-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PawrXXg4NSR9iIDQF1mkPsIBvWFpED5XwR0MgyHWVGxSs9oSjrcpBZVzjL3pKGhr NuV5UxRCDpycwKwHsIQGnw== 0000950129-98-004060.txt : 19980930 0000950129-98-004060.hdr.sgml : 19980930 ACCESSION NUMBER: 0000950129-98-004060 CONFORMED SUBMISSION TYPE: 10KSB40 PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980929 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: SHARPS COMPLIANCE CORP CENTRAL INDEX KEY: 0000898770 STANDARD INDUSTRIAL CLASSIFICATION: ORTHOPEDIC, PROSTHETIC & SURGICAL APPLIANCES & SUPPLIES [3842] IRS NUMBER: 742657168 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10KSB40 SEC ACT: SEC FILE NUMBER: 000-22390 FILM NUMBER: 98716804 BUSINESS ADDRESS: STREET 1: 9050 KIRBY DRIVE STREET 2: STE 350 CITY: HOUSTON STATE: TX ZIP: 77054 BUSINESS PHONE: 713-432-0300 MAIL ADDRESS: STREET 1: 7600 BURNET RD STREET 2: STE 350 CITY: AUSTIN STATE: TX ZIP: 78757 FORMER COMPANY: FORMER CONFORMED NAME: US MEDICAL SYSTEMS INC DATE OF NAME CHANGE: 19970128 FORMER COMPANY: FORMER CONFORMED NAME: MEDICAL POLYMERS TECHNOLOGIES INC DATE OF NAME CHANGE: 19930916 10KSB40 1 SHARPS COMPLIANCE CORP. - 06/30/98 1 FORM 10-KSB U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 [ ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended June 30, 1998 [X] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the transition period from January 1, 1998 to June 30, 1998. --------------- ------------- Commission File Number: 0-22390 SHARPS COMPLIANCE CORP. (Name of Small Business Issuer in its Charter) Delaware 74-2657168 -------- ---------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 9050 Kirby Drive, Houston, Texas 77054 -------------------------------- ----- (Address of principal executive offices) (Zip Code) Issuer's telephone number (713) 432-0300 Securities Registered under 12(g) of the Exchange Act: Title of Each Class ------------------- Common Stock, $0.01 Par Value Check whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO --- Check if there is no disclosure of delinquent filers in response to item 405 of Regulation S-B contained in this form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [ X] Issuer's revenues for most recent six months: $730,000 Aggregate market value of the voting stock held by non-affiliates computed by the closing stock price on September 15, 1998: $12,464,051 Number of shares outstanding of the issuer's Capital Stock as of September 15, 1998: 7,593,944 DOCUMENTS INCORPORATED BY REFERENCE: (1) Portions of the Registrant's definitive Proxy Statement for Annual Meeting of Stockholders held on July 23, 1998 are incorporated by reference in Part II and Part III hereof. 1 2 (2) Portions of the Registrant's definitive Proxy Statement for Annual Meeting of Stockholders to be held on November 11, 1998 are incorporated by reference in Part II and Part III hereof. (3) Portions of the Registrant's Transitional Report on Form 10-QSB for the transition period January 1, 1998 to March 31, 1998 are incorporated by reference in Part II hereof. Transitional Small Business Disclosure Format (check one): Yes No X ---- ---- 3 --------------------------------- SHARPS COMPLIANCE CORP. TABLE OF CONTENTS* ANNUAL REPORT ON FORM 10-KSB ---------------------------------
Page PART I Item 1 Description of Business . . . . . . . . . . . . . 2 Item 2 Description of Properties . . . . . . . . . . . . 7 Item 3 Legal Proceedings . . . . . . . . . . . . . . . . 7 Item 4 Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . . . . 8 PART II Item 5 Market for Registrant's Common Equity and Related Stockholder Matters . . . . . . . . . . . . . . 8 Item 6 Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . 9 Item 7 Financial Statements . . . . . . . . . . . . . . 12 Item 8 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . . . . . . 12 PART III Item 9 Directors, Executive Officers, Promoters and Control Persons of the Registrant; Compliance with Section 16(a) of the Exchange Act . . . . 13 Item 10 Executive Compensation . . . . . . . . . . . . . 13 Item 11 Security Ownership of Certain Beneficial Owners and Management . . . . . . . . . . . . . 13 Item 12 Certain Relationships and Related Transactions. . 13 Item 13 Exhibits and Reports on Form 8-K. . . . . . . . . 13 Signatures . . . . . . . . . . .. . . . . . . . . 15
- ------------- * This Table of Contents is inserted for convenience of reference only and is not a part of this Report as filed. 4 PART I ITEM 1. DESCRIPTION OF BUSINESS Until February 27, 1998, Sharps Compliance Corp. (formerly U. S. Medical Systems, Inc.) (the "Company"), through its wholly owned subsidiary U. S. Medical, Inc. developed, produced and marketed products directed at the over-the-counter consumer market and products related to infection prevention for the professional dental healthcare industry. As of September 2, 1998, and as further discussed below, the Company divested all of the aforementioned product lines to devote all of its resources to developing its systems that center around the Sharps by Mail Disposal System described below. On July 23, 1998, the stockholders voted to (i) elect three directors, (ii) approve a one-for-5.032715 reverse stock split, (iii) change the name of the Company to Sharps Compliance Corp., (iv) delete Article 10 of the Company's Certificate of Incorporation relating to specific stockholders' rights, (v) increase the number of shares subject to issuance under the Company's 1993 Stock Plan (vi) ratify the selection of Arthur Andersen LLP as the Company's independent auditors for the fiscal year June 30, 1998, and (vii) adopt the