1997, the stockholder borrowed the remaining $100,000
available under this note. Pursuant to the officer's employment agreement
entered into in January 1998, an annual cash bonus will be paid to that
officer equal to one-fifth of the outstanding balance of principal and
interest due in 1998 and 1999, with the annual cash bonus to be paid to the
officer in 2000 to be equal to the remaining principal and accrued interest
due under this note agreement. 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.
4. PROPERTY AND EQUIPMENT:
Property and equipment at December 31, 1997, consists of the following at the
date shown:
<TABLE>
Useful Life
------------
<S> <C> <C>
Furniture and fixtures 5 years $ 13,767
Computers and software 3 years 4,784
Automobiles 5 years 30,758
---------
49,309
Less- Accumulated depreciation (10,519)
---------
$ 38,790
---------
---------
</TABLE>
5. DEBT:
In July 1995, Sharps entered into a promissory note agreement with an
automobile finance company to finance the purchase of a vehicle. In October
1997, the vehicle was traded in for another vehicle and Sharps entered into a
new promissory note agreement with another automobile finance company, which
bears interest at 7.75 percent. The note matures in October 2002 and is due
in monthly installments of $581. The acquired automobile secures the new
note. The balance outstanding on the note at December 31, 1997, was $28,044
and is due as follows:
<TABLE>
<S> <C>
Year ending December 31-
1998 $ 4,997
1999 5,377
2000 5,809
2001 6,276
2002 5,585
--------
$ 28,044
--------
--------
</TABLE>
In September 1997, Sharps entered into an unsecured promissory note agreement
for $30,000 with a stockholder. The principal and related accrued interest
were paid in December 1997.
On November 14, 1997, Sharps issued an unsecured promissory note to a
stockholder in the amount of $400,000. The note accrues interest at 8 percent
annually and is payable in equal monthly principal and interest payments
beginning on April 15, 1998, with maturity of all amounts due on September
15, 1998. In connection with the stock offering in February 1998 and Sharps
subsequently retired the note by paying the stockholder approximately
$409,000 for principal and accrued interest (see Note 9).
<PAGE>
-4-
6. CHANGE IN S CORPORATION STATUS AND PRO FORMA INCOME TAXES:
Prior to February 18, 1998, Sharps maintained the status of S Corporation for
federal and certain state income tax purposes. As an S Corporation, Sharps is
generally not responsible for income taxes.
On February 18, 1998, Sharps terminated its S Corporation election.
Accordingly, Sharps will be subject to federal and state income taxes from
that date forward.
Effective with the termination of Sharps' S Corporation status, Sharps will
provide for deferred income taxes for cumulative temporary differences
between the tax basis and financial reporting basis of its assets and
liabilities at the date of termination.
Significant components of Sharps' pro forma deferred tax assets and
liabilities at December 31, 1997, are as follows:
<TABLE>
<S> <C>
Deferred tax assets-
Accrued disposal costs $ 117,083
Deferred tax valuation allowance (117,083)
---------
Net deferred tax assets $ -
---------
---------
</TABLE>
A reconciliation of taxes based on the federal statutory rate of 34 percent
and the unaudited pro forma provision for income taxes for the year ended
December 31, 1997, is summarized as follows (in thousands):
<TABLE>
<S> <C>
Income tax benefit at the federal statutory rate $(100,396)
Increase in deferred tax valuation allowance 117,083
---------
Unaudited pro forma provision for income taxes $ 16,687
---------
---------
</TABLE>
7. COMMON STOCK:
In May 1994, the founding stockholder of Sharps made a capital contribution
of $1,000. In return for this cash contribution, the stockholder received
3,000,000 shares of common stock with a $.01 par value. In addition to the
cash contribution discussed above, certain fixed assets were contributed by
the stockholder to Sharps.
In October 1997, Sharps issued a total of 2,000,000 shares of common stock to
two consultants for services provided. Management valued the shares at
$145,000, which is management's estimate of the fair market value of the
services provided.
On December 12, 1997, Sharps' stockholders increased the number of authorized
shares of common stock of Sharps from 1,000,000 shares to 10,000,000 shares
and effected a 300-for-1 stock split of Sharps' common stock outstanding on
that date. All common stock and per share information included in the
accompanying financial statements has been adjusted to give retroactive
effect to the split.
8. COMMITMENTS AND CONTINGENCIES:
INSURANCE
Sharps is subject to numerous risks and uncertainties because of the nature
and status of its operations. Sharps maintains insurance coverage for events
and in amounts that it deems appropriate. Management believes that losses,
if any, will not be materially adverse to Sharps' financial position or
results of operations.
<PAGE>
-5-
SALES AND DISTRIBUTION AGREEMENT
On June 1, 1995, Sharps entered into an exclusive sales and distribution
agreement with American 3CI Complete Compliance Corporation (American 3CI)
that expires in 2001. The agreement grants Sharps the exclusive right to sell
and distribute American 3CI's mail sharps disposal system (MSDS), including
disposal services to one or more incinerators under contract with American
3CI, to all wholesale and retail organizations which have a need for such a
system. Pursuant to the agreement, Sharps has agreed to pay a per pound fee
up to a maximum of $6.00 for every MSDS that is destroyed at an American 3CI
incinerator. Obligations related to MSDS units sold but not yet incinerated
are estimated and included in accrued disposal costs in the accompanying
balance sheet, although amounts in excess of minimum payments are not due
until incineration has occurred. Expenses related to this agreement during
1996 and 1997 were $11,797 and $41,018, respectively.
Sharps has guaranteed annual minimum payments to American 3CI as follows:
<TABLE>
<S> <C>
Year ending December 31-
1998 $25,000
1999 25,000
2000 25,000
2001 12,500
</TABLE>
Sharps has the option to renew the agreement after 2002 for an additional
five-year period at a rate not in excess of 20 percent more than the current
disposal rate and the minimum annual payments.
DISTRIBUTOR AGREEMENT
On August 1, 1996, Sharps entered into an agreement with Ecolab, Inc.
(Ecolab), for Ecolab to be Sharps' exclusive U.S. distributor of the MSDS in
commercial and industrial markets. The price of the system remained constant
for the first six months of the agreement. Thereafter, the price was and will
be reviewed quarterly and adjusted upon the mutual agreement of the parties.
The term of the agreement is for one year with an automatic renewal for
one-year periods unless either party provides notice of termination to the
other within 120 days prior to expiration of the then current term.
MANUFACTURING AGREEMENT
On May 12, 1997, Sharps entered into an agreement with Winfield Medical
(Winfield) for Winfield to be Sharps' exclusive manufacturer of a certain
line of sharps containers for one specific distributor. The prices of the
containers are fixed based upon the number purchased, and Winfield may
increase prices, no more than once per year, upon notice to Sharps. The term
of the agreement is one year, with an option to extend the term for up to an
additional four years if certain purchase requirements have been met. The
agreement calls for minimum purchase requirements to be set at a date
subsequent to the agreement date. As of December 31, 1997, these requirements
had not been determined and minimal purchases under this agreement had
occurred.
