<PAGE>
FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
( ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
--------------
or
(x) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the transition period from January 1, 1998
to March 31, 1998.
Commission File Number:
0-22390
------------------------------------
U.S. MEDICAL SYSTEMS, INC.
--------------------------
Delaware 68-0206382
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
7600 Burnet Road, Suite 350, Austin, TX 78757
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code . . . . . . . (512) 458-3335
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Act of 1934
during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES X NO
--- ---
Number of shares outstanding of the issuer's common stock, as of March 31,
1998: 2,938,823
Page 1 of 15
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U.S. MEDICAL SYSTEMS, INC.
INDEX
<TABLE>
PART I FINANCIAL INFORMATION PAGE
----
<S> <C> <C>
Item 1. Financial Statements
Unaudited Condensed Consolidated Balance Sheets -
March 31, 1998 and December 31, 1997 3
Unaudited Condensed Consolidated Statements of
Operations - For the three months ended
March 31, 1998 and March 31, 1997 4
Unaudited Condensed Consolidated Statements of
Cash Flows - For the three months ended
March 31, 1998 and March 31, 1997 5
Notes to the Unaudited Condensed Consolidated
Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Conditions and Results of Operations 9
PART II. OTHER INFORMATION
Item 1- 5 13
Item 6 - 7 14
Signature 15
</TABLE>
Page 2 of 15
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
U.S. MEDICAL SYSTEMS, INC.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
March 31 December 31
1998 1997
(unaudited)
----------- -----------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $3,512,000 $ 67,000
Accounts receivable 173,000 112,000
Inventory 94,000 40,000
Other current assets 29,000 3,000
---------- ---------
TOTAL CURRENT ASSETS 3,808,000 222,000
Other Assets
Property and equipment, net 64,000 39,000
Deferred issuance costs - 158,000
Note receivable from stockholder 400,000 300,000
---------- ---------
TOTAL OTHER ASSETS 464,000 497,000
---------- ---------
TOTAL ASSETS $4,272,000 $ 719,000
---------- ---------
---------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 125,000 $ 69,000
Accrued liabilities and disposal costs 520,000 442,000
Current portion of long-term debt 4,000 5,000
Note payable to stockholder - 400,000
---------- ---------
TOTAL CURRENT LIABILITIES 649,000 916,000
Long Term Debt, net of current maturities 17,000 23,000
---------- ---------
TOTAL LIABILITIES $ 666,000 $ 939,000
Stockholders' Equity
U.S. Medical Systems, Inc. preferred stock, 1,000,000 shares
authorized, $0.01 par value, 1,000,000 shares issued and
outstanding March 31, 1998 10,000 -
U.S. Medical Systems, Inc. common stock, 20,000,000 shares
authorized, $0.01 par value, 583,944 shares issued and
outstanding March 31, 1998 29,000 -
Sharps Compliance, Inc. common stock, 10,000,000 shares
authorized, $0.01 par value, 5,000,000 shares issued and
outstanding December 31, 1997 - 50,000
Additional paid-in capital 4,252,000 99,000
Accumulated deficit (685,000) (369,000)
---------- ---------
Total Stockholders' Equity 3,606,000 (220,000)
---------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $4,272,000 $ 719,000
---------- ---------
---------- ---------
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
Page 3 of 15
<PAGE>
U.S. MEDICAL SYSTEMS, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
For the three months For the three months
ended March 31 ended March 31
1998 1997
(unaudited) (unaudited)
-------------------- --------------------
<S> <C> <C>
Net Sales $ 462,000 $ 143,000
Cost of sales (243,000) (93,000)
--------- ---------
GROSS PROFIT 219,000 50,000
Costs and expenses
General and administrative 472,000 77,000
Selling and marketing 90,000 29,000
Depreciation and amortization 5,000 1,000
--------- ---------
TOTAL COST AND EXPENSES 567,000 107,000
--------- ---------
LOSS FROM OPERATIONS (348,000) (57,000)
Interest income, net 32,000 -
--------- ---------
NET LOSS $(316,000) $ (57,000)
--------- ---------
--------- ---------
Basic and diluted net loss per share $ (0.54) $ (0.02)
--------- ---------
--------- ---------
Shares used in computing basic and diluted
net loss per share 583,944 3,000,000
--------- ---------
--------- ---------
Pro forma basic and diluted net loss per share $ (.04) $ (.02)
--------- ---------
--------- ---------
Shares used in computing Pro forma basic and
diluted net loss per share 7,583,944 3,000,000
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
Page 4 of 15
<PAGE>
U.S. MEDICAL SYSTEMS, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
For the three months For the three months
ended March 31 ended March 31
1998 1997
(unaudited) (unaudited)
-------------------- --------------------
<S> <C> <C>
Cash flows from operating activities
Net loss $ (316,000) $ (57,000)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization 5,000 1,000
Changes in assets and liabilities
(Increase) decrease in accounts receivable (30,000) 32,000
Increase in inventories (32,000) (3,000)
Decrease in other current assets 41,000 4,000
Increase (decrease) in accounts payable 34,000 (6,000)
Increase in accrued liabilities and disposal costs 64,000 37,000
---------- ---------
Net cash provided by (used in) operating activities (234,000) 8,000
Cash flows from investing activities:
Net cash received from the agreement and plan of
reorganization 205,000 -
Note receivable from stockholder (100,000) -
Purchase of property and equipment (19,000) -
---------- ---------
Net cash provided by (used in) for operating activities 86,000 -
Cash flows from financing activities
Payment on long-term debt (7,000) (2,000)
Payment of note payable to stockholder (400,000) -
Sale of common stock, net of issuance expense 4,000,000 -
---------- ---------
Net cash provided by (used in) financing activities 3,593,000 (2,000)
Increase in cash 3,445,000 6,000
Cash and cash equivalents at beginning of period 67,000 13,000
---------- ---------
Cash and cash equivalents at end of period $3,512,000 $ 19,000
---------- ---------
---------- ---------
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
Page 5 of 15
<PAGE>
U.S. MEDICAL SYSTEMS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. ORGANIZATION
U.S. Medical Systems, Inc ("USME" or the "Company"), through its wholly
owned subsidiary U.S. Medical, Inc., develops, produces, and markets
products directed at the over-the-counter consumer market and products
related to infection prevention for the professional dental health care
industry.
On February 27, 1998 the Company, Sharps Compliance, Inc. ("Sharps") and
all of the stockholders of Sharps entered into an Agreement and Plan of
Reorganization (the "Agreement"). The Agreement closed on February 27,
1998. The Company did not have sufficient authorized but unissued shares
of Common Stock to issue to the former stockholders of Sharps to
complete the transaction. Therefore, under the terms of the Agreement,
the Company acquired all of the issued and outstanding Common Stock, $.01
par value, of Sharps in consideration for the issuance of 1,000,000
shares of Preferred Stock, $.01 par value, such that each share of Common
Stock of Sharps outstanding on the closing date was exchanged for
0.142858 shares of Preferred Stock. Each share of Preferred Stock is
entitled to 35.190319 votes. 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 (the "Conversion") into seven
(7) shares of Common Stock of the Company, and the existing stockholders
of the Company will own approximately 583,940 shares and the former
shockholders of Sharps will own 7,000,000 shares.
