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 / /
 
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    / /  Confidential, for Use of the Commission Only (as permitted by Rule
         14a-6(e)(2))
    / /  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.
- --------------------------------------------------------------------------------
                (Name of Registrant as Specified In Its Charter)
 
- --------------------------------------------------------------------------------
    (Name of Person(s) Filing Proxy Statement, if other than the Registrant)
 
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/X/  No fee required

/ /  Fee computed on table below per Exchange Act Rules 14a-6(i)(1) 
     and 0-11

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                           U.S. MEDICAL SYSTEMS, INC.
                           7600 BURNET ROAD, SUITE 350
                            AUSTIN, TEXAS 78734-6342

                         -------------------------------

                    NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
                           TO BE HELD ON MAY 27, 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 Wednesday, May 27, 1998, at
10:00 a.m. local time in the Stone Crossing 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 April 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
May __, 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.



                           U.S. MEDICAL SYSTEMS, INC.
                          7600 BURNET ROAD, SUITE 350
                            AUSTIN, TEXAS 78734-6342

                            -------------------------

                                PROXY STATEMENT
                                      FOR
                        ANNUAL MEETING OF STOCKHOLDERS
                            TO BE HELD MAY 27, 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 May 27, 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' SPECIFIC 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



first being mailed to the stockholders of the Company on or about May __,
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 and Current Report on
Form 8-K dated March 5, 1998 are incorporated by reference in this Proxy
Statement.

                 THE DATE OF THIS PROXY STATEMENT IS MAY__, 1998








                                       2




                               THE ANNUAL MEETING

GENERAL

           The Board has fixed the close of business on April 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 April 15, 1998, 2,933,823 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.

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.

           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 Delaware General Corporation Law.

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 per share. The Agreement and
Plan of Reorganization was subject to various conditions, including the
completion of an equity private placement by Sharps of $4,000,000, 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.

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:

           (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 flat 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 $4,000,000 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' business operations,
                   financial conditions, competitive position and prospects,
                   including the outlook for the medical disposal industry,
                   and, in particular, the outlook for smaller companies
                   within that industry;

           (v)     the information provided to the board of the Company by
                   management of Sharps and Howard Frazier Barker Elliott,
                   Inc., with respect to the financial and other aspects of
                   the Agreement and Plan of Reorganization, the advantages of
                   a business combination between the Company and Sharps from
                   the viewpoint of Sharps and its stockholders, and the
                   Company's prospects if the Agreement and Plan of
                   Reorganization were not to be effective;

                                       2


           (vi)    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 with little or no capital compared to the strengths
                   of a combination between the Company and Sharps;

           (vii)   the amount and form of consideration to be paid and future
                   prospects for the market price of Sharps and the perceived
                   strength and quality of Sharps, which the board believes
                   represented an attractive opportunity for the Company's
                   stockholders in spite of the dilution;

           (viii)  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;

           (ix)    such other matters as the Company's board deemed
                   appropriate or necessary in considering the Agreement and
                   Plan of Reorganization.

FAIRNESS OPINION

           Howard Frazier Barker Elliott, Inc., of Houston, Texas, 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.

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
per share. 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 27, 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 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. In addition, the employment
agreement provides for the repayment of a $400,000 loan by Sharps to Dr.
Kunik through the payment of an annual cash bonus or forgiveness of an amount
equal to (a) one fifth of the total outstanding principal and interest owed
to Sharps for years one and two, payable by December 31, 1998 and 1999, and
(b) three fifths of the total outstanding principal and interest owed to
Sharps in year three, payable by

                                       3


December 31, 2000. For a complete description of the terms of Dr. Kunik's
employment agreement, including severance provisions, see "Executive
Compensation--Employment Agreements."

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 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 anticipates filing transitional reports on Form 10-QSB for the
quarter ended March 31, 1998 and Form 10-KSB for the year ended 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.

                          U.S. MEDICAL SYSTEMS, INC.