Company's amended and restated Certificate of Incorporation. Also on July 23, 1998, the Board of Directors elected Dr. Burt Kunik as Chairman of the Board, President and Chief Executive Officer of the Company. The executive offices of the Company were moved from Austin, Texas to the offices of Sharps Compliance, Inc. in Houston, Texas subsequent to the July 23, 1998 stockholders meeting. On or about September 2, 1998, the Company entered into an agreement with Mr. Lee Cooke, its former Chief Executive Officer and President to sell any and all assets and liabilities related to its subsidiary U. S. Medical, Inc., including (i) all cash on hand, less $40,000 (ii) all accounts receivable, (iii) all personal property located at the offices in Austin, Texas, (iv) all patents and trademarks owned or licensed to U. S. Medical, Inc., (v) customer lists of U. S. Medical, Inc., (vi) rights to the name U. S. Medical Systems, Inc. and (vii) all of the capital stock of U. S. Medical, Inc. As consideration for the sale of the assets described above, Mr. Cooke waived and released the Company from any and all liabilities in connection with those certain severance obligations of the Company under that certain Employment Agreement entered into between Mr. Cooke and the Company. The Company based its decision on, among other things, an independent evaluation by CFO Services, Inc. of Austin, Texas, of the assets and liabilities of U. S. Medical, Inc. for the total valuation of $99,000. ACQUISITION OF SHARPS COMPLIANCE, INC. The Company, Sharps Compliance, Inc. ("Sharps"), and all of the stockholders of Sharps entered into an Agreement and Plan of Reorganization as of February 27, 1998. Sharps is a Texas corporation with its principal office located at 9050 Kirby, Houston, Texas 77054. Sharps focuses on developing cost effective systems for home healthcare and industrial markets that include a Sharps by Mail Disposal System component for medical sharps, which are used (i.e., contaminated) syringes/needles and razors in commercial, industrial and home healthcare industries. Its services are provided primarily to generators of small amounts of medical waste to facilitate their compliance with state and federal regulations by tracking, incinerating and documenting the disposed medical waste. The Agreement and Plan of Reorganization closed on February 27, 1998. The Company did not have sufficient authorized but unissued shares of Common Stock to issue to the former stockholders of Sharps to complete the transaction. Therefore, under the terms of the agreement, the Company acquired all of the issued and outstanding 2 5 common stock of Sharps in consideration for the issuance of 1,000,000 shares of Preferred Stock such that each share of common stock of Sharps, par value $.01 per share, outstanding on the closing date was exchanged for 0.142858 shares of Preferred Stock. The Company filed its Certificate of Designation, Powers, Preferences and Rights of the Series of the Preferred Stock with the Secretary of State of the State of Delaware on February 23, 1998, setting forth the terms and conditions of the Preferred Stock upon its issuance. Among other provisions of the Certificate of Designation, each share of Preferred Stock was entitled to 35.190319 votes. On July 23, 1998, the stockholders of the Company approved a one-for-5.032715 reverse stock split. The Preferred Stock received by the former stockholders of Sharps was converted into seven (7) shares of Common Stock of the Company, at which time the former stockholders of Sharps owned approximately 91% of the issued and outstanding Common Stock of the Company on a fully diluted basis. Upon completion of the conversion, the Company had 7,583,944 shares of Common Stock outstanding, of which the existing stockholders of the Company held 583,944 shares and the former stockholders of Sharps held 7,000,000 shares. Subsequent to February 27, 1998, Sharps has operated as a wholly owned subsidiary of the Company. The Agreement is treated as a reverse acquisition for accounting and financial reporting purposes. As such, Sharps is considered the acquiror for accounting and financial reporting purposes and the net assets of the Company were combined with those of Sharps at their historical cost basis on the effective date of the Agreement. Sharps has reflected the ongoing results of operation of the Company in its financial statements from the effective date of the Agreement. The combined entity will carry forward the Company's fiscal year end of June 30. Sharps was formed in May of 1994 by Dr. Burt Kunik. Sharps' systems provide a product for use by small medical waste generators to facilitate their compliance with state and federal regulations by tracking, incinerating and documenting the disposal of sharps (syringes, razors, needles, etc.) by utilizing the Sharps by Mail Disposal System (the "Mail Disposal System"). Sharps occupies a 7,274 square foot office facility in Houston, Texas, and employs 17 full-time employees, most located at the principal place of business of Sharps, 9050 Kirby Drive, Houston, Texas 77054. The Mail Disposal System contains a securely sealed, leak and puncture resistant sharps container; U.S. Postal Service approved shipping carton with priority mail postage; absorbent material inside the container that can hold up to 150 milliliters; a red bag for additional containment; and complete documentation and tracking manifest. When the container is full, the customer closes the sharps container, places it in the red bag, places it back inside the approved prepaid shipping carton and deposits the