LICENSING AND PURCHASE AGREEMENTS
On May 12, 1997, Sharps entered into a license and purchase agreement with
Cardico, Inc. (Cardico), for certain molds used in the manufacture of sharps
containers. The term of the license agreement is for three years, with the
option to extend the term for an additional five years if certain milestones
have been achieved. The agreement calls for royalties to be paid to Cardico
of $.10 per container sold, up to $150,000 in royalty payments, for the
exclusive right to use the molds. Additionally, the agreement specifies that
Sharps has an option to purchase the molds under the following conditions:
(a) within two years of the license and purchase agreement, Sharps pays
Cardico royalties of $150,000 or a purchase fee equal to $150,000 less all
royalties paid, (b) anytime after the second year, but no later than three
years from the effective date of the license agreement, Sharps pays royalties
of $150,000 or a purchase fee equal to $150,000 less all royalties paid and
pays an additional $50,000 within 90 days from the election to purchase the
molds or grants Cardico a five-year royalty of $.02 per sharps container sold
or (c) anytime after the expiration of eight years, if all royalties have been
paid. At December 31, 1997, no sharps containers relating to the Cardico
agreement had been sold.
<PAGE>
-6-
On August 13, 1997, Sharps entered into a letter of intent with Novo Nordisk
Pharmaceutical, Inc. (Novo), for the exclusive right to develop and use molds,
patents, if any, and technical know-how attributable to the manufacturing of
plastic sharps containers for use by Novo. The term of the agreement is for five
years with automatic renewal periods of one year, unless either party provides
notice of termination to the other within 60 days prior to the expiration of the
current term. Associated with this agreement, Sharps agreed to pay Novo a per
unit royalty to be mutually agreed upon by the companies. At December 31, 1997,
no sharps containers relating to this agreement had been sold.
SALES REPRESENTATION AGREEMENTS
On February 21, 1995, Sharps entered into a sales representation agreement with
a sales agency for promotion of the MSDS exclusively in the veterinary market.
The initial term of the agreement was for a two-year period with automatic
two-year renewal periods, unless either party notified the other 90 days prior
to expiration of the current period of its intent to terminate. The agreement
further specifies a 15 percent commission on net sales as defined in the
agreement. Commission expense related to this agreement was $2,589 and $3,679
for the years ended December 31, 1996 and 1997, respectively.
On April 1, 1995, Sharps entered into a sales representation agreement with an
independent sales agent for promotion of the MSDS. The initial term of the
agreement was for a two-year period with an automatic three-year renewal unless
either party notified the other in writing, 90 days prior to expiration, of its
intent to terminate at the end of such period. As defined in the agreement, a 10
percent commission is to be paid to the sales representative based on net sales.
Commission expense related to this agreement was $4,286 and $12,714 for the
years ended December 31, 1996 and 1997, respectively.
OPERATING LEASES
Sharps leases office space and equipment under operating lease agreements, which
expire at various dates over the next four years. Rent expense for the years
ended December 31, 1996 and 1997 was approximately $11,700 and $18,100,
respectively. Future minimum lease payments under noncancelable operating leases
are as follows:
<TABLE>
<S> <C>
Year ending December 31-
1998 $ 15,156
1999 4,382
2000 3,945
2001 1,170
--------
Total minimum lease payments $ 24,653
--------
--------
</TABLE>
9. SUBSEQUENT EVENTS:
In February 1998, Sharps completed a private placement of 2,000,000 shares of
common stock (the Offering). In return, Sharps received approximately $4,000,000
in proceeds, net of issuance costs of approximately $171,000. The proceeds from
this Offering will be used to retire Sharps' indebtedness to a certain
stockholder, support Sharps' sales and marketing program and for other working
capital purposes.
In connection with the stock offering discussed above, in February 1998, Sharps
retired the note payable to a stockholder in the amount of $400,000 plus accrued
interest of approximately $9,000.
<PAGE>
-7-
The following unaudited pro forma information assumes that Sharps received
the net proceeds from the Offering and retired the note payable to a
stockholder at December 31, 1997.
<TABLE>
<S> <C>
Current assets $ 3,647,005
-----------
-----------
Total assets $ 4,144,395
-----------
-----------
Note payable to stockholder $ -
-----------
-----------
Common stock $ 70,000
Additional paid-in capital 3,907,900
Accumulated deficit (368,393)
-----------
Total stockholders' equity $ 3,609,507
-----------
-----------
</TABLE>
On February 27, 1998, Sharps and all the stockholders of Sharps entered into an
agreement and plan of reorganization (the Agreement) with U.S. Medical Systems,
Inc. (USMS). Under the terms of the Agreement, USMS acquired all of the issued
and outstanding common stock of Sharps in consideration for the issuance of
1,000,000 shares of convertible preferred stock of USMS. Each share of
convertible preferred stock is entitled to 35.190319 common stock votes of USMS.
Upon the approval of a 1-for-5.032715 reverse stock split of USMS common stock
by the stockholders of USMS, each share of convertible preferred stock will be
converted into seven shares of USMS common stock, at which time the former
common stockholders of Sharps will own approximately 91 percent of the issued
and outstanding common stock of USMS.
<PAGE>
PRO FORMA UNAUDITED FINANCIAL STATEMENTS
FOR THE PERIODS ENDED DECEMBER 31, 1997 AND MARCH 31, 1998
<PAGE>
PRO FORMA FINANCIAL INFORMATION
The following pro forma unaudited statements assume (i) the effects of the
Agreement and Plan of Reorganization (the Reorganization) between U.S.
Medical Systems, Inc. (the Company), and Sharps Compliance, Inc. (Sharps),
(ii) the effect of the proposal to amend the Company's Certificate of
Incorporation to effect a 1-for-5.032715 reverse stock split of the Company's
common stock and (iii) the effect of a private placement of 2,000,000 shares
of Sharps common stock (the Offering), resulting in an estimated net proceeds
of $3,829,000, which was used to retire indebtedness of Sharps to a
stockholder in the amount of $400,000 plus accrued interest, support the
sales and marketing program of Sharps and for other working capital purposes.
The pro forma unaudited balance sheet assumes that the above-described
transactions occurred on December 31, 1997, and the pro forma unaudited
statement of operations for the year ended December 31, 1997, assumes that
the above described transactions occurred on January 1, 1997. The pro forma
unaudited statement of operations for the three months ended March 31, 1998
assumes that the above-described transactions occurred on January 1, 1998.
The pro forma unaudited income statements for the 12-month period ended
December 31, 1997, reflect the audited income statement of Sharps for the
year ended December 31, 1997, and the unaudited income statement of the
Company for the 12-month period ended December 31, 1997, on a historical
basis. The pro forma unaudited statement of operations for the three months
ended March 31, 1998 reflects the unaudited income statements of Sharps and
the Company on a historical basis.
The pro forma financial information is a presentation of historical results with
accounting and other adjustments. The pro forma financial information does not
reflect the effects of any of the anticipated changes to be made as a result of
the Reorganization in the Company's operations from the historical operations.