Sharps now operates as a wholly owned subsidiary of the Company.
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 provided primarily to small
waste generators to facilitate their compliance with state and federal
regulations by tracking, incinerating and documenting the waste disposal.
In 1996, Sharps also provided consulting services to other entities
related to medical sharps products.
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, upon expiration of certain agreements between
Sharps and its suppliers, management believes that alternative sources
would be available at similar costs.
2. BASIS OF PRESENTATION
The Agreement is treated as a reverse acquisition for accounting and
financial reporting purposes. As such, Sharps is considered the acquirer
for accounting and financial reporting purposes and the net assets of the
Company were combined with those of Sharps at their historical cost basis
on the effective date of the Agreement. Sharps has reflected the ongoing
results of operation of the Company in its financial statements from the
effective date of the Agreement. The combined entity will carry
forwarded the Company's fiscal year end of June 30.
Page 6 of 15
<PAGE>
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with the rules and regulations of the
Securities and Exchange Commission and, accordingly, do not include all
information and footnotes required under generally accepted accounting
principles for complete financial statements. In the opinion of
management, these interim condensed consolidated financial statements
contain all adjustments (consisting of normal recurring adjustments)
considered necessary for a fair presentation of the financial position of
the Company as of March 31, 1998, and the results of its operations and
its cash flows for the three months ended March 31, 1998 and the results
of operations and cash flows of Sharps for the three months ended March
31, 1997. These condensed consolidated financial statements should be
read in conjunction with the Sharps financial statements for the year
ended December 31, 1997 included in the Company's preliminary proxy
statement filed on April 22, 1998.
3. NET LOSS PER SHARE AND UNAUDITED PRO FORMA 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 of 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 basis EPS and diluted EPS for any periods.
Unaudited pro forma loss per share represents basic and diluted net loss
per share as if the Conversion had occurred on January 1, 1998, which
would have increased the shares used in computing basic and diluted net
loss per share by 7,000,000 shares for the three months ended March 31,
1998.
4. STATEMENTS OF CASH FLOWS
Cash payments and non-cash activities during the periods indicated
were as follows
<TABLE>
Three Months Ended
March 31
--------------------
1998 1997
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<S> <C> <C>
Cash payments for interest $ 5,000 $ -
Non-cash deferred issuance cost 158,000 -
Net assets of U.S. Medical Systems, Inc.
related to the Agreement, net of cash 79,000 -
</TABLE>
5. NOTE RECEIVABLE FROM STOCKHOLDER
In November 1997, Sharps entered into a note receivable with a
stockholder and officer of Sharps. All unpaid principal and accrued
interest is due in November 2002. In November 1997, the stockholder
borrowed $300,000 from Sharps. On February 27, 1998, the stockholder
borrowed the remaining $100,000 available under this note.
Page 7 of 15
<PAGE>
6. NOTE PAYABLE TO STOCKHOLDER
On November 14, 1997, Sharps issued an unsecured promissory note to a
stockholder in the amount of $400,000. In connection with the stock
offering in February 1998, Sharps subsequently retired the note by paying
the stockholder approximately $409,000 for the principal and accrued
interest.
7. DEFERRED FEDERAL 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 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.
Effective with the termination of Sharps' corporation status, the Company
adopted the provisions of Statement of Financial Accounting Standards No.
109, "Accounting for Income Taxes" ("SFAS 109"). SFAS 109 requires
recognition of deferred tax liabilities and assets for the expected
future tax consequences of events that have been included in a company's
financial statements or tax returns. Under this method, deferred tax
liabilities and assets are determined based on the differences between
the financial statement and tax bases of assets and liabilities using
currently enacted tax rates in effect for the years in which the
differences are expected to reverse.
At March 31, 1998, Sharps had a deferred tax asset of $134,000 related to
the accrued disposal liability. A valuation allowance of $134,000 was
provided against the deferred tax asset as it was not realizable at that
date.
As a result of adopting SFAS 109, the Company reported no deferred tax
expense in the quarter ended March 31, 1998.
8. STOCKHOLDERS' EQUITY
On March 10, 1998, the Company's board of directors approved a
1-for-5.032715 reverse stock split of the Company's Common Stock
outstanding, subject to stockholder approval. All Common Stock and
per-share information related to the Company's Common Stock included in
the accompanying financial statements has been adjusted to give
retroactive effect to the split.
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 $161,000. The proceeds from the Offering will be used to
retire Sharps' indebtedness to a certain stockholder, support Sharps'
sales and marketing program and for other working capital purposes.
Page 8 of 15
<PAGE>
ITEM 2.
THIS QUARTERLY REPORT ON FORM 10-QSB CONTAINS CERTAIN FORWARD-LOOKING
STATEMENTS AND INFORMATION RELATING TO THE COMPANY AND ITS SUBSIDIARIES THAT
ARE BASED ON THE BELIEFS OF THE COMPANY'S MANAGEMENT AS WELL AS ASSUMPTIONS
MADE BY AND INFORMATION CURRENTLY AVAILABLE TO THE COMPANY'S MANAGEMENT.
WHEN USED IN THIS REPORT, THE WORDS "ANTICIPATE," "BELIEVE," "ESTIMATE" AND
"INTEND" AND WORDS OR PHRASES OF SIMILAR IMPORT, AS THEY RELATE TO THE
COMPANY OR ITS SUBSIDIARIES OR COMPANY MANAGEMENT, ARE INTENDED TO IDENTIFY
FORWARD-LOOKING STATEMENTS. SUCH STATEMENTS REFLECT THE CURRENT RISKS,
UNCERTAINTIES AND ASSUMPTIONS RELATED TO CERTAIN FACTORS INCLUDING, WITHOUT
LIMITATIONS, COMPETITIVE FACTORS, GENERAL ECONOMIC CONDITIONS, CUSTOMER
RELATIONS, RELATIONSHIPS WITH VENDORS, GOVERNMENTAL REGULATION AND
SUPERVISION, SEASONALITY, DISTRIBUTION NETWORKS, PRODUCT INTRODUCTIONS AND
ACCEPTANCE, TECHNOLOGICAL CHANGE, CHANGES IN INDUSTRY PRACTICES, ONETIME
EVENTS AND OTHER FACTORS DESCRIBED HEREIN. BASED UPON CHANGING CONDITIONS,
SHOULD ANY ONE OR MORE OF THESE RISKS OR UNCERTAINTIES MATERIALIZE, OR SHOULD
ANY UNDERLYING ASSUMPTIONS PROVE INCORRECT, ACTUAL RESULTS MAY VARY
MATERIALLY FROM THOSE DESCRIBED HEREIN AS ANTICIPATED, BELIEVED, ESTIMATED,
EXPECTED OR INTENDED. THE COMPANY DOES NOT INTEND TO UPDATE THESE
FORWARD-LOOKING STATEMENTS.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The discussion below analyzes changes in the consolidated operating results
and financial condition of the reorganized company (i.e., USME and Sharps)
during the third quarter of fiscal 1998. The comparison is made to the
operating results and financial condition of Sharps as an independent entity
for the year 1997.