container with the mail carrier who sends the authorized shipping carton through the U.S. Postal Service routing to a municipally owned incinerator providing third party verification of destruction. After destruction of the Mail Disposal System, the incinerator sends verification of such destruction to the customer. The Company has not expended any funds to comply with environmental regulations and relies on the contracted incinerator to comply with all federal, state and local environmental regulations. Sharps' target market segments include the home healthcare industry; non-healthcare institutional users; the diabetic community that requires insulin injection; dental, veterinarian and physician markets; and other miscellaneous markets where the Mail Disposal System is a fit and is currently under development. While maintaining a low overhead structure, highly automated tracking, accounting and operational systems, cross-trained employees and a quality staff, Sharps has remained flexible and responsive to its customer needs in an industry that demands flexibility, quick response and technological innovation. Sharps has strategically placed four sales people around the U.S. to sell to the home care market. Sharps' goal is to obtain agreements with home care companies to use its products and arrange for the distributor of choice of that home care company to sell and deliver the product directly to the end user. Sharps sells the product to home health companies and their distributors. Sharps also has two sales people to sell to the non-healthcare institutional market. Sharps' goal is to obtain agreements with large hospitality companies to use its products and arrange for its exclusive distributor to sell and deliver the product to the end user. 3 6 In 1998, home care will be affected by the Department of Transportation's ("DOT") new medical waste regulations which will make it more difficult for companies that are non-medical waste transporters to transport medical waste. Management expects the new requirements to be a positive development for Sharps since Sharps believes it can fulfill the home care companies' needs and keep them in compliance with the new regulations. INDUSTRY ANALYSIS Today, almost all businesses are affected with waste disposal concerns for safety and liability reasons. Regulated waste such as syringes, razor blades, bloodborne items, bio-hazard waste spills and other sharp waste can occur in the following situations: treating cuts, abrasions and burns; cleaning rooms and finding needles, syringes or blood-soaked items; laundering linens and finding needles or razor blades in towels; maintenance people finding syringes, needles and broken glass with blood stains; and bio-hazard clean-up. Sharps has added products in conjunction with the Mail Disposal System that create cost effective alternatives to customers who are small quantity medical waste generators in applicable industry segments. MARKET SIZE Management of Sharps believes that the overall consumption of the Mail Disposal System will grow, with such growth being fueled by a number of factors and applications, including: 1. The systems that Sharps has assembled makes the Mail Disposal System both user friendly and cost effective. 2. DOT enforcement of regulations on the transportation of medical waste. In 1998, new regulations will levy heavy fines against non-compliance of regulatory statutes. 3. Occupational Safety and Health Administration ("OSHA") enhanced regulations to protect all employees from bloodborne pathogens in the workplace (i.e., medical, offices, hotels, office buildings and public locations). 4. The continued move toward stronger regulations for transporting medical waste. In 1998, new regulations are anticipated to make it more difficult for homecare couriers, company trucks and nurses to legally be able to transport sharps containers. 5. The overall increased need and appreciation for a full circle of systemic computerized medical waste tracking and verification. MARKET SEGMENTS Home Healthcare Industry. The home healthcare industry is a primary market for the SCI Trip LesSystem(TM) which centers around the Mail Disposal System. Sharps' products are distributed to the home healthcare industry through major national homecare equipment and supply distributors. The home healthcare industry is a somewhat fragmented market; however, management of Sharps estimates that there are approximately 20 corporations that dominate the home healthcare market within the United States. Sharps currently has a presence with the majority of those corporations. The SCI Trip LesSystem(TM) is the predominate disposal system with many of the top healthcare corporations and is under serious consideration with several of the remaining companies. Sharps' current principal customers include major nationally known homecare customers such as Apria Healthcare Inc., Coram Healthcare Inc. and Olsten Health Services Inc. Homecare has intensified its focus on self-injection, resulting in a significant increase in used syringes outside of medical care facilities. Sharps has created a system for the home healthcare industry that will free them from making unnecessary and more costly trips to the patient's home. Sharps has created the SCI Trip LesSystem(TM) for homecare which virtually eliminates the need for all pick-ups from the home after treatment has been completed. Thus, the creation of the SCI Trip LesSystem(TM) has combined three complete programs for return and disposal. All systems contain the Mail Disposal System along with either (i) a prepaid pump return box using Federal