THE PRO FORMA STATEMENTS ARE PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND SHOULD
NOT BE CONSTRUED TO BE INDICATIVE OF THE COMPANY'S FINANCIAL POSITION OR RESULTS
OF OPERATIONS HAD THE TRANSACTIONS BEEN CONSUMMATED ON THE DATES ASSUMED AND DO
NOT PROJECT THE COMPANY'S RESULTS OF OPERATIONS FOR ANY FUTURE PERIOD.
The following pro forma unaudited statements and accompanying notes should be
read in conjunction with the financial statements and the financial information
pertaining to the Company and Sharps included elsewhere in this Proxy Statement.
<PAGE>
PRO FORMA UNAUDITED STATEMENT OF OPERATIONS
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1997
<TABLE>
Sharps Offering
U.S. Medical Compliance, Pro Forma
Systems, Inc. Inc. Combined Adjustments(1) Pro Forma
------------- ------------- ------------- -------------- -------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
REVENUES:
Sales, net $ 500,000 $ 830,000 $ 1,330,000 $ - $ 1,330,000
Consulting services - 4,000 4,000 - 4,000
------------- ------------- ------------- ------------ -------------
Total revenues 500,000 834,000 1,334,000 - 1,334,000
COSTS AND EXPENSES:
Cost of revenues 202,000 625,000 827,000 - 827,000
Selling, general and
administrative expenses 282,000 492,000 774,000 - 774,000
Depreciation and amortization
95,000 8,000 103,000 - 103,000
------------- ------------- ------------- ------------ -------------
Operating loss (79,000) (291,000) (370,000) - (370,000)
INTEREST AND OTHER INCOME
(EXPENSE), net 3,000 (4,000) (1,000) 4,000(D) 3,000
------------- ------------- ------------- ------------ -------------
Net loss $ (76,000) $ (295,000) $ (377,000) $ 4,000 $ (367,000)
------------- ------------- ------------- ------------ -------------
------------- ------------- ------------- ------------ -------------
PROFORMA NET LOSS PER SHARE
$ (.13) $ (.04) $ (.05)
------------- ------------- -------------
------------- ------------- -------------
PROFORMA WEIGHTED AVERAGE
NUMBER OF SHARES OUTSTANDING
571,023(E) 7,000,000(F) 7,571,023(E)(F)
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
<PAGE>
PRO FORMA UNAUDITED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1998
<TABLE>
Sharps Offering
U.S. Medical Compliance, Pro Forma
Systems, Inc. Inc. Combined Adjustments (1) Pro Forma
------------- ----------- -------- --------------- ---------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Net sales $183,000 $ 279,000 $ 462,000 $ - $ 462,000
Cost of sales (52,000) (191,000) (243,000) - (243,000)
-------- --------- --------- ------ ---------
GROSS PROFIT 131,000 88,000 219,000 - 219,000
Cost and expenses
General and administrative 180,000 292,000 472,000 - 472,000
Selling and marketing 3,000 87,000 90,000 - 90,000
Depreciation and amortization 2,000 3,000 5,000 - 5,000
-------- --------- --------- ------ ---------
TOTAL COST AND EXPENSES 185,000 382,000 567,000 - 567,000
LOSS FROM OPERATIONS (54,000) (294,000) (348,000) - (348,000)
Interest income, net 0 32,000 32,000 4,000(D) 36,000
-------- --------- --------- ------ ---------
NET LOSS $(54,000) $(262,000) $(316,000) $4,000 $(312,000)
-------- --------- --------- ------ ---------
-------- --------- --------- ------ ---------
PROFORMA NET LOSS PER SHARE $ (.09) $ (.04) $ (.04)
-------- --------- ---------
-------- --------- ---------
PROFORMA WEIGHTED AVERAGE
NUMBER OF SHARES OUTSTANDING 583,944(E) 7,000,000(F) 7,583,944 (E)(F)
-------- --------- ---------
-------- --------- ---------
</TABLE>
See the accompanying notes to pro forma unaudited financial statements.
See the accompanying notes to pro forma unaudited financial statements.
<PAGE>
PRO FORMA UNAUDITED BALANCE SHEET
AS OF DECEMBER 31, 1997
<TABLE>
Sharps Offering
U.S. Medical Compliance, Pro Forma
Systems, Inc. Inc. Combined Adjustments(1)
------------- ------------ ------------ --------------
ASSETS (Unaudited)
<S> <C> <C> <C> <C>
CURRENT ASSETS:
Cash $ 206,000 $ 67,000 $ 273,000 $ 3,425,000(A)
Accounts receivable 31,000 112,000 143,000 -
Inventory 22,000 40,000 62,000 -
Other current assets 87,000 3,000 90,000 -
------------- ---------- ------------ -----------
Total current assets 346,000 222,000 568,000 3,425,000
PROPERTY AND EQUIPMENT, net 11,000 39,000 50,000 -
- 458,000 458,000 -
------------- ---------- ------------ -----------
Total assets $ 357,000 $ 719,000 $ 1,076,000 $ 3,425,000
------------- ---------- ------------ -----------
------------- ---------- ------------ -----------
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable $ 38,000 $ 69,000 $ 107,000 $ (4,000)(B)
Accrued liabilities and disposal cost 14,000 442,000 456,000 -
Current maturities of long-term debt 50,000 5,000 55,000 -
Note payable to stockholder - 400,000 400,000 (400,000)(B)
------------- ---------- ------------ -----------
Total current liabilities 102,000 916,000 1,018,000 (404,000)
LONG-TERM DEBT, net of current maturities - 23,000 23,000 -
------------- ---------- ------------ -----------
Total liabilities 102,000 939,000 1,041,000 (404,000)
------------- ---------- ------------ -----------
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock 29,000 50,000 79,000 20,000(C)
Additional paid-in capital 7,039,000 99,000 7,138,000 3,809,000(C)
Accumulated deficit (6,813,000) (369,000) (7,182,000) -
------------- ---------- ------------ -----------
Total stockholders' equity (deficit) 255,000 (220,000) (35,000) 3,829,000
------------- ---------- ------------ -----------
Total liabilities and stockholders' deficit $ 357,000 $ 719,000 $ 1,076,000 $ 3,425,000
------------- ---------- ------------ -----------
------------- ---------- ------------ -----------
<CAPTION>
Reorganization
Subtotal Pro Forma Total
Pro Forma Adjustments(2) Pro Forma
------------- -------------- -----------
ASSETS
<S> <C> <C> <C>
CURRENT ASSETS:
Cash $ 3,698,000 $ - $ 3,698,000
Accounts receivable 143,000 - 143,000
Inventory 62,000 - 62,000
Other current assets 90,000 - 90,000
------------- ------------ -----------
Total current assets 3,993,000 - 3,993,000
PROPERTY AND EQUIPMENT, net 50,000 - 50,000
OTHER ASSETS:
Notes receivable from stockholder 458,000 - 458,000
------------- ------------ -----------
Total assets $ 4,501,000 $ - $ 4,501,000
------------- ------------ -----------
------------- ------------ -----------
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable $ 103,000 $ - $ 103,000
Accrued liabilities and disposal cost 456,000 - 456,000
Current maturities of long-term debt 55,000 - 55,000
Note payable to stockholder - - -
------------- ------------ -----------
Total current liabilities 614,000 - 614,000
LONG-TERM DEBT, net of current maturities 23,000 - 23,000
------------- ------------ -----------
Total liabilities 637,000 - 637,000
------------- ------------ -----------
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock 99,000 (23,000) 76,000
Additional paid-in capital 10,947,000 (6,790,000) 4,157,000
Accumulated deficit (7,182,000) 6,813,000 (369,000)
------------- ------------ -----------
Total stockholders' equity (deficit) 3,864,000 - 3,864,000
------------- ------------ -----------
Total liabilities and stockholders' deficit $ 4,501,000 $ - $ 4,501,000
------------- ------------ -----------
------------- ------------ -----------
</TABLE>
See the accompanying notes to pro forma unaudited financial statements.