                                                                                       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)
                                                                                       
SUMMARY OF INCOME
STATEMENT DATA

Revenues                              $   305,000     $ 504,000     $ 455,000    $ 113,000    $ 48,000   $1,334,000
Cost of products sold                     250,000       429,000       225,000       58,000      26,000      827,000
Selling, general and
  administrative expenses               1,518,000       652,000       335,000      122,000      72,000      774,000
Depreciation and
  amortization expense                    553,000       261,000       151,000       40,000       2,000      103,000
                                      -----------     ---------     ---------    ---------    --------   ----------
Operating loss                         (2,501,000)     (838,000)     (256,000)    (107,000)    (52,000)    (370,000)
Other expense                              17,000       (79,000)      (17,000)      (1,000)      3,000        3,000
                                      -----------     ---------     ---------    ---------    --------   ----------
Net loss                               (2,484,000)     (917,000)     (273,000)    (106,000)    (49,000)    (367,000)
                                      -----------     ---------     ---------    ---------    --------   ----------
                                      -----------     ---------     ---------    ---------    --------   ----------
Net loss per share                    $     (2.06)    $    (.75)    $    (.13)   $    (.08)   $   (.02)  $     (.05)
                                      -----------     ---------     ---------    ---------    --------   ----------
                                      -----------     ---------     ---------    ---------    --------   ----------
4 As of December 31, 1997 --------------------------- Actual Pro Forma (2) -------- ------------- 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
SHARPS COMPLIANCE, INC. ------------------------- Year Ended December 31, --------------------------------- 1995 1996 1997 -------- -------- --------- 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) -------- -------- --------- -------- -------- ---------
As of December 31, 1997 ---------------------------- Actual Pro Forma (2) --------- ------------- 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
- ---------- (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 stock of Sharps, and the conversion of the 5 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 $3,960,000 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 "OTC Bulletin Board"). The closing bid price for one share of Common Stock on March 31, 1998 was $1.00. 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): Common Stock(1) -------------------------- High Low ----- ----- 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
(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. 6 (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. 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: 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) - ------------------------ ------------ --------------- ------------ --------------- Lee Cooke(4) 336,202(5) 10.8% 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) 12.3% 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%
- ---------------- *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 2,933,823 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. 7 (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. (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"): COMMON STOCK ------------------------------------ AMOUNT AND NATURE OF PERCENT OF BENEFICIAL CLASS OWNED NAME OF BENEFICIAL OWNER OWNERSHIP(1) BENEFICIALLY(2) - ------------------------ ------------ --------------- Lee Cooke(3) 116,801(4) 1.5% John W. Dalton(5) 1,256,228(6) 16.6% 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%
- ---------------- *Represents less than 1% of the issued and outstanding shares of Common Stock. 8 (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 582,950 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. (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. 9 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." YEAR FIRST BECAME A NAME AND AGE DIRECTOR OF THE COMPANY - ------------ ----------------------- Lee Cooke (53) 1992 Parris H. Holmes, Jr. (54) N/A Dr. Burt Kunik (59) N/A
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. 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 by 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 10 number of outstanding shares of Common Stock from 2,938,823 shares to approximately 584,000 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. PURPOSE OF THE REVERSE STOCK SPLIT 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. 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; 11 (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: "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. 12 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: "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 British Columbia, Canada, to the State of Delaware, the Vancouver Stock Exchange 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 Vancouver Stock Exchange 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 Delaware General Corporation Law 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 13 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 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; 14 (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: (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 tan 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." 15 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. 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 March 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 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. 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 March 31, 1998 was $1.00. 16 1993 STOCK PLAN NAME AND POSITION NUMBER OF SHARES(1) ----------------- ------------------- 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