Express, (ii) a disposable IV pole to which Sharps owns the patents and manufactures or (iii) a 4 7 reusable case for the collapsible IV pole and pole mounted IV pump, depending on the patient's therapy. In the home healthcare industry, Sharps has become part of the formulary for dealing with the disposal of the sharps encountered by the leading national homecare companies primarily because of the SCI Trip LesSystem(TM). Sales of the SCI Trip LesSystem(TM) recently have begun to escalate and now account for approximately 20% of Sharps' sales. Non-healthcare Institutional. The second market segment of Sharps is the non-healthcare institutional market. Management believes that this market will be one of the fastest growing segments and will include hotels, restaurants and manufacturing sites. Sharps has contracted with ECOLAB as its exclusive distributor to the industrial market. ECOLAB has an extensive marketing program that includes 7,000 sales people. ECOLAB markets to potential users of the Mail Disposal System such as hotels, motels, resorts, schools, colleges, stadiums, daycare centers, planes, trains, cruise ships, casinos, supermarkets, distribution centers, business offices, restaurants, bars and clubs. ECOLAB has a substantial impact in this market, and Sharps has granted an exclusivity to ECOLAB to distribute its Mail Disposal System, custom design cones and wall mount brackets along with Sharps' customized automatic reorder service available for all ECOLAB customers within this marketplace. Diabetic Community. A third area of focus is the diabetic who often requires numerous insulin injections. Sharps intends to actively market to the vast number of insulin injected diabetics, and this market is expected to grow over the next three to five years because more people are being tested for the condition and modern dietary habits are leading to an increased number of diabetics. Sharps has positioned itself with Gainor Medical, which management of Sharps believes to be the largest lancet manufacturer in the United States. Gainor distributes directly to the diabetic community through its mail order division and is also in the managed care diabetes management market. Sharps and Gainor are the only marketers of the Mail Disposal System to the diabetic community. Dentists, Veterinarians and Physicians. Sharps has made a presence within the medical market that has identified the usefulness of the Mail Disposal System. Sharps' product has been demonstrated to be a perfect fit for these small volume waste generators. Sharps has grouped the dental, physician and veterinarian market together due to their similar model and duration usage. 1997 census figures supplied by the American Dental Association, the American Medical Association and the American Veterinary Association indicate that there are approximately 115,000 dentists, 600,000 physicians and 60,000 veterinarians in active practice in the U.S. Sharps utilizes distributors to reach the dental, veterinarian and physician marketplace. In all areas, Sharps' product is distributed through major distributors within each of the respective markets. Henry Schein and Patterson Dental distribute to dental customers. In the veterinary market, the distributors utilized are The Butler Company and MWI Veterinary Supply. In the physician market, a variety of methods are used to reach the needs of all physicians. RESEARCH & DEVELOPMENT The Sharps' Mail Disposal System is seeking new applications in many different areas since small infectious waste generators can be found in many industries. The Company is constantly looking into development of new products to comply with OSHA regulations for disposal of potentially infectious waste and attempting to reduce potential liability. The Company has dedicated a minimum amount of time and money towards research and development of alternative disposal and healthcare treatments, focusing on the acquisition of compatible product lines such as the acquisition of new products such as the "PitchIt" and "PitchIt Jr." disposable IV poles. 5 8 MARKET RISKS Although Sharps has experienced growth in revenues over the past few years, there is an inherent concentration of credit risk associated with accounts receivable arising from sales to its major customers, which are primarily distributors. During the six months ended June 30, 1998, four distributors represented approximately 62% of sales; during the year ended December 31, 1997, three distributors represented approximately 74% of sales; and, during the year ended December 31, 1996, one distributor represented approximately 50% of sales. At June 30, 1998, four distributors comprised approximately 72% (or $146,700) of the total accounts receivable balance, and at December 31, 1997, three distributors comprised approximately 80% (or $89,741) of the total accounts receivable balance. Sharps may be affected by its dependence on a limited number of distributors. Management believes the risk is mitigated by the long-standing business relationships with and reputation of Sharps' major customers. Further management believes a loss of any distributor does not necessarily mean the loss of the underlying customer base of that distributor for the Mail Disposal System. Sharps continues to sole-source each of its manufacturing, assembly, transportation and disposal functions. Sharps may be affected by its dependence on the suppliers of these functions The risk is mitigated by the long-standing business relationships with and reputation of Sharps' suppliers. Although there are no assurances with regard to the continued future business