<PAGE>
NOTES TO PRO FORMA UNAUDITED FINANCIAL STATEMENTS
The following notes identify the pro forma adjustments made to the historical
amounts in the pro forma unaudited financial statements.
1. Pro forma adjustments related to the issuance of 2,000,000 shares of Sharps
common stock for $3,829,000 in net proceeds, and the use of proceeds to
retire Sharps indebtedness to a Sharps stockholder in the amount of
$400,000 plus interest payable of approximately $4,000, to support the
sales and marketing program of Sharps and for other working capital
purposes.
A. Represents the remaining net proceeds of the Offering assumed to be used
for working capital purposes.
B. Represents the retirement of the note payable to a Sharps stockholder
with the net proceeds of the Offering.
C. Represents the net proceeds of the Offering.
D. Represents the reduction interest expense related to the $400,000
stockholder note payable of Sharps assumed to be retired by the net
proceeds of the Offering.
2. Pro forma adjustments related to the Reorganization, the effect of the
proposal to amend the Company's Certificate of Incorporation to effect a
stock split of the Company's common stock outstanding as of December 31,
1997.
E. Represents the effect of the one-for-5.032715 stock split of the
Company's outstanding common stock subject to stockholder approval.
F. Reflects the issuance of 1,000,000 shares of convertible preferred
stock to Sharps in exchange for all the outstanding common stock of
Sharps, and the conversion of the convertible preferred stock into
seven shares of the Company's common stock for each share of
convertible preferred stock as if it occurred on January 1, 1997.
3. It is anticipated that a severance agreement will be entered into with
Lee Cooke, the Chairman of the Board, Chief Executive Officer and
President of U.S. Medical Systems, Inc., the terms of which have not been
negotiated. Accordingly, no pro forma adjustments have been recorded.
<PAGE>
EXHIBIT "A"
TO
PROXY STATEMENT FOR 1997 ANNUAL MEETING OF STOCKHOLDERS OF
U.S. MEDICAL SYSTEMS, INC.
SECTION 262 OF THE GENERAL CORPORATION LAW OF THE STATE OF DELAWARE
SECTION 262. APPRAISAL RIGHTS.
(a) Any stockholder of a corporation of this State who holds shares of
stock on the date of the making of a demand pursuant to subsection (d) of
this section with respect to such shares, who continuously holds such shares
through the effective date of the merger or consolidation, who has otherwise
complied with subsection (d) of this section and who has neither voted in
favor of the merger or consolidation nor consented thereto in writing
pursuant to Section 228 of this title shall be entitled to an appraisal by
the Court of Chancery of the fair value of the stockholder's shares of stock
under the circumstances described in subsections (b) and (c) of this section.
As used in this section, the word "stockholder" means a holder of record of
stock in a stock corporation and also a member of record of a nonstock
corporation; the words "stock" and "share" mean and include what is
ordinarily meant by those words and also membership or membership interest of
a member of a nonstock corporation; and the words "depository receipt" mean a
receipt or other instrument issued by a depository representing an interest
in one or more shares, or fractions thereof, solely of stock of a
corporation, which stock is deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to
be effected pursuant to Section 251 (other than a merger effected pursuant to
Section 251(g) of this title), Section 252, Section 254, Section 257, Section
258, Section 263 or Section 264 of this title;
(1) Provided, however, that no appraisal rights under this
section shall be available for the shares of any class or series of
stock, which stock, or depository receipts in respect thereof, at the
record date fixed to determine the stockholders entitled to receive
notice of and to vote at the meeting of stockholders to act upon the
agreement of merger or consolidation, were either (i) listed on a
national securities exchange or designated as a national market system
security on an interdealer quotation system by the National
Association of Securities Dealers, Inc. or (ii) held of record by more
than 2,000 holders; and further provided that no appraisal rights
shall be available for any shares of stock of the constituent
corporation surviving a merger if the merger did not require for its
approval the vote of the stockholders of the surviving corporation as
provided in subsection (f) of Section 251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal
rights under this section shall be available for the shares of any class or
series of stock of a constituent corporation if the holders thereof are
required by the terms of an agreement of merger or consolidation pursuant
to Sections 251, 252, 254, 257, 258, 263 and 264 of this title to accept
for such stock anything except:
a. Shares of stock of the corporation surviving or resulting
from such merger or consolidation, or depository receipts in respect
thereof;
b. Shares of stock of any other corporation, or depository
receipts in respect thereof, which shares of stock (or depository
receipts in respect thereof) or depository receipts at the effective
date of the merger or consolidation will be either listed on a
national securities exchange or designated as a national market system
security on an interdealer quotation system by the National
Association of Securities Dealers, Inc. or held of record by more than
2,000 holders;
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c. Cash in lieu of fractional shares or fractional depository
receipts described in the foregoing subparagraphs a. and b. of this
paragraph, or
d. Any combination of the shares of stock, depository receipts
and cash in lieu of fractional shares or fractional depository
receipts described in the foregoing subparagraphs a., b. and c. of
this paragraph.
(3) In the event all of the stock of a subsidiary Delaware
corporation party to a merger effected under Section 253 of this title is
not owned by the parent corporation immediately prior to the merger,
appraisal rights shall be available for the shares of the subsidiary
Delaware corporation,
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets
of the corporation. If the certificate of incorporation contains such a
provision, the procedures of this section, including those set forth in
subsections (d) and (e) of this section, shall apply as nearly as is
practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights
are provided under this section is to be submitted for approval at a
meeting of stockholders, the corporation, not less than 20 days prior to
the meeting, shall notify each of its stockholders who was such on the
record date for such meeting with respect to shares for which appraisal
rights are available pursuant to subsection (b) or (c) hereof that
appraisal rights are available for any or all of the shares of the
constituent corporations, and shall include in such notice a copy of this
section. Each stockholder electing to demand the appraisal of his shares
shall deliver to the corporation, before the taking of the vote on the
merger or consolidation, a written demand for appraisal of his shares.