- ------------- (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 17 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 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, 18 1997 included an explanatory paragraph with respect to the Company being in the development stage and its 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. 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: NAME AGE POSITION - ----------------------------- ----- -------------------------------------- LEE COOKE 53 Chairman of the Board, Chief Executive Officer and President CLARK A GUNDERSON, M.D.(1)(2) 49 Director SHARRI MCANALLY(1)(2) 52 Corporate Secretary, Controller and Director
- --------------- (1) Member of the Audit Committee, Compensation Committee and Stock Option Committees 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 19 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, Inc., 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 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. He is also a director of Recompute! Corporation, a nationwide direct remanufacturer of newly used and pre-owned commercial-grade Intel 486 and Pentium personal computer systems from top-tier manufacturers. 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(s) 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 sole 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. 20 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. BOARD OF DIRECTOR AND COMMITTEE MEETINGS. The Board of Directors met four times in the 12 months ended June 30, 1997 and have met three times during the first three quarters of 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: SECURITIES UNDERLYING UNREALIZED VALUE OF OPTIONS OPTIONS EXERCISE PRICE AT JUNE 30, 1997 ($) (2) DIRECTOR EXERCISABLE UNEXERCISABLE PER SHARE(1) EXERCISABLE UNEXERCISABLE - -------- ----------- ------------- -------------- ----------- ------------- 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
- ---------------- (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 greater 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 21 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. SUMMARY COMPENSATION TABLE NAME AND PRINCIPAL POSITION FISCAL YEAR SALARY BONUS --------------------------- ----------- ------ ----- LEE COOKE, CHAIRMAN, PRESIDENT 1997 $ 76,700 none AND CHIEF EXECUTIVE OFFICER 1996 111,500 none 1995 81,000 none
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. 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%($) - ------------ ------------- ------------- --------- ---------- ------- ------- LEE COOKE(4) 28,521 100% $3.02 1/21/02 $23,797 $52,585
- ------------- (1) Represents the number of Options granted in fiscal 1997, after giving effect to the reverse stock split under Proposal 2 of this Proxy Statement. (2) Represents the exercise price after giving effect to the reverse stock split under Proposal 2 of this Proxy Statement. (3) Calculation based on stock option exercise price over the exercise period of the option assuming annual compounding. The columns present estimates of potential values based on certain mathematical assumptions. The actual value, if any, that an executive officer may realize is dependent upon the market price on the date of option exercise. No value is reflected for the aggregate value of Billing stock underlying Billing stock options received by such individuals pursuant to the terms of the Distribution. (4) In fiscal 1998, Mr. Cooke was granted Options for the purchase of 4,967 shares, after giving effect to the reverse stock split under Proposal 2 of this Proxy Statement. AGGREGATED OPTION EXERCISES IN FISCAL 1997 AND FISCAL YEAR-END OPTION VALUES There were no option exercises by executive officers during the 1997 fiscal year. The following table provides the number and value of options held at fiscal year end, after giving effect to the reverse stock split under Proposal 2 of this Proxy Statement. The Company does not have any outstanding stock appreciation rights. NUMBER OF SECURITIES VALUE OF UNEXERCISED UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT FY-END(#) OPTIONS AT FY-END($)(1) SHARES ACQUIRED VALUE --------------------------- --------------------------- NAME UPON OPTION EXERCISE(#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - ------------ ---------------------- ----------- ----------- ------------- ----------- ------------- LEE COOKE(4) 0 N/A 14,051 14,470 N/A N/A