associations, after expirations of certain agreements between Sharps and its suppliers, management believes that alternative sources would be available at similar costs due to the large number of potential waste generators. MANUFACTURING Manufacturing capabilities are key in the total solution offered by Sharps. Sharps can control quality, remain flexible and be responsive to its customer requirements. The technology required to participate in the various markets is key to being on the forefront of project design. Sharps manufactures its products in Houston, Texas and is currently producing approximately 1,000 systems per day, per shift. The manufacturing facility has the ability to increase its capacity to produce in excess of 3,000 systems per day, per shift. Sharps currently operates one shift, and its manufacturing facility is approximately 15,000 square feet. Sharps entered into a contractual agreement with Winfield Medical on May 12,1998 to manufacture a certain line of Sharps containers for one specific distributor. The Company entered into a contract with Lukens Medical Corporation for the manufacture of certain one, two and three gallon containers for sale to the Company's industrial and healthcare facilities, and diabetic patients. PATENTS On June 18, 1998 Sharps completed the purchase of two patented disposable IV poles from IVy Green Corp. for approximately $100,000. The assets purchased included two patents for two different poles, all manufacturing rights, existing customers and a completed prototype for a third pole. On July 22, 1998, the Company filed with the U. S. Patent & Trademark Office an assignment of Patents numbers D390952 and D390953 from IVy Green Corporation to Sharps Compliance, Inc. These disposable poles can be a significant cost saver for homecare companies by eliminating trips to the home to pick up poles after treatment is completed. Sharps has combined these poles with its Mail Disposal Systems to further eliminate unnecessary pick-up trips to a homecare patient. RISK FACTORS Dependence on Certain Management Personnel Sharps' growth and development to date has been largely dependent upon active participation of its current chief executive officer, Dr. Burt Kunik. Although Sharps expects to hire and retain other qualified and experienced management personnel from time to time, the loss of services of any of its current executives, especially Dr. Burt Kunik, could have a material adverse affect on the development of the Company's business. Sharps has applied for key man life insurance on Dr. Kunik only and not on any other officer, director or employee of the Company, but may elect to do so in the future. Competition There are several competitors who offer disposal of medical waste services, such as Browning Ferris Industries, Inc. and Ongard System, Inc.; however, no other company focuses primarily on the disposal of sharps and other medical waste use through transport by the U.S. Postal Service. While Sharps currently does not face any significant competition in the mail sharps business, Sharps must compete with other, larger and better financed and capitalized companies. It also may face contemplating additional competition in the future from other businesses which may enter into the same or similar business as Sharps and may be better capitalized than Sharps. Customer Relationships Sharps has no firm long-term volume commitments from its customers and generally enters into individual purchase orders with its customers. Sharps has experienced fluctuations in order levels from period to period and expects it will continue to experience fluctuations in the near future. In addition, customer purchase orders may be canceled and order volume levels can be changed, canceled or delayed with limited or no penalties. The replacement of canceled, delayed or reduced purchase orders with new business cannot be assured. Moreover, the businesses, financial condition and results of operations of Sharps will depend in significant part upon its ability to obtain orders from new customers, as well as the financial condition and success of its customers, its customers' products and the general economy. The factors affecting any of the major customers of Sharps or its customers, could have a material adverse effect on the businesses, financial condition and results of operations of Sharps. Limitation on Burn Facilities Sharps currently has a contractual arrangement with American 3CI, a company primarily in the business of medical waste disposal through heat incineration. American 3CI has an exclusive arrangement with the City of Carthage, Texas to burn its medical waste at the municipal facility. If for any reason American 3CI was no longer able to burn at the Carthage facility, the Company would be required to obtain an alternative burn site or enter into a contractual relationship with the City of Carthage, Texas. There can be no assurance that such an agreement would ultimately be entered into between Sharps and the City of Carthage, or that the Company would be able to enter into another arrangement for the incineration of its products and at cost that would be acceptable to Sharps. 