Such demand will be sufficient if it reasonably informs the corporation of
the identity of the stockholder and that the stockholder intends thereby to
demand the appraisal of his shares. A proxy or vote against the merger or
consolidation shall not constitute such a demand. A stockholder electing
to take such action must do so by a separate written demand as herein
provided. Within 10 days after the effective date of such merger or
consolidation, the surviving or resulting corporation shall notify each
stockholder of each constituent corporation who has complied with this
subsection and has not voted in favor of or consented to the merger or
consolidation of the date that the merger or consolidation has become
effective; or
(2) If the merger or consolidation was approved pursuant to Section
228 or 253 of this title, each constituent corporation, either before the
effective date of this merger or consolidation or within ten days
thereafter, shall notify each of the holders of any class or series of
stock of such constituent corporation who are entitled to appraisal rights
of the approval of the merger or consolidation and that appraisal rights
are available for any or all shares of such class or series of stock of
such constituent corporation, and shall include in such notice a copy of
this section; provided that, if the notice is given on or after the
effective date of the merger or consolidation, such notice shall be given
by the surviving or resulting corporation to all such holders of any class
or series of stock of a constituent corporation that are entitled to
appraisal rights. Such notice may, and, if given on or after the effective
date of the merger or consolidation, shall, also notify such stockholders
of the effective date of the merger or consolidation. Any stockholder
entitled to appraisal rights may, within 20 days after the date of mailing
of such notice, demand in writing from the surviving or resulting
corporation the appraisal of such holder's shares. Such demand will be
sufficient if it reasonably informs the corporation of the identity of the
stockholder and that the stockholder intends thereby to demand the
appraisal of such holder's shares. If such notice did not notify
stockholders of the effective date of the merger or consolidation, either
(i) each such constituent corporation shall send a second notice before the
effective date of the merger or consolidation notifying each of the holders
of any class or series of stock of such constituent corporation that are
entitled to appraisal rights of the effective date of the merger or
consolidation or (ii) the surviving or
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<PAGE>
resulting corporation shall send such a second notice to all such
holders on or within 10 days after such effective date; provided,
however, that if such second notice is sent more than 20 days following
the sending of the first notice, such second notice need only be sent
to each stockholder who is entitled to appraisal rights and who has
demanded appraisal of such holder's shares in accordance with this
subsections. An affidavit of the secretary or assistant secretary or
of the transfer agent of the corporation that is required to give
either notice that such notice has been given shall, in the absence of
fraud, be prima facie evidence of the facts stated therein. For
purposes of determining the stockholders entitled to receive either
notice, each constituent corporation may fix, in advance, a record date
that shall be not more than 10 days prior to the date the notice is
given, provided, that if the notice is given on or after the effective
date of the merger or consolidation, the record date shall be such
effective date. If no record date is fixed and the notice is given
prior to the effective date, the record date shall be the close of
business on the day next preceding the day on which the notice is given.
(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any stockholder who has
complied with subsections (a) and (d) hereof and who is otherwise entitled to
appraisal rights, may file a petition in the Court of Chancery demanding a
determination the value of the stock of all such stockholders. Notwithstanding
the foregoing; at any time within 60 days after the effective date of the merger
or consolidation, any stockholder shall have the right to withdraw his demand
for appraisal and to accept the terms offered upon the merger or consolidation.
Within 120 days after the effective date of the merger or consolidation, any
stockholder who has complied with the requirements of subsections (a) and (d)
of, upon written request, shall be entitled to receive from the corporation
surviving the merger or resulting from the consolidation a statement setting
forth the aggregate number of shares not voted in favor of the merger or
consolidation and with respect to which demands for appraisal have been received
and the aggregate number of holders of such shares. Such written statement
shall be mailed to the stockholder within 10 days after his written request for
such a statement is received by the surviving or resulting corporation or within
10 days after expiration of the period for delivery of demands for appraisal
under subsection (d) hereof, whichever is later.
(f) Upon the filing of any such petition by a stockholder, service of a
copy thereof shall be made upon the surviving or resulting corporation, which
shall within 20 days after such service file in the office of the Register in
Chancery in which the petition was filed a duly verified list containing the
names all addresses of all stockholders who have demanded payment for their
shares and with whom agreements as to the value of their shares have not been
reached by the surviving or resulting corporation. If the petition shall be
filed by the surviving or resulting corporation, the petition shall be
accompanied by such a duly verified list. The Register in Chancery, if so
ordered by the Court, shall give notice of the time and place fixed for the
hearing of such petition by registered or certified mail to the surviving or
resulting corporation and to the stockholders shown on the list at the addresses
therein stated. Such notice shall also be given by 1 or more publications at
least 1 week before the day of the hearing, in a newspaper of general
circulation published in the City of Wilmington, Delaware or such publication as
the Court deems advisable. The forms of the notices by mail and by publication
shall be approved by the Court, and the costs thereof shall be borne by the
surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled to
appraisal rights. The Court may require the stockholders who have demanded an
appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as to
such stockholder.
(h) After determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of any element
of value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
Court shall take into account all relevant factors. In determining the fair
rate of interest, the Court may consider all relevant factors, including the
rate of interest which the surviving or resulting corporation would have had to
pay to borrow money during the pendency of the proceeding. Upon application by
the surviving or resulting corporation or by any stockholder entitled to
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<PAGE>
participate in the appraisal proceeding, the Court may, in its discretion,
permit discovery or other pretrial proceedings and may proceed to trial upon
the appraisal prior to the final determination of the stockholder entitled to
an appraisal. Any stockholder whose name appears on the list filed by the
surviving or resulting corporation pursuant to subsection (f) of this section
and who has submitted his certificates of stock to the Register in Chancery,
if such is required, may participate fully in all proceedings until it is
finally determined that he is not entitled to appraisal rights under this
section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to
the stockholders entitled thereto. Interest may be simple or compound, as
the Court may direct. Payment shall be so made to each such stockholder, in
the case of holders of uncertificated stock forthwith, and the case of
holders of shares represented by certificates upon the surrender to the
corporation of the certificates representing such stock. The Court's decree
may be enforced as other decrees in the Court of Chancery may be enforced,
whether such surviving or resulting corporation be a corporation of this
State or of any state.
(j) The costs of the proceeding may be determined by the Court and
taxed upon the parties as the Court deems equitable in the circumstances.
Upon application of a stockholder, the Court may order all or a portion of
the expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation,
no stockholder who has demanded his appraisal rights as provided in
subsection (d) of this section shall be entitled to vote such stock for any
purpose or to receive payment of dividends or other distributions on the
stock (except dividends or other distributions payable to stockholders of
record at a date which is prior to the effective date of the merger or
consolidation); provided, however, that if no petition for an appraisal shall
be filed within the time provided in subsection (e) of this section, or if
such stockholder shall deliver to the surviving or resulting corporation a
written withdrawal of his demand for an appraisal and an acceptance of the
merger or consolidation, either within 60 days after the effective date of
the merger or consolidation as provided in subsection (e) of this section or
thereafter with the written approval of the corporation, then the right of
such stockholder to an appraisal shall cease. Notwithstanding the foregoing,
no appraisal proceeding in the Court of Chancery shall be dismissed as to any
stockholder without the approval of the Court, and such approval may be
conditioned upon such terms as the Court deems just.
(l) The shares of the surviving or resulting corporation to which the
shares of such objecting stockholders would have been converted had they
assented to the merger or consolidation shall have the status of authorized
and unissued shares of the surviving or resulting corporation. (8 Del. C.
1953, Section 262; 56 Del. Laws, c. 50; 56 Del. Laws, c. 186, Section 24; 57
Del. Laws, c. 148, Sections 27-29; 59 Del. Laws, c. 106, Section 12; 60 Del.