GENERAL
On February 27, 1998 the Company, Sharps, and all of the stockholders of
Sharps entered into the Agreement and Plan of Reorganization (the
"Agreement"). The Agreement closed on February 27, 1998. The Company did not
have sufficient authorized but unissued shares of Common Stock to issue to
the former stockholders of Sharps to complete the transaction. Therefore,
under the terms of the Agreement, the Company acquired all of the issued and
outstanding Common Stock, $.01 par value, of Sharps in consideration for the
issuance of 1,000,000 shares of Preferred Stock, $.01 par value, such that
each share of Common Stock of Sharps outstanding on the closing date was
exchanged for 0.142858 shares of Preferred Stock. Each share of Preferred
Stock is entitled to 35.190319 votes. 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 (the "Conversion") into seven (7)
shares of Common Stock of the Company, and the existing stockholders of the
Company will own approximately 583,940 shares and the former shockholders of
Sharps will own 7,000,000 shares.
The combined company will shift its main product focus to the Sharps mail
back disposal system and will seek to sell the PDS-Registered Trademark-
Clean and Miracle Grip-Registered Trademark- product lines. Management
believes that the new Sharps product will present a better opportunity for
growth of the Company and future value to the stockholders and anticipates
that revenues from the PDS-Registered Trademark- Clean and Miracle
Grip-Registered Trademark- products will decrease in the next two quarters.
In addition, management anticipates that expenses related to USME will
decrease in the next two quarters due to the downsizing or sale of its
products.
The Agreement is treated as a reverse acquisition for accounting and
financial reporting purposes. As such, Sharps is considered the acquirer for
the accounting and financial reporting purposes and the net assets of the
Company were combined with those of Sharps at their historical cost basis on
the effective date of the Agreement. Sharps has reflected the ongoing
results of operations of the Company in its financial statements from the
effective date of the Agreement. The combined entity will carry forward the
Company's fiscal year end of June 30.
Page 9 of 15
<PAGE>
Sharps experienced an increase in net sales, a loss from operations and a
loss for the fiscal quarter ended March 31, 1998. Net sales increased
approximately 95% during the three months ended March 31, from $143,000 in
1997 to $279,000 in 1998. Sharps' net sales increase can be attributed to a
wider acceptance of the Sharps mail back disposal system as a more cost
effective means of disposing of contaminated sharps than is currently being
used by the small waste generator. Secondly, Sharps has created a product
line defined as the Trip LesSystem which will further decrease the need for
Sharps' primary customer, home health care facilities, to make an additional
trip to the patient's home to retrieve the used sharps container. Finally,
due to the overall increase in exposure to contaminated sharps, the Company
is continually finding new markets where the Sharps product is a natural fit.
Sharps has been successfully working with ECOLAB, a major supplier of hotel
and restaurant cleansing products, to place the mail back disposal system
within many major hotel and motel chains across the United States.
With the Agreement, the reorganized Company has a stronger balance sheet
resulting from the $4 million private equity offering completed by Sharps
prior to the acquisition on February 27, 1998. The reorganization has
provided the Company with the additional capital resources needed to further
expand into its core markets and have the ability to find new viable markets
to place its products. Some of these capital resources are being used to
provide Sharps with a more nationally identifiable image. Sharps has retained
a Houston, Texas based marketing firm to better assist the Company with this
new image effort. Additionally, a sales team has been assembled to
strategically cover the United States to better identify, qualify and assist
the existing and new customer base in the use and efficiency benefits of the
Sharps product line.
The increases in general and administrative expenses are due to the Company's
expansion of its infrastructure and additional resources needed to penetrate
the new markets in the three months ended March 31, 1998. The Company has
incurred significant general and administrative expenses and resulted in a
net loss. As discussed in "Results of Operations," "General and
Administrative" and "Selling and Marketing" have significantly increased in
this quarter of 1998 in relation to the same period in 1997. The needed
additional support and sales staffing, the travel expense associated with
Sharps sales personnel and the additional overall increased marketing effort
have considerably increased these expense items.
Page 10 of 15
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain items from
the Company's Condensed Consolidated Financial Statements of Income,
expressed as a percentage of revenue:
<TABLE>
Three Months ended
March 31
-------------------
1998 1997
---------------------------------------------------------
<S> <C> <C>
NET SALES 100.0% 100.0%
COSTS AND EXPENSES
Cost of sales (53.0%) (65.0%)
General and administrative (102.0%) (54.0%)
Selling and marketing (20.0%) (20.0%)
Research and development (0.0%) (0.0%)
Depreciation and amortization (1.0%) (1.0%)
-------------------
OPERATING EXPENSES (176.0%) (140.0%)
-------------------
LOSS FROM OPERATIONS (76.0%) (40.0%)
Total other income (expense): 7.0% (0.0%)
-------------------
NET LOSS (69.0%) (40.0%)
-------------------
-------------------
---------------------------------------------------------
</TABLE>
THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE MONTHS
ENDED MARCH 31, 1997
Combined net sales experienced a significant increase for the period. Net
sales for the three months ended March 31, 1998 totaled approximately
$462,000. Sales for Sharps products increased 95% to $279,000 over the same
period in 1997, when sales were $143,000. The increase in sales can be
attributed to three major events that were undertaken during the year 1997
and early 1998: first, Sharps introduced a new product line named the Trip
LesSystem; second, in January 1998, Sharps increased its sales force and
support staff to better cover the United States and service its customers;
and last, the Sharps product line has entered the industrial marketplace,
which has proven to be a significant part of its customer base. USME had
revenues of $183,000. USME sales in the period were primarily the
PDS-Registered Trademark- Product and the Miracle Grip-Registered Trademark-
consumer product for the retail market.
Sharps' cost of goods sold as a percentage of sales remained relatively flat
at approximately 68% for the period. Sharps includes an estimated cost of
postage and destruction on its product at the time of sale and accrues this
liability until the product is received and destroyed. USME's cost of goods
sold as a percentage of net sales was 29.2%, primarily as a result of
decreased chemical costs.
Sharps' selling, general and administrative expenses increased approximately
250% in the three months ended March 31, 1998 compared to the same period in
1997. This increase is directly attributable to the addition of sales and
support staff required to properly market and support the product line on a
national basis. USME had selling, general and administrative expenses of
$339,000.
Interest expense decreased to $1,000 due to a debt payoff of $62,700 of debt,
including principal and accrued interest payable. Interest income for the
Company was approximately $37,000 in the period.
As a result of the above activities, the Company's performance declined from
a loss of $57,000 in the fiscal 1997 period, or $(0.02) per share, to a loss
of $316,000, or $(0.54) per share, in fiscal 1998's third quarter. On a pro
forma basis, the Company's earnings per share would have been $(0.04) per
share.
Page 11 of 15
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Working capital at March 31, 1998 was $3,143,000. The relatively favorable
liquidity ratios are primarily due to the successful private placement of
2,000,000 of Sharps Common Stock in February 1998.
Capital expenditures for the combined Company in this period were
approximately $19,000 and consisted primarily of computers and computer
networking related equipment.
At March 31, 1998, total long-term debt outstanding was approximately $21,000
for the combined Company.