- ---------------- (1) Market value of the underlying securities at June 30, 1997 ($0.50 Cdn) was less than the exercise price. 22 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 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. 23 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 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. The employment agreement expires August 27, 1999. 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. In addition, the employment agreement provides for the repayment of a $400,000 loan by Sharps to Dr. Kunik through the payment of an annual cash bonus or forgiveness of an amount equal to (a) one fifth of the total outstanding 24 principal and interest owed to Sharps for years one and two, payable by December 31, 1998 and 1999, and (b) three fifths of the total outstanding principal and interest owed to Sharps in year three, payable by December 31, 2000. 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 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 per share. Therefore, the aforementioned individuals can collectively vote 25 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 27, 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 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. In addition, the employment agreement provides for the repayment of a $400,000 loan by Sharps to Dr. Kunik through the payment of an annual cash bonus or forgiveness of an amount equal to (a) one fifth of the total outstanding principal and interest owed to Sharps for years one and two, payable by December 31, 1998 and 1999, and (b) three fifths of the total outstanding principal and interest owed to Sharps in year three, payable by December 31, 2000. For a complete description of the terms of Dr. Kunik's employment agreement, including severance provisions, see "Executive Compensation--Employment Agreements." 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 Securities and Exchange Commission (the "SEC"). Officers, directors and greater than 10% beneficial owners also are required by SEC 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. 26 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 May __, 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. 27 SHARPS COMPLIANCE, INC. FINANCIAL STATEMENTS AS OF DECEMBER 31, 1997 TOGETHER WITH AUDITORS' REPORT 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 SHARPS COMPLIANCE, INC. BALANCE SHEET--DECEMBER 31, 1997 ASSETS 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 --------- ---------
The accompanying notes are an integral part of these financial statements. SHARPS COMPLIANCE, INC. STATEMENTS OF OPERATIONS For the Year Ended December 31 ---------------------- 1996 1997 -------- --------- 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 --------- --------- --------- ---------
The accompanying notes are an integral part of these financial statements. SHARPS COMPLIANCE, INC. STATEMENTS OF STOCKHOLDERS' DEFICIT Common Stock Additional Total ---------------------- Paid-In Accumulated Stockholders' Shares Amount Capital Deficit Deficit ---------- --------- ----------- ------------- ------------- 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) ---------- --------- ----------- ------------- ------------- ---------- --------- ----------- ------------- -------------
The accompanying notes are an integral part of these financial statements. SHARPS COMPLIANCE, INC. STATEMENTS OF CASH FLOWS For the Year Ended December 31 ------------------------ 1996 1997 ---------- ----------- 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
The accompanying notes are an integral part of these financial statements. 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. -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 -3- In November 1997, Sharps entered into a note receivable with a stockholder and officer of Sharps. The note receivable allows the officer to borrow up to $400,000 from Sharps. The note accrues interest at 8% per annum and payments are due over five annual installments equal to one-fifth of the outstanding balance of principal and accrued -4- interest. All unpaid principal and accrued interest is due in November, 2002. In November 1997, the stockholder borrowed $300,000 from Sharps. Subsequent to December 31, 1997, the stockholder borrowed the remaining $100,000 available under this note. Pursuant to the officer's employment agreement entered into in January 1998, an annual cash bonus will be paid to that officer equal to one-fifth of the outstanding balance of principal and interest due in 1998 and 1999, with the annual cash bonus to be paid to the officer in 2000 to be equal to the remaining principal and accrued interest due under this note agreement. 4. PROPERTY AND EQUIPMENT: Property and equipment at December 31, 1997, consists of the following at the date shown: Useful Life ------------ 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 --------- ---------
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: Year ending December 31- 1998 $ 4,997 1999 5,377 2000 5,809 2001 6,276 2002 5,585 -------- $ 28,044 -------- --------
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). -5- 6. CHANGE IN S CORPORATION STATUS AND PRO FORMA INCOME TAXES: Prior to February 18, 1998, Sharps maintained the status of S Corporation for federal and certain state income tax purposes. As an S Corporation, Sharps is generally not responsible for income taxes. On February 18, 1998, Sharps terminated its S Corporation election. Accordingly, Sharps will be subject to federal and state income taxes from that date forward. Effective with the termination of Sharps' S Corporation status, Sharps will provide for deferred income taxes for cumulative temporary differences between the tax basis and financial reporting basis of its assets and liabilities at the date of termination. Significant components of Sharps' pro forma deferred tax assets and liabilities at December 31, 1997, are as follows: Deferred tax assets- Accrued disposal costs $ 117,083 Deferred tax valuation allowance (117,083) --------- Net deferred tax assets $ - --------- ---------