Laws, c. 371, Sections 3-12; 63 Del. Laws, c. 25, Section 14; 63 Del. Laws,
c. 152, Sections 1, 2; 64 Del. Laws, c. 112, Sections 46-54; 66 Del. Laws,
c. 136, Sections 30-32; 66 Del. Laws, c. 352, Section 9; 67 Del. Laws, c.
376, Sections 19, 20; 68 Del. Laws, c. 337, Sections 3, 4; 69 Del. Laws, c.
61, Section 10; 69 Del. Laws, c. 262, Sections 1-9; 70 Del. Laws, c. 79,
Section 16; 70 Del. Laws, c. 186, Section 1; 70 Del. Laws, c. 299, Sections
2, 3; 70 Del. Laws, c. 349, Section 22; 71 Del. Laws, c. 120, Section 15.)
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<PAGE>
EXHIBIT "B"
TO
PROXY STATEMENT FOR 1997 ANNUAL MEETING OF STOCKHOLDERS OF
U.S. MEDICAL SYSTEMS, INC.
[LETTERHEAD]
December 1, 1997
Board of Directors
U.S. Medical Systems, Inc.
7600 Burnet Road, Suite 350
Austin, Texas 78757
Gentlemen:
This letter confirms the understanding and agreement between Howard
Frazier Barker Elliott, Inc. ("HFBE") and U.S. Medical Systems, Inc.( the
"Company"), as follows:
I. THE OPINION
1. The Company hereby engages HFBE to render to the Board of
Directors of the Company an opinion (the "Opinion") with respect to
the fairness, from a financial point of view, to the shareholders of
the Company, of the consideration to be received in the proposed
business combination (the "Proposed Transaction") between the Company
and Sharp's Compliance, Incorporated.
2. HFBE hereby accepts the engagement described in paragraph 1 and,
in that connection, agrees to conduct such a financial review of the
Company and its business and operations as HFBE will deem appropriate
and feasible. Such review will be limited to an analysis of (i)
publicly available information with respect to the Company, its
outstanding securities and such other matters as HFBE deems
appropriate, and (ii) such other information as will be supplied to
HFBE by the Company. The Opinion may be in such a form as HFBE will
determine, including by (i) stating therein that HFBE has relied upon
the information furnished to it by the Company, (ii) stating therein
that HFBE has assumed the accuracy and completeness of such
information, (iii) stating therein that HFBE has not attempted
independently to verify any of such information and (iv) disclosing
any relationships that HFBE currently then has with the Company or any
party to the Proposed Transaction. The Opinion will, in any event, be
limited to the fairness, from a financial point of view, of the
consideration to be offered in the Proposed Transaction, and will not
address the Company's underlying business decision to effect the
Proposed Transaction.
3. HFBE will consent to a description and inclusion of the Opinion
in proxy statement to be used in connection with a meeting of the
Company's to be held for the purpose of voting on the Proposed
Transaction and to references to HFBE in such proxy statement,
provided that any such description is reasonably acceptable to HFBE.
Except as otherwise provided above or otherwise required by law, the
Opinion is solely for the use and benefit of the Company and will not
be disclosed publicly or made available to third parties without
HFBE's prior written consent.
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<PAGE>
Board of Directors
U.S. Medical Systems, Inc.
December 1, 1997
Page two
II. OBLIGATIONS OF THE COMPANY
The Company will cooperate fully with HFBE in connection with its
financial review and analysis and the rendering of its Opinion, and will
provide HFBE with such information concerning the Company as HFBE deems
necessary for its financial review and analysis and the rendering of its
Opinion. All such information provided by the Company will be complete and
accurate and not misleading. HFBE may rely upon the accuracy and
completeness of all such information without independent verification.
III. FEES AND EXPENSES
1. As compensation for the services rendered by HFBE hereunder, the
Company will pay HFBE as follows:
(a) A retainer of $10,000, payable upon execution of this
agreement, and
(b) An additional fee of $12,000, payable upon delivery of
the Opinion.
2. The Company will reimburse HFBE for its reasonable out-of-pocket
expenses incurred during the period of its engagement hereunder with
respect to the services to be rendered by it. Such reimbursement will
not exceed $2,500 unless the Company agrees to reimburse HFBE for
out-of-pocket expense in excess of this amount.
IV. INDEMNIFICATION
1. Because HFBE will be acting on behalf of the Company, we require
indemnification from the Company. A copy of our standard
Indemnification Provision is attached to this agreement and is
incorporated by reference herein and made a part hereof for all
purposes as though set forth entirely herein.
2. The Company agrees that the indemnification and reimbursement
commitments set forth in the attached Indemnification Provision will
apply whether or not HFBE is a formal party to any such lawsuits,
claims, or other proceedings and that HFBE is entitled to retain
separate counsel of its choice in connection with any of the matters
to which such commitments relate.
V. CONFIDENTIALITY
1. Except as contemplated by the terms hereof or as required by
applicable law, HFBE will keep confidential all material non-public
information provided to it by the Company, and will not disclose such
information to any third party, other than such of its employees and
advisors as HFBE determines to have a need to know.
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<PAGE>
Board of Directors
U.S. Medical Systems, Inc.
December 1, 1997
Page three
2. Neither any advice rendered by HFBE nor any communication from
HFBE in connection with the services performed by HFBE pursuant to
this agreement will be publicly quoted, nor will any such advice or
communication or the name of HFBE be referred to, in any public
report, document, release, or other communication, whether written or
oral, prepared, issued, or transmitted by the Company, or any
director, officer, employee, agent or representative of the Company,
without HFBE's prior written consent.
VI. MISCELLANEOUS
1. The Company agrees that after its engagement is completed or
terminated, HFBE has the right to place advertisements in financial
and other newspapers and journals at its own expense describing its
services to the Company hereunder, provided that HFBE will submit a
copy of any such advertisements to the Company for its approval, which
approval shall not be unreasonably withheld or delayed.
2. This agreement may not be amended or modified except in writing
and will be governed by and construed in accordance with laws and
State of Texas.
If the foregoing correctly sets forth the understanding and agreement
between HFBE and the Company, please so indicate in the space provided for that
purpose below, whereupon this letter will constitute a binding agreement as of
the date first above written.
Sincerely,
HOWARD FRAZIER BARKER ELLIOTT, INC.
By: /s/ William H. Frazier
-----------------------------------
William H. Frazier, ASA
Accepted and agreed on this 1 day of December , 1997
------------ -------------
U.S. MEDICAL SYSTEMS, INC.