The Company expects to incur substantial costs related to sales, marketing
and administrative activities. The amount and timing of anticipated
expenditures will depend upon numerous factors both within and outside the
Company's control, including the nature and timing of marketing and sale
activities. Moreover, the Company's ability to generate income from
operations will be dependent upon, among other things, sufficient penetration
of the home health care, industrial and other markets. Management believes
the reorganization and Sharps acquisition will satisfactorily fund operations
for the next 12 to 18 months. There can be no assurance that the Company will
be able to obtain financing on acceptable terms, if at all, to fund
operations beyond that time frame.
Page 12 of 15
<PAGE>
PART II - OTHER INFORMATION
ITEMS 1-3. NONE
ITEM 4. CHANGES IN REGISTRANTS' CERTIFYING ACCOUNTANT.
a) Previous independent accountants.
i. On April 22, 1998, the Company appointed Arthur Andersen LLP
("Andersen") to replace Faske Lay & Co., L.L.P. ("Faske") as
independent auditors of the Company for the fiscal year ending
June 30, 1998. This change was made in anticipation of the
move of the Company's home office from Austin, Texas to
Houston, Texas. Faske, which served as independent public
accountants of the Company with respect to the Company's
financial statements for the fiscal year ended June 30, 1998,
is based in Austin, Texas, and Andersen is a national
accounting firm with offices in Houston.
ii. The report of Faske 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'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.
iii. The decision to engage Andersen as the Company's independent
auditors was approved by the Company's board of directors.
iv. In connection with the audit for the year ended June 30,
1997, and through April 22, 1998, the Company has had no
disagreements with Faske on any matter or accounting
principles or practices, financial statement disclosure or
auditing scope or procedure, which disagreements if not
resolved to the satisfaction of Faske would have caused it to
make reference thereto in its report on the consolidated
financial statements for such year.
v. During the year ended June 30, 1997 through April 22, 1998,
there have been no reportable events (as defined in Item
304(a)(1)(v) of Regulation S-K).
Faske has provided to the Company a letter addressed to the Securities and
Exchange Commission stating that it has reviewed the disclosure provided
herein and in the Company's Current Report on Form 8-K and has no
disagreement with the relevant portions of this disclosure, pursuant to the
requirements of Item 304(a)(3) of Regulation S-K. A copy of such letter,
dated as of April 22, 1998, was filed as Exhibit 16.1 to the Company's
Current Report on Form 8-K filed May 4, 1998.
ITEM 5. NONE
Page 13 of 15
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
The following exhibit are filed as part of this Report:
<TABLE>
Exhibit No. Description
------------- -----------
<S> <C>
Exhibit 10.29 Employment Agreement effective January 1, 1998
by and between Sharps Compliance, Inc. and
Dr. Burt Kunik, and First Amendment to
Employment Agreement (filed herewith).
Exhibit 27.1 Financial Data Schedule (filed herewith).
</TABLE>
b) Reports on Form 8-K
(i) A Current Report on Form 8-K reporting the acquisition of
Sharps Compliance, Inc. was filed on March 5, 1998 and
amended on May 4, 1998.
(ii) A Current Report on Form 8-K reporting the change in the
registrant's certifying accountant was filed on May 4, 1998.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
a) Not Applicable.
b) Not Applicable.
c) Exhibits.
<TABLE>
Exhibit No. Description
------------- -----------
<S> <C>
10.29 Employment Agreement effective January 1, 1998
by and between Sharps Compliance, Inc. and
Dr. Burt Kunik, and First Amendment to
Employment Agreement (filed herewith).
27.1 Financial Data Schedule (filed herewith).
</TABLE>
Page 14 of 15
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
U.S. MEDICAL SYSTEMS, INC.
THE REGISTRANT
Date: May 15, 1998 /s/ LEE COOKE
--------------------------------
Lee Cooke
CHAIRMAN OF THE BOARD, PRESIDENT
AND CHIEF EXECUTIVE OFFICER
(PRINCIPAL FINANCIAL OFFICER)
Page 15 of 15
<PAGE>
EXHIBIT 10.29
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT is made effective the 1st day of January, 1998,
by and between Sharps Compliance, Inc., a Texas corporation, with principal
offices located at 8928 Kirby Drive, Houston, Texas 77054 (hereinafter
referred to as "Employer"), and Dr. Burt Kunik, a resident of Harris County,
Texas (hereinafter referred to as "Employee").
WITNESSETH:
WHEREAS, the Company desires to employ Employee as its Chairman of the
Board, President and Chief Executive Officer, and Employee is desirous of
undertaking such responsibilities;
NOW, THEREFORE, in consideration of the foregoing premises, the mutual
agreements contained herein and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:
ARTICLE I
DUTIES
1.1 DUTIES. During the term of this Agreement, the Company agrees to
employ Employee as the Company's Chairman of the Board, President and Chief
Executive Officer, and Employee agrees to serve the Company in such
capacities or in such other capacities (subject to Employee's termination
rights under section 4.2) as the Board of Directors of the Company may
direct, all upon the terms and subject to the conditions set forth in this
Agreement.
1.2 EXTENT OF DUTIES. Employee shall devote substantially all of his
business time, energy and skill to the affairs of The Company as the Company,
acting through its Board of directors, shall reasonably deem necessary to
discharge Employee's duties in such capacities. Employee shall not engage in
any other business activity during the term of this Agreement without prior
written consent of the Company, other than the passive management of
Employee's personal investment or activities which would not materially
detract from Employee's ability to perform his duties under this Agreement
(such as Employee's current positions with other companies and other future
positions of a similar nature.)
ARTICLE II
TERM OF EMPLOYMENT
The term of this AGREEMENT shall commence on the effective date and
continue for a period of three (3) years and for additional five year
extensions thereafter, except if terminated as provided herein. This
Agreement is subject to earlier termination as hereinafter provided.
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ARTICLE III
COMPENSATION
3.1 ANNUAL BASE COMPENSATION. As compensation for services rendered
under this Agreement, Employee shall be entitled to receive from Company an
annual base salary (before standard deductions) of $180,000 during the term
of this Agreement. Employees' annual base salary shall be subject to review
and adjustment by the Compensation Committee of the Company at the time of
this Agreement (the "Compensation Committee") and on an annual basis,
provided that any downward adjustment shall be to an amount no less than
$180,000 during the term of this Agreement. Employees' annual base salary
shall be payable at regular intervals in accordance with the prevailing
practice and policy of the Company. Any unpaid base salary shall accrue
3.2 INCENTIVE BONUS. As additional compensation for services rendered
under this Agreement, the Compensation Committee may, in its sole discretion
and without any obligation to do so, declare that Employee shall be entitled
to an annual incentive bonus (whether payable in cash, stock, stock rights or
other property) as the Compensation Committee shall determine. If any such
bonus is declared, the bonus shall be payable in accordance with the terms
prescribed by the Compensation Committee. Should the Company change control,
the Compensation Committee may consider a bonus to the Employee as part of a
severance package
3.3 EMPLOYEE LOAN REPAYMENT. In connection with that certain loan in the
principal amount of $400,000 owed by Employee to the Company, the Company
shall be obligated to pay to Employee, each year, during the term of this
Agreement an annual cash bonus equal to (i) one-fifth (1/5) of the total
outstanding principal and interest owed by Employee to the Company for years
one and two and (ii) three-fifths (3/5) of the total outstanding principal
and all accrued interest owed by Employee to the Company in year three. The
bonus required under this Section 3.3 shall be paid no later than December
31, of each year beginning in 1998 with the last year's bonus issued no later
than December 31, 2000. Additionally, the Company agrees that in the event
the Company shall increase its gross sales in any year by at least thirty
percent (30%) over the gross sales in the prior year, or if the Company's
EBIDTA shall be at least __________ in any year, the Company shall cause
Employee to receive a cash bonus necessary to cover all tax liability, at the
maximum tax rate applicable, attributable to the Employee Loan Repayment, and
the bonus provided hereby (the "Gross-up"). Any Gross-Up Amount owed
hereunder shall also be paid prior to December 31 of each year, where
applicable.