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): 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 --------- ---------
7. COMMON STOCK: In May 1994, the founding stockholder of Sharps made a capital contribution of $1,000. In return for this cash contribution, the stockholder received 3,000,000 shares of common stock with a $.01 par value. In addition to the cash contribution discussed above, certain fixed assets were contributed by the stockholder to Sharps. In October 1997, Sharps issued a total of 2,000,000 shares of common stock to two consultants for services provided. Management valued the shares at $.006 per share, which is management's estimate of the fair market value of the services provided. On December 12, 1997, Sharps' stockholders increased the number of authorized shares of common stock of Sharps from 1,000,000 shares to 10,000,000 shares and effected a 300-for-1 stock split of Sharps' common stock outstanding on that date. All common stock and per share information included in the accompanying financial statements has been adjusted to give retroactive effect to the split. 8. COMMITMENTS AND CONTINGENCIES: INSURANCE Sharps is subject to numerous risks and uncertainties because of the nature and status of its operations. Sharps maintains insurance coverage for events and in amounts that it deems appropriate. Management -6- believes that uninsured losses, if any, will not be materially adverse to Sharps' financial position or results of operations. -7- SALES AND DISTRIBUTION AGREEMENT On June 1, 1995, Sharps entered into an exclusive sales and distribution agreement with American 3CI Complete Compliance Corporation (American 3CI) that expires in 2001. The agreement grants Sharps the exclusive right to sell and distribute American 3CI's mail sharps disposal system (MSDS), including disposal services to one or more incinerators under contract with American 3CI, to all wholesale and retail organizations which have a need for such a system. Pursuant to the agreement, Sharps has agreed to pay a per pound fee up to a maximum of $6.00 for every MSDS that is destroyed at an American 3CI incinerator. Obligations related to MSDS units sold but not yet incinerated are estimated and included in accrued disposal costs in the accompanying balance sheet, although amounts in excess of minimum payments are not due until incineration has occurred. Expenses related to this agreement during 1996 and 1997 were $11,797 and $41,018, respectively. Sharps has guaranteed annual minimum payments to American 3CI as follows: Year ending December 31- 1998 $25,000 1999 25,000 2000 25,000 2001 12,500
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 -8- purchase agreement, Sharps pays Cardico royalties of $150,000 or a purchase fee equal to $150,000 less all royalties paid, (b) anytime after the second year, but no later than three years from the effective date of the license agreement, Sharps pays royalties of $150,000 or a purchase fee equal to $150,000 less all royalties paid and pays an additional $50,000 within 90 days from the election to purchase the molds or grants Cardico a five-year royalty of $.02 per sharps container sold or (c) anytime after the expiration of eight years, if all royalties have been paid. At December 31, 1997, no sharps containers relating to the Cardico agreement had been sold. -9- On August 13, 1997, Sharps entered into a letter of intent with Novo Nordisk Pharmaceutical, Inc. (Novo), for the exclusive right to develop and use molds, patents, if any, and technical know-how attributable to the manufacturing of plastic sharps containers for use by Novo. The term of the agreement is for five years with automatic renewal periods of one year, unless either party provides notice of termination to the other within 60 days prior to the expiration of the current term. Associated with this agreement, Sharps agreed to pay Novo a per unit royalty to be mutually agreed upon by the companies. At December 31, 1997, no sharps containers relating to this agreement had been sold. SALES REPRESENTATION AGREEMENTS On February 21, 1995, Sharps entered into a sales representation agreement with a sales agency for promotion of the MSDS exclusively in the veterinary market. The initial term of the agreement was for a two-year period with automatic two-year renewal periods, unless either party notified the other 90 days prior to expiration of the current period of its intent to terminate. The agreement further specifies a 15 percent commission on net sales as defined in the agreement. Commission expense related to this agreement was $2,589 and $3,679 for the years ended December 31, 1996 and 1997, respectively. On April 1, 1995, Sharps entered into a sales representation agreement with an independent sales agent for promotion of the MSDS. The initial term of the agreement was for a two-year period with an automatic three-year renewal unless either party notified the other in writing, 90 days prior to expiration, of its intent to terminate at the end of such period. As defined in the agreement, a 10 percent commission is to be paid to the sales representative based on net sales. Commission expense related to this agreement was $4,286 and $12,714 for the years ended December 31, 1996 and 1997, respectively. OPERATING LEASES Sharps leases office space and equipment under operating lease agreements, which expire at various dates over the next four years. Rent expense for the years ended December 31, 1996 and 1997 was approximately $11,700 and $18,100, respectively. Future minimum lease payments under noncancelable operating leases are as follows: Year ending December 31- 1998 $ 15,156 1999 4,382 2000 3,945 2001 1,170 -------- Total minimum lease payments $ 24,653 -------- --------