By: /s/ Lee Cooke
-----------------------------------
Lee Cooke
Chairman of the Board of Directors
B-3
<PAGE>
ENGAGEMENT AGREEMENT
INDEMNIFICATION PROVISIONS
1. U. S. Medical Systems, Inc. (the "Company") agrees to indemnify and
hold harmless Howard Frazier Barker Elliott, Inc. ("HFBE"), against any and
all losses, claims, damages, and liabilities, expenses, or costs (and all
actions in respect thereof and any legal or other expenses in giving
testimony or furnishing documents in response to a subpoena or otherwise),
including the cost of investigating, preparing, or defending any such action
or claim, whether or not in connection with litigation in which HFBE is a
party, as and when incurred (including any loss, claim, damage, liability, or
cost sustained or incurred as a result of HFBE's negligence), directly or
indirectly, caused by, relating to, based upon, or arising out of HFBE acting
for the Company including, without limitation, any act or omission by HFBE in
connection with its acceptance of or of the performance or non-performance of
its obligations under the letter agreement dated as of December 1, 1997, as
it may be amended from time to time (the "Agreement"); provided, however,
such indemnity agreement shall not apply to any such loss, claim, damage,
liability, or cost to the extent it is found in a final judgment by a court
of competent jurisdiction (not subject to further appeal) to have resulted
primarily and directly from the gross negligence or willful misconduct of
HFBE. The Company also agrees that HFBE shall not have any liability
(whether direct or indirect, in contract or tort or otherwise) to the Company
for or in connection with the engagement of HFBE (including any loss, claim,
damage, liability, or cost sustained or incurred as a result of HFBE's
negligence), except to the extent that any such liability for losses, claims,
damages, liabilities, costs or expenses that is found in a final judgment by
a court of competent jurisdiction (not subject to further appeal) to have
resulted from HFBE's gross negligence or willful misconduct.
2. These Indemnification Provisions shall be in addition to any
liability that the Company may otherwise have to HFBE or the persons
indemnified below in this sentence and shall extend to the following: HFBE,
its affiliated entities, directors, officers, employees, agents, legal
counsel, and controlling persons of HFBE within the meaning of the federal
securities laws, and the respective successors, assigns, heirs,
beneficiaries, and legal representatives of each of the foregoing indemnified
persons or entities. All references to HFBE in these Indemnification
Provisions (except paragraph 4) shall be understood to include any of the
foregoing indemnified persons or entities.
3. If any action, proceeding, or investigation is commenced, as to
which HFBE proposes to demand such indemnification, it will notify the
Company with reasonable promptness; provided, however, that any failure by
HFBE to notify the Company will not relieve the Company from its obligations
hereunder unless and to the extent such delay materially and adversely
affects the Company's or its affiliates' rights in such action, proceeding or
investigation. HFBE will have the right to retain counsel of its own choice
to represent it, and the Company will pay the reasonable fees and expenses of
such counsel; and such counsel shall to the fullest extent consistent with
its professional responsibilities cooperate with the Company and any counsel
designated by it. The Company will be liable for any settlement of any claim
against HFBE made with the Company's written consent.
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<PAGE>
4. In order to provide for just and equitable contribution, if a claim
for indemnification pursuant to these Indemnification Provisions is made but
it is found in a final judgment by a court of competent jurisdiction (not
subject to further appeal) that such indemnification may not be enforced in
such case, even though the express provisions hereof provide for
indemnification in such case, then The Company, on the one hand, and HFBE, on
the other hand, shall contribute to the losses, claims, damages, liabilities,
or costs to which the indemnified persons may be subject in accordance with
the relative benefits received by the Company, on the one hand, and HFBE, on
the other hand, and also the relative fault of the Company on the one hand
and HFBE on the other hand, in connection with the statements, acts, or
omissions that resulted in such losses, claims, damages, liabilities, or
costs and the relevant equitable considerations shall also be considered. No
person found liable for a fraudulent misrepresentation shall be entitled to
contribution from any person who is not also found liable for such
misrepresentation. Notwithstanding the foregoing, HFBE shall not be
obligated to contribute any amount hereunder that exceeds the amount of fees
received by HFBE pursuant to the Agreement.
5. Neither termination nor completion of the engagement of HFBE
referred to above shall affect the provisions of these Indemnification
Provisions which shall then remain operative and in full force and effect.
These Indemnification Provisions may not be amended orally.
U. S. MEDICAL SYSTEMS, INC.
By: /s/ Lee Cooke
-----------------------------------
Lee Cooke
Chairman of the Board of Directors
HOWARD FRAZIER BARKER ELLIOTT, INC.
By: /s/ William H. Frazier
-----------------------------------
William H. Frazier, ASA
B-5
<PAGE>
[LETTERHEAD]
February 28, 1998
The Board of Directors
U.S. Medical Systems, Inc
7600 Burnet Road, Suite 350
Austin, Texas 78757
Dear Sirs:
You have requested Howard Frazier Barker Elliott, Inc. ("HFBE") to
render its opinion as to the fairness, from a financial point of view, to
U.S. Medical Systems, Inc, (formerly Medical Polymers Technologies, Inc.) a
Delaware corporation (the "Company") and its stockholders, of the
consideration to be paid and received in the proposed share exchange (the
"Exchange") pursuant to an Agreement and Plan of Reorganization (the
"Agreement") among the Company and the shareholders of Sharps Compliance,
Inc. ("Sharps"). In the Exchange, the Company will survive as the parent
corporation and existing Company shareholders will hold an aggregate number
of shares representing 9.10 percent of the outstanding shares of the
Company, on a fully diluted basis, subsequent to the Exchange. The foregoing
calculation disregards any holdings of Company shares to be held by Company
shareholders which are also shareholders of Sharps.
As part of our financial advisory activities, HFBE engages in the
valuation of businesses and securities in connection with mergers and
acquisitions, private placements, and valuations for estate, corporate and
other purposes. We are experienced in these activities and have performed
assignments similar in nature to that requested by you on numerous occasions.
The opinion of HFBE is for the use of the Board of Directors and cannot be
used for any other purpose without our prior written consent. Our opinion does
not constitute investment advice to the individual shareholders of the Company.
In rendering its written opinion, HFBE: (i) reviewed The Company's
Annual Report, Form 10-K and related financial information for the fiscal
years ended June 30, 1997, 1996, 1995, and Form 10-QSB and related financial
information for the fiscal quarter ended September 30, 1997; (ii) reviewed
Sharps's financial information for the nine months ended September 30, 1997
and for the fiscal years ended December 31, 1995 and 1996; (iii) reviewed
certain information, including financial forecasts, relating to the business,
earnings, cash flow, assets and prospects of Sharps and the Company furnished
to HFBE by Sharps and the Company; (iv) conducted discussions with members of
senior management of Sharps and the Company concerning their respective
business and prospects; (v) reviewed the historical market prices and trading
activity for the Company's Common Stock; (vi) reviewed the Exchange
Agreement, (vii) reviewed the private placement memorandum and (viii)
reviewed such other matters as HFBE deemed necessary, including an assessment
of general economic, market and monetary conditions.
In preparing its opinion, HFBE relied on the accuracy and completeness of
all information supplied or otherwise made available to HFBE by the Company and
Sharps and assumed that financial forecasts had been reasonably prepared on
bases reflecting the best currently available estimates and judgements of the
managements of the Company and Sharps as to the expected future financial
performance of their respective companies. HFBE did not independently verify
such information or assumptions, including financial forecasts, or undertake an
independent appraisal of the assets of the Company or Sharps. HFBE's opinion is
based upon market, economic, financial and other conditions as they exist and
can be evaluated as of the date of the opinion. To the extent a vote of
Shareholders' is required or sought, HFBE's opinion does not constitute a
recommendation to any stockholder of the Company as to how any such stockholder
should vote on the Exchange. The opinion does not address the relative merits
of the Exchange and any other transaction or business strategies discussed by
the Board of the Company as alternatives to the Exchange or the decision of the
Company Board to proceed with the Exchange. No opinion is expressed by HFBE as
to the price at which the securities to be issued in the Exchange to the
stockholders of Sharps may trade at any time following the Exchange.