3.4 OTHER BENEFITS. Employee shall, in addition to the compensation
provided for in Sections 3.1 and 3.2 above, be entitled to the following
additional benefits:
a) MEDICAL, HEALTH AND DISABILITY BENEFITS. Employee shall be
entitled to receive all of the medical, health and disability
benefits that may, from time to time, be provided by the Company.
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<PAGE>
b) OTHER BENEFITS. Employee shall be entitled to receive payment
by the Company a retirement benefit into his Individual Retirement
(SEP) account beginning in calendar year 1998 to the maximum
allowed by law.
c) VACATION PAY. Employee shall be entitled to an annual vacation
as determined in accordance with the prevailing practice and
policy of the Company but in no event less than two (2) weeks
per calendar year.
d) HOLIDAYS. Employee shall be entitled to holidays in accordance
with the prevailing practice and policy of the Company.
e) REIMBURSEMENT OF EXPENSES. The Company shall reimburse Employee
for all expenses reasonably incurred by Employee on behalf of the
Company in accordance with the prevailing practice and policy of
the Company.
f) CLUB MEMBERSHIP. Payment in full of monthly dues at the
Doctor's Club in Houston, Texas with payment of reimbursement of
all charges incurred at such club relating to entertainment of
business guest. Upon termination of the Agreement under
Section 4.1, 4.2 or 4.6 hereof, such club membership shall again
transfer to Employee without further consideration.
g) CAR ALLOWANCE. The Company shall be requested to provide to
Employee, during the term of this Agreement, at the sole cost of
the Company, a automotive vehicle for Employees use, that is
acceptable to Employee and reasonable to the Company along with
insurance to cover such vehicle at limits and deductions mutually
acceptable to Employee and the Company.
ARTICLE IV
TERMINATION
4.1 TERMINATION BY THE COMPANY WITHOUT CAUSE. Subject to the provisions
of this Section 4. 1, this Agreement may be terminated by the Company without
cause upon 30 days prior written notice thereof given to Employee. In the
event of termination pursuant to this Section 4.1, (a) the Company shall at
the election of Employee either (x) continue to pay Employee his then
effective base salary under Section 3.1 hereof and all benefits under
Sections 3.3 and 3.4 hereof through the expiration of the three-year term
then in effect (without giving effect to any further extensions thereof under
Article II hereof) or (y) pay Employee, within 15 days of such termination, a
lump sum payment equal to (without discounting present value) his then
aggregate effective base salary owed under Section 3.1 hereof through the
expiration of the three-year term then in effect (without giving effect to
any further extensions thereof under Article II hereof), and (b) any
outstanding stock options held by Employee shall become fully vested and
exercisable pursuant to an Agreement Regarding Vesting of Stock Options the
form which is attached hereto as Exhibit A. Employee must make election under
clause (a) above by giving the Company written notice thereof within 90 days
after notice of termination is given pursuant to this section 4.1. If
Employee does not make such an election within the 90-day period, he will be
deemed to have elected to receive the
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<PAGE>
lump sum payment described in clause (a)(y) above. Payment or performance by
the Company in accordance with this Section shall constitute Employee's full
severance pay and the Company shall have no further obligation to Employee
arising out of such termination.
4.2 VOLUNTARY TERMINATION BY EMPLOYEE FOR GOOD REASON. Employee may at
any time voluntarily terminate his employment for "good reason" (as defined
below) upon 30 days prior written notice thereof to the Company. In the event
of such voluntary termination for "good reason", (a) the Company shall at the
election of Employee either (x) continue to pay Employee his then effective
base salary under Section 3.1 hereof and all benefits under Section 3.3 and
3.4 hereof through the expiration of the three-year term then in effect
(without giving effect to any further extensions thereof under Article II
hereof) or pay Employee, within 15 days of such termination, a lump sum
payment equal to (without discounting to present value) his then effective
base salary under Section 3.1 hereof through the expiration of the three-year
term then in effect (without giving effect to any further extensions thereof
under Article II hereof), and (b) any outstanding stock options held by
Employee shall become fully vested and exercisable pursuant to the Agreement
Regarding Vesting of Stock Options, the form of which is attached hereto as
Exhibit A. Regardless of which election is made by Employee, the Company
shall also pay the Employee the aggregate of all remaining Employee Loan
Repayment, if any, previously paid to Employee.
Employee must make his election under clause (a) above by giving the
Company written notice thereof with 30 days after notice of termination is
given pursuant to this Section 4.1. If Employee does not make such an
election within the 30-day period, he will be deemed to have elected to
receive the lump sum payment described in clause (a)(y) above.
For purposes of this Agreement, "good reason" shall mean the occurrence of
any of the following events:
a) Removal from the offices Employee holds on the date of this
Agreement or a material reduction in Employee's authority or
responsibility, including, without limitation, involuntary
removal from the Board of Directors, but not including
termination of Employee for "cause", as defined below; or
b) Relocation of the Company's headquarters from its current
location without the approval of Employee; or
c) An involuntary reduction in the Employee's compensation; or
d) The Company otherwise commits a material breach of this Agreement.
4.3 TERMINATION BY THE COMPANY FOR CAUSE. The Company may terminate this
Agreement at any time if such termination is for "cause" (as defined below),
by delivering to Employee written notice describing the cause of termination
30 days before the effective date of such termination and by granting
Employee at least 30 days to cure the cause. In the event the employment of
Employee is terminated for "cause", Employee shall be entitled only to the
base salary earned pro rata to the date of such termination with no
entitlement to any base salary
4
<PAGE>
continuation payments or benefits continuation (except as specifically
provided by the terms of an employee benefit plan of the Company) and all
amounts still owing under Section 3.3 above in regards to the Employee Loan
Repayment. Except as otherwise provided is this Agreement, the determination
of whether Employee shall be terminated for "cause" shall be made by the
Board of Directors of the Company, in reasonable exercise of its business
judgment, and shall be limited to the occurrence of the following events:
a) Conviction of or a plea of nolo contendere to the charge of a
felony (which, through lapse of time or otherwise, is not
subject to appeal);
b) Willful refusal without proper legal cause to perform, or gross
negligence in performing, Employee's duties and responsibilities;
c) Material breach of fiduciary duty to the Company through the
misappropriation of Company funds or property; or
d) The unauthorized absence of Employee from work (other than for
sick leave or disability) for a period of 30 working days or more
during any period of 45 working days during the term of this
Agreement.