6 9 Limited Operating History; History of Losses Sharps has a limited operating history, has incurred significant losses from operations since its inception and has had working capital deficits in the past. There can be no assurance that Sharps will ever attain profitable operations or will be able to generate future revenue levels to support operations. The future success of Sharps is dependent upon many factors, including environmental regulation, continuity of its distributorship agreements, successful completion of its product development activities, and the identification of penetration of additional markets for its products and services. There can be no assurance that future additional capital will be available to Sharps from any other sources, or that if available, it will be on terms acceptable to Sharps. Governmental Regulation Currently, Sharps is required to operate within the guidelines established by the OSHA, administered by the Occupational Safety and Health Administration. Such guidelines have been established to promote occupational safety and health standards, and certain standards have been established in connection with the handling, transportation and disposal of certain types of medical wastes including mail sharps. Sharps believes that it is currently in compliance in all material respects with all applicable laws and regulations governing its business. However, in the event additional guidelines are established to more specifically control the business of Sharps, additional expenditures may be required in order for Sharps to be in compliance with such changing regulations. Furthermore, any material relaxation of any existing regulatory requirements governing the transportation and disposal of medical sharps products could result in a reduced demand for Sharps' services and could have a material adverse effect on Sharps' revenues and financial condition. The scope and duration of existing and future regulations affecting the medical waste disposal industry cannot be anticipated and are subject to change due to political and economic pressures. Postal Work Interruptions Since the basis by which Sharps transports its medical sharps products is by use of the United States Postal Service, any interruption in the day-to-day postal services would have a material adverse effect on Sharps' revenues and financial condition. Postal delivery interruptions are rare and cannot be predicted with any certainty. However, since United States Postal employees are federal employees, such employees may be prohibited from engaging in or continuing a postal work stoppage, although there can be no assurance that such work stoppage can be avoided. ITEM 2. DESCRIPTION OF PROPERTY Sharps currently leases 7,274 square feet of commercial office space in Houston, Texas. The lease period commenced August 1, 1998 and runs through July 31, 2002 at an annual rental rate of $14.11 per square foot. The lease agreement provides for annual escalations based on increases in common area maintenance, property taxes, insurance costs and management. Sharps believes that the facility is adequate and anticipates remaining in the facility for the period of the lease. ITEM 3. LEGAL PROCEEDINGS The Company is not a party to any pending litigation and is not aware of any contemplated proceeding. 7 10 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Company sent out proxies to its stockholders dated June 29, 1998 for matters to be voted at the Annual Meeting of Stockholders held on July 23, 1998, in Austin, Texas, and the following proposals were adopted by the margins indicated at such meeting: 1) The election of three directors to hold office until the next Annual Meeting of Stockholders or until the election and qualification of their respective successors. Lee Cooke For 34,202,694 Against -0- Abstain 4,415 Parris H. Holmes, Jr. For 34,202,694 Against -0- Abstain 4,415 Dr. Burt Kunik For 34,202,694 Against -0- Abstain 4,415
2) A proposal to amend the Company's Certificate of Incorporation to effect a one-for-5.032715 reverse stock split of the Company's common stock. For 34,192,019 Against 6,318 Abstain 4,399 3) A proposal to amend the Company's Certificate of Incorporation to rename the Company Sharps Compliance Corp. For 34,199,311 Against 3,494 Abstain 405 4) A proposal to amend the Company's Certificate of Incorporation to delete Article 10 relating to specific stockholders' rights. For 33,053,923 Against 5,822 Abstain 7,658 5) A proposal to approve an amendment to the Company's 1993 Stock Plan to increase the number of shares of common stock subject to issuance under this plan from 59,609 shares to 1,000,000 shares (after giving effect to the reverse stock split under Proposal 2 above). For 33,059,285 Against 10,087 Abstain 712 6) A proposal to ratify the appointment of Arthur Andersen LLP as independent public accountants of the Company for the fiscal year ending June 30, 1998. For 34,149,459 Against 1,581 Abstain 14,744 7) A proposal to adopt the Company's Amended and Restated Certificate of Incorporation. For 34,153,541 Against 7,167 Abstain 7,117 PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS MARKET INFORMATION. During the two (2) years ended June 30, 1998 and subsequent, the Common Stock of the Company has been quoted on the NASD OTC Bulletin Board under the symbol "SCOM" (subsequent to July 22, 1998), "USME" (prior to July 23, 1998 and subsequent to December 18, 1996), and "MPTI" (prior to December 19, 1996). The Common Stock has also traded on the Vancouver Stock Exchange for the period under the symbol "USS" except 8 11 that the Company voluntarily removed its Common Stock from the exchange on June 8, 1998. The Company's Common Stock has had limited trading volume averaging approximately 7,600 shares traded per month (giving effect to the one-for-5.032715 reverse stock split effective July 23, 1998) on the OTC Bulletin Board. The table below sets forth the high and low closing prices at the OTC Bulletin Board for each quarter within the last two (2) fiscal years.