B-6
<PAGE>
The Board of Directors
U.S. Medical Systems, Inc
February 28, 1998
Page Two
HFBE assumed that there had been no material change in the Company's or
Sharps's financial condition, results of operations, business or prospects
since the date of the last financial statements made available to HFBE. HFBE
relied on advice of counsel to the Company as to all legal matters with
respect to the Company, the Exchange and the Exchange Agreement and upon the
Company with respect to the accounting treatment to be accorded in the
transaction. In addition, HFBE did not make an independent evaluation
appraisal or physical inspection of the assets or individual properties of
The Company or Sharps, nor was it furnished with any such appraisals.
The preparation of a fairness opinion involves various determinations as
to the most appropriate and relevant quantitative and qualitative methods of
financial analyses and the application of those methods to the particular
circumstances and, therefore, such an opinion is not readily susceptible to
partial analysis or summary description. Furthermore, in arriving at its
fairness opinion, HFBE did not attribute any particular weight to any
analysis or factor considered by it, but rather made qualitative judgements
as to the significance and relevance of each analysis or factor.
Accordingly, HFBE believes that its analysis must be considered as a whole
and that considering any portion of such analysis and of the factors
considered, without considering all analyses and factors, could create a
misleading or incomplete view of the process underlying its opinion. In its
analyses, HFBE made numerous assumptions with respect to industry
performance, general business and economic conditions and other matters, many
of which are beyond the control of the Company and Sharps. Any estimates
contained in these analyses are not necessarily indicative of actual values
or predictive of future results or values which may be significantly more or
less favorable than as set forth therein. In addition, analyses relating to
the value of the businesses do not purport to be appraisals or to reflect the
prices at which businesses may actually be sold.
Neither HFBE nor its employees have any present, or contemplate future,
interest in the Company which might tend to prevent them from making a fair
and unbiased opinion.
Subject to and based upon the foregoing, it is our opinion that the
consideration to be paid and received by The Company in the proposed Exchange
is fair, from a financial point of view, to the Company and its stockholders.
Sincerely,
HOWARD FRAZIER BARKER ELLIOTT, INC.
By: /s/ William H. Frazier
------------------------------
William H. Frazier, ASA
B-7
<PAGE>
- -------------------------------------------------------------------------------
U.S. MEDICAL SYSTEMS, INC.
7600 Burnet Road, Suite 350
Austin, Texas 78757
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Lee Cooke, Dr. Burt Kunik and each of them,
as Proxies, each with the power to appoint his substitute, and hereby authorizes
each of them to represent and vote, as designated below, all of the shares of
the Common Stock, par value $0.01 per share, of U.S. Medical Systems, Inc. (the
"Company") held of record by the undersigned at the close of business on June
15, 1998, at the Annual Meeting of Stockholders to be held on July 23, 1998, or
any adjournment(s) thereof.
1. PROPOSAL TO ELECT THREE DIRECTORS TO HOLD OFFICE UNTIL THE NEXT ANNUAL
MEETING OF STOCKHOLDERS OR UNTIL THE ELECTION AND QUALIFICATION OF THEIR
RESPECTIVE SUCCESSORS.
/ / FOR all nominees listed / / WITHHOLD AUTHORITY to vote
below (except as marked to for all nominees listed below
to the contrary below)
LEE COOKE PARRIS H. HOLMES, JR. DR. BURT KUNIK
INSTRUCTION: To withhold authority to vote for any individual nominee,
write that nominee's name on the line provided:
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2. 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 / / AGAINST / / ABSTAIN
3. PROPOSAL TO AMEND THE COMPANY'S CERTIFICATE OF INCORPORATION TO RENAME THE
COMPANY SHARPS COMPLIANCE CORP.
/ / FOR / / AGAINST / / ABSTAIN
4. PROPOSAL TO AMEND THE COMPANY'S CERTIFICATE OF INCORPORATION TO DELETE
ARTICLE 10 RELATING TO SPECIFIC STOCKHOLDERS' RIGHTS.
/ / FOR / / AGAINST / / ABSTAIN
(PLEASE SIGN ON OTHER SIDE)
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(CONTINUED FROM FRONT)
5. 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 EFECT TO
THE REVERSE STOCK SPLIT UNDER PROPOSAL 2).
/ / FOR / / AGAINST / / ABSTAIN
6. 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 / / AGAINST / / ABSTAIN
7. IN THEIR DISCRETION, THE PROXIES ARE AUTHORIZED TO VOTE UPON SUCH OTHER
BUSINESS AS MAY PROPERLY COME BEFORE THE MEETING.
/ / FOR / / AGAINST / / ABSTAIN
This proxy, when properly executed, will be voted in the manner directed
herein by the undersigned stockholder(s). IF NO DIRECTION IS MADE, THIS PROXY
WILL BE VOTED "FOR" THE ELECTION OF THE NOMINEES UNDER PROPOSAL 1, "FOR" THE
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 UNDER
PROPOSAL 2, "FOR" THE PROPOSAL TO AMEND THE COMPANY'S CERTIFICATE OF
INCORPORATION TO RENAME THE COMPANY SHARPS COMPLIANCE CORP. UNDER PROPOSAL 3,
"FOR" THE PROPOSAL TO AMEND THE COMPANY'S CERTIFICATE OF INCORPORATION TO DELETE
ARTICLE 10 RELATING TO SPECIFIC STOCKHOLDERS' RIGHTS UNDER PROPOSAL 4, "FOR" THE
PROPOSAL TO AMEND THE COMPANY'S 1993 STOCK PLAN TO INCREASE THE NUMBER OF SHARES
OF COMMON STOCK SUBJECT TO ISSUANCE THEREUNDER FROM 59,609 TO 1,000,000 SHARES
UNDER PROPOSAL 5 (AFTER GIVING EFFECT TO THE REVERSE STOCK SPLIT UNDER PROPOSAL
2) AND "FOR" THE PROPOSAL TO RATIFY THE APPOINTMENT OF ARTHUR ANDERSEN LLP AS
INDEPENDENT PUBLIC ACCOUNTANTS OF THE COMPANY UNDER PROPOSAL 6, and in the
discretion of the Proxies with respect to any other matter that is properly
presented at the meeting.
Please execute this proxy as your name appears hereon. When shares are
held by joint tenants, both should sign. When signing as attorney, executor,
administrator, trustee or guardian, please give full title as such. If a
corporation, please sign in full corporate name by the president or other
authorized officer. If a partnership, please sign in partnership name by
authorized person. PLEASE MARK, SIGN, DATE AND RETURN THIS PROXY PROMPTLY USING
THE ENCLOSED ENVELOPE.
DATED: ___________________________, 1998
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Signature
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Signature If Held Jointly
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