4.4 TERMINATION UPON DEATH OR PERMANENT DISABILITY. In the event that
Employee dies, this Agreement shall terminate upon the Employee's death.
Likewise, if the Employee becomes unable to perform the essential functions
of the position, with or without reasonable accommodation, on account of
illness, disability, or other reason whatsoever for a period of more than six
consecutive or nonconsecutive months in any twelve month period, this
Agreement shall terminate effective upon such incapacity, and Employee (or
his legal representatives/trust) shall be entitled only to the base salary
earned pro rata to the date of such termination with no entitlement to any
base salary continuation payments or benefits continuation (except as
specifically provided by the terms of (i) an employee benefit plan of the
Company, (ii) Section 3.3 regarding the Employee Loan Repayment, or (iii) in
connection with any stock options which may be exercised by Employee for 90
days.)
4.5 VOLUNTARY TERMINATION BY EMPLOYEE. Employee may terminate this
Agreement at any time upon delivering 30 days written notice of resignation
to the Company. In the event of such voluntary termination other than for
"good reason" (as defined above), Employee shall be entitled to his base
salary earned pro rata to the date of his resignation, but no base salary
continuation payments or benefits continuation (except as specifically
provided by the terms of (i) an employee benefit plan of the Company, (ii)
Section 3.3 regarding the Employee Loan Repayment, or (iii) in connection
with any stock options which may be exercised by Employee for 90 days
thereafter.) On or after the date the Company receives notice of Employee's
resignation, the Company may, at its option, pay Employee his base salary
through the effective date of his resignation and terminate his employment
immediately.
5
<PAGE>
4.6 TERMINATION FOLLOWING CHANGE OF CONTROL.
a) Notwithstanding anything to the contrary herein, should Employee
at any time within 12 months of the occurrence of a "change of
control" (as defined below) cease to be an employee of the
Company (or its successor), by reason of (i) termination by
the Company (or its successor) other than for "cause'
(following a change of control, "cause shall be limited to the
conviction of or a plea of nolo contendere to the charge of a
felony (which, through lapse of time or otherwise, is not
subject to appeal), or a material breach of fiduciary duty to
the Company through the misappropriation of Company funds or
property, or (ii) voluntary termination by Employee for "good
reason upon change of control" (as defined below), then in any
such event,
(1) If the Company is merged or acquires a company in a field
outside of the current product alignment, the Company and
Employee could consider the assignment of existing
product lines and technology to Employee or Employee's
assignee as part of or in lieu of the value of the
settlement severance pay highlighted above.
(2) The Company shall at the election of Employee either continue
to pay Employee his then effective base salary under
Section 3.1 hereof and all benefits under Sections 3.3
and 3.4 hereof through the expiration of the term
described then in effect (without giving effect to any
further extensions thereof under Article II hereof) or
(y) pay Employee, within 45 days of the severance of
employment described in this Section 4.6, a lump sum
payment equal to (without discounting present value) his
then effective base salary under Section 3.1 and 3.3
hereof and all benefits under Section 3.4 hereof through
the expiration of the three-year term then in effect
(without giving effect to any further extensions thereof
under Article II hereof).
(3) the Company shall provide the continued benefit coverage
described in Section 4.1 in the event of the Employee's
termination by the Company without cause, and
(4) Certain outstanding stock options held by Employee, if any,
shall become fully vested and exercisable pursuant to the
Agreement Regarding Vesting of Stock Options, the form of
which is attached hereto as Exhibit A.
6
<PAGE>
b) If, an election is made by Employee under paragraph (a) above,
Employee shall be entitled to an additional payment, to the
extent all payments to Employee (whether pursuant to the
Agreement or any other agreement whatsoever) in connection
with a change of control as defined in the Section 4.6 exceed
in the aggregate, the maximum amount that could be paid to
Employee, triggering an excess parachute payment under Section
280(b) of the Internal Revenue Code of 1986, as amended (the
"Code"), to cover Employee owing any excise tax under Section
4999 of the Code, (referred to herein as the "maximum payment
amount") equal to an amount to cover all excise tax liability
which may accrue to Employee, including any tax liability
which may accrue to Employee in connection with the Company's
payment of the excise tax. If such a payment is required
under this paragraph (b) in addition to the amounts set forth
in paragraph (a) above, it shall be paid at the time and in
the manner elected by the Employee under paragraph (a)(1).
Employee must make his election under paragraph (a)(1) by
giving the Company written notice thereof within 30 days after
the severance of employment described in this Section 4.6. If
Employee does not make such an election within the 30-day
period, he will be deemed to have elected to receive the lump
sum payment described in paragraph (a)(l)(y) above.
c) In determining the amount to be paid to Employee under this
Section 4.6, as well as the limitation determined under
Section 280G of the Code (i) no portion of the total payments
which Employee has waived in writing prior to the date of the
payment of benefits under this Agreement will be taken into
account, (ii) no portion of the total payments which
nationally recognized tax counsel (whether through
consultation or retention of any actuary consultant or other
expert), selected by the Company's independent auditors and
acceptable to Employee, (referred to herein as "Tax Counsel")
determines not to constitute a "parachute payment", (iii) no
portion of the total payments which Tax Counsel determines to
be reasonable compensation for services rendered within the
meaning of Section 280G(b)(4) of the Code will be taken into
account, and (iv) the value of any non-cash benefit or any
deferred payment or benefit included in the total payments
will be determined by the Company's independent auditors in
accordance with Sections 280G(d)(3) and (iv) of the Code.
d) As used in this Section, voluntary termination by Employee
"for good reason upon change of control" shall mean (i)
removal of Employee from the offices Employee holds on the
date of this Agreement, (ii) a material reduction in
Employee's authority or responsibility, including, without
limitation, involuntary removal from the Board of Directors,
(iii) relocation of the Company's headquarters from its then
current location, (iv) a involuntary reduction in Employee
compensation without the approval of Employee, or (v) the
Company otherwise commits a breach of this Agreement.
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<PAGE>
e) As used in this Agreement, a "change of control" shall be
deemed to have occurred if (i) any "Person" (as such term is
used in Sections 12(d) and 14(d) of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), is or becomes a
"beneficial owner" (as defined in Rule 12d-3 under the
Exchange Act), directly or indirectly, of securities of the
Company representing more than 30% of the combined voting
power of the Company's then outstanding securities, 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 Company's Board of Directors shall cease to consist of
"continuing directors" (meaning directors of the Company who
either were directors prior to such transaction or who
subsequently became directors and whose election, or
nomination for election by the Company's stockholders, was
approved by a vote of a least two-thirds of the directors then
still in office who were directors prior to such transaction),
or (iii) the stockholders of the Company approve a merger or
consolidation of the Company with any other corporation, other
than a merger or consolidation that would result in. the
voting securities of the Company 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 Company or such
surviving entity outstanding immediately after such merger or
consolidation, or (iv) the stockholders of the Company approve
a plan for complete liquidation of the Company or an agreement
of sale or disposition by the Company of all or substantially
all of the Company's assets.