Common Stock (1) Fiscal Year Ended June 30, 1997 High Low First Quarter $5.28 $4.40 Second Quarter $4.40 $1.89 Third Quarter $7.54 $1.88 Fourth Quarter $6.29 $1.89 Fiscal year Ended June 30, 1998 First Quarter $3.15 $1.89 Second Quarter $3.15 $2.83 Third Quarter $5.03 $2.99 Fourth Quarter $5.03 $4.43 Fiscal Year Ended June 30, 1999 First Quarter (through September 23, 1998) $7.50 $2.25
(1) Prices have been adjusted to reflect the effect of the one-for-5.032715 reverse split effective July 23, 1998. Stockholders: At September 23, 1998, there were 583,944 shares of Common Stock that could be traded. They were held by 209 holders of record. The last reported sale of the Common Stock on September 15, 1998, was $2.25 per share. Dividend Policy: The Company has never declared or paid any cash dividends on its Common Stock. The Company currently intends to retain all of its earnings for the operation and expansion of its business and does not anticipate paying any such dividends in the foreseeable future. ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This annual report on Form lO-KSB contains certain forward-looking statements and information relating to the Company and its subsidiaries that are based on the beliefs of the Company's management as well as assumptions made by and information currently available to the Company's management. When used in this report, the words "anticipate," "believe," "estimate" and "intend" and words or phrases of similar import, as they relate to the Company or its subsidiaries or Company management, are intended to identify forward-looking statements. Such statements reflect the current risks, uncertainties and assumptions related to certain factors, including without limitations, competitive factors, general economic conditions, customer relations, relationships with vendors, governmental regulation and supervision, seasonality, distribution networks, product introductions and acceptance, technological change, changes in industry practices, onetime events and other factors described herein. Based upon changing conditions, should any one or more of these risks or uncertainties materialize, or should any underlying assumptions prove incorrect, actual results may vary materially from those described herein as anticipated, believed, estimated, expected or intended. The Company does not intend to update these forward-looking statements. 9 12 The discussion below analyzes changes in the consolidated operating results and financial condition of the reorganized company (i.e., Sharps Compliance Corp. and Sharps) during the six months ended June 30, 1998. The comparison is made to the operating results and financial condition of Sharps as an independent entity for the six months ended June 1997. GENERAL On February 27, 1998, the Company, Sharps, and all of the stockholders of Sharps entered into the Agreement and Plan of Reorganization (the "Agreement"). The Agreement closed on February 27, 1998. The Company did not have sufficient authorized but unissued shares of Common Stock to issue to the former stockholders of Sharps to complete the transaction. Therefore, under the terms of the Agreement, the Company acquired all of the issued and outstanding Common Stock, $.01 par value, of Sharps in consideration for the issuance of 1,000,000 shares of Preferred Stock, $.01 par value, such that each share of Common Stock of Sharps outstanding on the closing date was exchanged for 0.142858 shares of Preferred Stock. Each share of Preferred Stock is entitled to 35.190319 votes On July 23, 1998, the stockholders voted to (i) elect three directors, (ii) approve a one-for-5.032715 reverse stock split, (iii) change the name of the Company to Sharps Compliance Corp., (iv) delete Article 10 of the Company's Certificate of Incorporation relating to specific stockholders' rights, (v) increase the number of shares subject to issuance under the Company's 1993 Stock Plan, (vi) ratify the selection of Arthur Andersen LLP as the Company's independent auditors for the fiscal year ended June 30, 1998 and (vii) adopt the Company's Amended and Restated Certificate of Incorporation. Also on July 23, 1998, the Board of Directors elected Dr. Burt Kunik as Chairman of the Board, President and Chief Executive Officer of the Company. The executive offices of the Company were moved from Austin, Texas to the offices of Sharps Compliance, Inc. in Houston, Texas subsequent to the July 23, 1998 stockholders meeting. Following the closing of the Agreement on February 27, 1998, the combined company shifted its main product focus to the Mail Disposal System and sought to sell the PDS(R) Clean and Miracle Grip(R) product lines. Management believed that the new Sharps product presented a better opportunity for growth of the Company and future value to the stockholder. On or about September 2, 1998, the Company entered into an agreement with Mr. Lee Cooke, its former Chief Executive Officer and President, to sell any and all assets and liabilities related to its subsidiary U. S. Medical, Inc., including (i) all cash on hand, less $40,000 (ii) all accounts receivable, (iii) all personal property located at the offices in Austin, Texas, (iv) all patents and trademarks owned or licensed to U. S. Medical, Inc., (v) customer lists of U. S. Medical, Inc., (vi) rights to the name U. S. Medical Systems, Inc. and (vii) all of the capital stock of U. S. Medical, Inc. As consideration for the sale of the assets described above, Mr. Cooke waived and released the Company from any and all liabilities in connection with those certain severance obligations of the Company under that certain Employment Agreement entered into between Mr. Cooke and the Company. The Agreement is treated as a reverse acquisition for accounting and financial reporting purposes. As such, Sharps is considered the acquiror for accounting and financial reporting purposes and the net assets of the Company were combined with those of Sharps at their historical cost basis on the effective date of the Agreement. Sharps has reflected the ongoing results of operations of the Company in its financial statements from the effective date of the Agreement. The combined entity will carry forward the Company's fiscal year end of June 30. 