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. -10- The following unaudited pro forma information assumes that Sharps received the net proceeds from the Offering and retired the note payable to a stockholder at December 31, 1997. 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 ----------- -----------
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. PRO FORMA UNAUDITED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1997 TOGETHER WITH AUDITORS' REPORT PRO FORMA FINANCIAL INFORMATION The following pro forma unaudited statements assume (i) the effects of the Agreement and Plan of Reorganization (the Reorganization) between U.S. Medical Systems, Inc. (the Company), and Sharps Compliance, Inc. (Sharps), (ii) the effect of the proposal to amend the Company's Certificate of Incorporation to effect a 1-for-5.032715 reverse stock split of the Company's common stock and (iii) the effect of a private placement of 2,000,000 shares of Sharps common stock (the Offering), resulting in an estimated net proceeds of $3,964,000, which was used to retire indebtedness of Sharps to a stockholder in the amount of $400,000 plus accrued interest, support the sales and marketing program of Sharps and for other working capital purposes. The pro forma unaudited balance sheet assumes that the above-described transactions occurred on December 31, 1997, and the pro forma unaudited statements of income for the year ended December 31, 1997, assumes that the above-described transactions occurred on January 1, 1997. The pro forma unaudited income statements for the 12-month period ended December 31, 1997, reflect the audited income statement of Sharps for the year ended December 31, 1997, and the unaudited income statement of the Company for the 12-month period ended December 31, 1997, on a historical basis. The pro forma financial information is a presentation of historical results with accounting and other adjustments. The pro forma financial information does not reflect the effects of any of the anticipated changes to be made as a result of the Reorganization in the Company's operations from the historical operations. THE PRO FORMA STATEMENTS ARE PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND SHOULD NOT BE CONSTRUED TO BE INDICATIVE OF THE COMPANY'S FINANCIAL POSITION OR RESULTS OF OPERATIONS HAD THE TRANSACTIONS BEEN CONSUMMATED ON THE DATES ASSUMED AND DO NOT PROJECT THE COMPANY'S RESULTS OF OPERATIONS FOR ANY FUTURE PERIOD. The following pro forma unaudited statements and accompanying notes should be read in conjunction with the financial statements and the financial information pertaining to the Company and Sharps included elsewhere in this Proxy Statement. PRO FORMA UNAUDITED BALANCE SHEET AS OF DECEMBER 31, 1997 Sharps Offering U.S. Medical Compliance, Pro Forma Systems, Inc. Inc. Combined Adjustments(1) ------------- ------------ ------------ -------------- ASSETS (Unaudited) 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 ------------- ---------- ------------ ----------- ------------- ---------- ------------ -----------
Reorganization Subtotal Pro Forma Total Pro Forma Adjustments(2) Pro Forma ------------- -------------- ----------- ASSETS 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 ------------- ------------ ----------- ------------- ------------ -----------
See the accompanying notes to pro forma unaudited financial statements. PRO FORMA UNAUDITED STATEMENT OF OPERATIONS FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1997 Sharps Offering U.S. Medical Compliance, Pro Forma Systems, Inc. Inc. Combined Adjustments(1) Pro Forma ------------- ------------- ------------- -------------- ------------- (Unaudited) 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) ------------- ------------- ------------- ------------- ------------- -------------
See the accompanying notes to pro forma unaudited financial statements. 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 $3,964,000 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. - ------------------------------------------------------------------------------- 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 April 15, 1998, at the Annual Meeting of Stockholders to be held on May 27, 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: ----------------------------------------------------- 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) - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (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 ---------------------------------------- Signature ---------------------------------------- Signature If Held Jointly - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------