4.7 EXCLUSIVITY OF TERMINATION PROVISIONS. The termination provisions of
this Agreement regarding the parties' respective obligations in the event
Employee's employment is terminated, are intended to be exclusive and in lieu
of any other rights or remedies to which Employee or the Company may
otherwise be entitle by law, in equity or otherwise. It is also agreed that,
although the personnel policies and fringe benefit programs of the Company
may be unilaterally modified from time to time, the termination provisions of
the Agreement are not subject to modification, whether orally, implied or in
writing, unless any such modification is mutually agreed upon and signed by
the parties.
ARTICLE V
CONFIDENTIAL INFORMATION AND NONCOMPETITION
5.1 NONDISCLOSURE. During the term of Agreement and thereafter, Employee
shall not, without the prior written consent of the Board of Directors,
disclose or use for any purpose (except in the course of his employment under
this Agreement and in furtherance of the business of the Company)
confidential information or proprietary data of the Company (or any of its
subsidiaries), except as required by applicable law or legal process,
provided, however, that confidential information shall not include any
information known generally to the public or ascertainable from public or
published information (other than as a result of unauthorized disclosure by
Employee) or any information of a type not otherwise considered confidential
by persons engaged in the same business or a business similar to that
conducted by the Company (or any of its subsidiaries).
8
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5.2 NONCOMPETITION. The Company and Employee agree that the services
rendered by Employee hereunder are unique and irreplaceable. Employee hereby
agrees that, during the term of this Agreement and for a period of six months
thereafter, he shall not (except in the course of his employment under this
Agreement and in furtherance of the business of the Company or any of its
subsidiaries), (I) engage in as principal, consultant or employee in any
segment of a business of a company, partnership or firm ("Business Segment")
that is directly competitive with any significant business of the Company in
one of its major commercial or geographic markets or (ii) hold an interest
(except as a holder of less than 5% interest in a publicly traded firm or
mutual funds, or as a minority stockholder or unitholder in a form not
publicly traded) in a company, partnership or firm with a Business Segment
that is directly competitive, without the prior written consent of the
Company.
5.3 VALIDITY OF NONCOMPETITION. The foregoing provisions of Section 5.2
shall not be held invalid because of the scope of the territory covered, the
actions restricted thereby, or the period of time such covenant is operative.
Any judgment of a court of competent jurisdiction may define the maximum
territory, the actions subject to and restricted by Section 5.2 and the
period of time during which such agreement is enforceable.
5.4 NONCOMPETITION COVENANTS INDEPENDENT. The covenants of the Employee
contained in Section 5.2 will be construed as independent of any other
provision in this Agreement; and the existence of any claim or cause of
action by the Employee against the Company will not constitute a defense to
the enforcement by the Company of said covenants. The Employee understands
that the covenants contained in Section 5.2 are essential elements of the
transaction contemplated by this Agreement and, but for the agreement for the
Employee to Section 5.2, the Company would not have agreed to enter into such
transaction. The Employee has been advised to consult with counsel in order
to be informed in all respects concerning the reasonableness and propriety of
Section 5.2 and its provisions with specific regard to the nature of the
business conducted by the Company and the Employee acknowledges that Section
5.2 and its provisions are reasonable in all respects.
5.5 CONFIDENTIAL AND PROPRIETARY INFORMATION. This shall include,
without limitation, matters of a technical nature, such a know-how, formula,
computer programs, software and documentation, secret processes or machines,
inventions. Research projects, plans for further development and matters of a
business nature, such as information about costs, profits, markets, sales
lists of customers, and business data regarding customers, salaries, and
other personnel data, and any other information of a similar nature to the
extent not available to the public.
The Employee shall promptly disclose to the Employer or its designee any
and all ideas, inventions, improvements, discoveries, developments,
innovations, or works of authorship (hereinafter referred to as the
"Inventions"), whether patentable or unpatentable, copyrightable or
uncopyrightable, made, created, developed, discovered, worked on or conceived
by the Employee, either solely or jointly with others, whether or not reduced
to drawings, written description, documentation, models or other intangible
form, during the Employment Period and for a period of six (6) months
thereafter that relate to, or arise out of, any developments, services
research or products of, or pertain to the business of, the Employer.
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5.6 REMEDIES. In the event of a breach or threatened breach by the
Employee of Section 5.2 or its provisions, the Company shall be entitled to a
temporary restraining order and an injunction restraining the Employee from
the commission of such breach. Nothing herein shall be construed as
prohibiting the Company from pursuing any other remedies available to it for
such breach or threatened breach, including the recovery of money damages.
ARTICLE VI
ARBITRATION
Any controversy of any nature whatsoever, including but not limited to
tort claims or contract disputes, between the parties to this Agreement or
between the Employee, his heirs, executors, administrators, legal
representatives, successors, and assigns and the Company and its affiliates,
arising out of or related to the Employee's employment with the Company; any
resignation from or termination of such employment and/or the terms and
conditions of this Agreement, including the implementation, applicability and
interpretation thereof, shall, upon the written request of one party served
upon the other, be submitted to and settled by arbitration in accordance with
the provision of the Federal Arbitration Act, 9 U.S.C. Sections 1-15, as
amended. Each of the parties to this Agreement shall appoint one person as an
arbitrator to hear and determine such disputes, and if they should be unable
to agree, then the two arbitrators shall chose a third arbitrator from a
panel made up of experienced arbitrators selected pursuant to the procedures
of the American Arbitration Association (the "AAA") and, once chosen, the
third arbitrator's decision shall be final, binding and conclusive upon the
parties to this Agreement. Each party shall be responsible for the fees and
expenses of its arbitrator and the fees and expenses of the third arbitrator
shall be shared equally by the parties. The terms or the Commercial
arbitration rules of AAA shall apply except to the extent they conflict with
the provisions of this paragraph. It is further agreed than any of the
parties hereto may petition the United States District Court for the Southern
District of Texas, Houston Division, for a judgment to be entered upon any
award entered through such arbitration proceedings.
ARTICLE VII
MISCELLANEOUS
7.1 COMPLETE AGREEMENT. This Agreement constitutes the entire agreement
between the parties and cancels and supersedes all other agreements between
the parties, which may have related to the subject matter contained in this
Agreement.
7.2 MODIFICATION; AMENDMENT; WAIVER. No modification, amendment or
waiver of any provisions of this Agreement shall be effective unless approved
in writing by booth parties. The failure at any time to enforce any of the
provisions of this Agreement shall in no way be construed as a waiver of such
provisions and shall not affect the right of either party thereafter to
enforce each and every provision hereof in accordance with its terms.
7.3 GOVERNING LAW; JURISDICTION. This Agreement and performance under
it, and all proceedings that may ensue from its breach, shall be construed in
accordance with and under the laws of the State of Texas.
7.4 EMPLOYEE'S REPRESENTATION. Employee represents and warrants that he is
free to enter into this Agreement and to perform each of the terms and covenants
of it. Employee represents
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and warrants that he is not restricted or prohibited, contractually or
otherwise, from entering into and performing this Agreement, and that his
execution and performance of this Agreement is not a violation or breach on
any other agreement between Employee and any other person or entity.
7.5 COMPANY'S REPRESENTATION. Company represents and warrants that it is
free to enter into this Agreement and to perform each of the terms and
covenants of it. Company represents and warrants that it is not restricted or
prohibited, contractually or otherwise, from entering into and performing
this Agreement, and that its execution and performance of this Agreement is
not a violation or breach on any other agreement between Employee and any
other person or entity. The Company represents and warrants that this
Agreement is a legal, valid and binding agreement of the Company, enforceable
in accordance with its terms.
7.6 SEVERABILITY. Whenever possible, each provision of this Agreement
shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement shall be held to be
prohibited by or invalid under applicable law, such provision shall be
ineffective only to the extent of such prohibition or invalidity, without
invalidating the remainder of such provision or the remaining provisions of
this Agreement.
7.7 ASSIGNMENT. The rights and obligations of the parties under this
Agreement shall be binding upon and inure to the benefit of their respective
successors, assigns, executors, administrators and heirs, provided, however,
that neither the Company nor Employee assign any duties under this Agreement
without the prior written consent of the other.
7.8 LIMITATION. This Agreement shall not confer any right or impose any
obligation on the Company to continue the employment of Employee in any
capacity, or limit the right of the Company or Employee to terminate
Employee's employment as provided herein.
7.9 ATTORNEY'S FEE AND COSTS. If any action at law or in equity is
brought to enforce or interpret the terms of this Agreement or any obligation
owing thereunder, venue will be in Travis County, Texas and the prevailing
party shall be entitled to reasonable attorney's fees and all costs and
expenses of the suit, including, without limitation, expert and accountant
fees, and such other relief which a court of competent jurisdiction may deem
appropriate.
7.10 NOTICES. All notices and other communications under this Agreement
shall be in writing and shall be given in person or by either personal
delivery, overnight delivery, or first class mail. certified or registered
with return receipt requested, with postal or delivery charges prepaid, and
shall be deemed to have been duly given when delivery personally, or three
days after mailing first class, certified or registered with return receipt
requested, to the respective persons named below:
If to the Company: Corporate Secretary
Sharps Compliance, Inc.
8928 Kirby Drive
Houston, Texas 77054
If to the Employee: Dr. Burt Kunik
7655 S. Braeswood, No. 17
Houston, Texas 77071
11
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement effective as
of the day and year indicated above.
APPROVED:
COMPANY: SHARPS COMPLIANCE, INC.
By: /s/ John W. Dalton
------------------------------
Printed Name: John W. Dalton
--------------------
Title: Director
---------------------------
EMPLOYEE:
/s/ Burt Kunik
---------------------------------------
Dr. Burt Kunik
12
<PAGE>
FIRST AMENDMENT
TO
EMPLOYMENT AGREEMENT
This First Amendment to Employment Agreement (the "Amendment") dated
April __, 1998 by and among Sharps Compliance, Inc., a Texas corporation, with
its principle offices located at 8928 Kirby Drive, Houston, Texas 77054
(hereinafter referred to as "Employer"), and Dr. Burt Kunik, a resident of
Harris County, Texas (hereinafter referred to as "Employee"), and hereby
amends that certain Employment Agreement entered into effective the 1st day
of January, 1998 by and between Employer and Employee (the "Agreement").
W I T N E S S E T H
WHEREAS, Employer and Employee have previously entered into that certain
Agreement;
WHEREAS, Employer and Employee hereby desire to amend the Agreement in
accordance with those terms and conditions provided herein by entering into
this Amendment.
THEREFORE, in consideration of the covenants mutual benefits contained
herein, and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto, intend to
be legally bound, hereby agree as follows:
1. AMENDMENT TO ARTICLE 2 OF THE AGREEMENT. Article II TERMS OF
EMPLOYMENT is hereby amended to read in its entirety as follows:
"Article II
TERMS OF EMPLOYMENT
The term of AGREEMENT shall commence on the effective date and
continue for a period of three (3) years thereafter, except if
terminated as provided herein. This Agreement is subject to earlier
termination as hereinafter provided."
2. AMENDMENT TO SECTION 3.3 OF THE AGREEMENT. Section 3.3 of the
Agreement is hereby amended to read in its entirety as follows:
"3.3 EMPLOYEE LOAN REPAYMENT. In connection with that certain
loan in the principal amount of $400,000.00 owed by Employee to the
Company, the Company shall be obligated to pay to Employee, each
year, during the term of this Agreement an annual cash bonus or
agree to forgive an amount equal to (i) one-fifth (1/5) of the
total and outstanding principal and interest owed by Employee to
the Company
1
<PAGE>
for years one (1) and two (2) and (ii) three-fifths (3/5)
of the total and outstanding principal and all accrued interest
owed by Employee to the Company in year three (3). The bonus or
forgiveness required under this Section 3.3 shall be paid or
acknowledged no later than December 31, of each year, beginning in
1998 with the last year's bonus issued no later than December 31,
2000."
3. AMENDMENT TO ARTICLE 4 OF THE AGREEMENT. Article 4 of the Agreement is
hereby amended to delete all references to any extensions beyond the initial
three year term. Therefore all words relating to "... then in effect
(without giving effect to any further extensions thereof under Article 2
hereof) ..." are deleted in Sections 4.1, 4.2, 4.6(a)(2), and any other place
it may be found, and no longer considered in the interpretation of any
provision of Article 4.
4. COUNTERPART EXECUTION. This Amendment may be executed by the parties
hereto in multiple counterparts. It shall not be necessary that the
signatures of the parties appear on the same counterparts.
5. GOVERNING LAW. This Amendment shall be governed by and construed in
accordance with the laws of the State of Texas.
6. ENFORCEABILITY OF REMAINING PROVISION. All other provisions of the
Agreement shall remain in full force and effect and any inconsistencies
between this Amendment and the Agreement shall be construed in favor of this
Amendment
Executed as of the date first written above.
COMPANY: SHARPS COMPLIANCE, INC.
By: /s/ John W. Dalton
--------------------------------
Printed Name: John W. Dalton
----------------------
Title: Director
-----------------------------
EMPLOYEE: DR. BURT KUNIK
/s/ Burt Kunik
------------------------------------
Dr. Burt Kunik
2
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONDENSED
CONSOLIDATED BALANCE SHEETS MARCH 31, 1998 AND DECEMBER 31, 1997; CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS MARCH 31, 1998 AND DECEMBER 31, 1997; AND
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS MARCH 31, 1998 AND DECEMBER 31,
1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 3,512,000
<SECURITIES> 0
<RECEIVABLES> 173,000
<ALLOWANCES> 0
<INVENTORY> 94,000
<CURRENT-ASSETS> 3,808,000
<PP&E> 178,000
<DEPRECIATION> 114,000
<TOTAL-ASSETS> 4,272,000
<CURRENT-LIABILITIES> 649,000
<BONDS> 21,000
0
10,000
<COMMON> 29,000
<OTHER-SE> 3,567,000
<TOTAL-LIABILITY-AND-EQUITY> 4,272,000
<SALES> 462,000
<TOTAL-REVENUES> 462,000
<CGS> 243,000
<TOTAL-COSTS> 562,000
<OTHER-EXPENSES> 5,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (316,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (348,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (316,000)
<EPS-PRIMARY> (.54)
<EPS-DILUTED> (.54)
</TABLE>