13 RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, certain items from the Company's Condensed Consolidated Financial Statements of Operations, expressed as a percentage of revenue:
Six Months Ended Year Ended June 30 December 31 ------------------ ------------------ 1998 1997 1997 1996 ---- ---- ---- ---- Net sales 100% 100% 100% 100% Costs and expenses: Cost of sales (77%) (66%) (75%) (52%) Selling, general and administrative (163%) (63%) (59%) (52%) Depreciation and amortization (2%) (3%) (1%) (1%) ---- ---- --- --- Total operating expenses (242%) (132%) (135%) (105%) ---- ---- Loss from operations (142%) (32%) (35%) (5%) Total other income (expense) 11% (2%) (1%) (1%) ---- ---- --- --- Net loss (131%) (34%) (36%) (6%) ==== ==== === ===
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997 Net sales increased approximately 129% during the six months ended June 30, from $318,000 in 1997 to $730,000 in 1998. Included in net sales for the six months ended June 30, 1998 were sales from PDS(R) Clean and Miracle Grip(R) products of $45,000 for the period subsequent to the closing of the Agreement which were not part of the Company's sales in 1997. Sharps' net sales increase can be attributed to a wider acceptance of the Sharps mail back disposal system as a more cost effective means of disposing of contaminated sharps than is currently being used by the small waste generator. Secondly, Sharps has created a product line defined as the Trip LesSystem(TM) which will further decrease the need for Sharps' primary customer, home healthcare facilities, to make an additional trip to the patient's home to retrieve the used sharps container. Finally, due to the overall increase in exposure to contaminated sharps, the Company is continually finding new markets where the Sharps product is a natural fit. Sharps has been successfully working with ECOLAB, a major supplier of hotel and restaurant cleansing products, to place the mail back disposal system within many major hotel and motel chains across the United States. The increases in selling, general and administrative expenses are due to the Company's expansion of its infrastructure and additional resources expended to penetrate the new markets in the six months ended June 30, 1998. The Company has incurred significant general and administrative expenses, resulting in a net loss. As discussed in "Results of Operations," selling, general and administrative expenses have significantly increased in the first six months of 1998 in relation to the same period in 1997. The needed additional support and sales staffing, the travel expenses associated with Sharps sales personnel and the additional overall increased marketing effort have considerably increased these expense items. The reorganized Company completed a $4 million private equity offering prior to the acquisition on February 27, 1998. Some of these capital resources are being used to provide Sharps with a more nationally identifiable image. Sharps has retained a Houston, Texas based marketing firm to better assist the Company with this new image effort. Additionally, a sales team has been assembled to strategically cover the United States to better identify, qualify and assist the existing and new customer base in the use and efficiency benefits of the Sharps product line. As of June 30, 1998, the Company has approximately $3,044,000 in cash and short-term investments. YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996 Net sales experienced a significant increase for the period. Net sales for the year ended December 31, 1996 totaled approximately $591,000. Sales for Sharps products increased 40% to $830,000 over the same period in 1997, when sales were $591,000. The increase in sales can be attributed to two major events that were undertaken during the year 1997: first, Sharps introduced a new product line named the Trip LesSystem(TM); and second, the Sharps product line has entered the industrial marketplace, which has proven to be a significant part of its customer base. During 1997, the Company had revenues of $500,000 attributable to the product lines of the Company which are not included in the financial statements of the Company on a pre-acquisition basis. Because Sharps has been treated as the acquiror for accounting and financial reporting purposes, financial results of the Company (formerly U. S. Medical Systems, Inc.) have been excluded from the Results of Operations. 11 14 Sharps' selling, general and administrative expenses increased approximately 44% in year ended December 31, 1997 compared to the same period in 1996. This increase is directly attributable to the addition of sales and support staff required to properly market and support the product line on a national basis. Interest expense increased to $8,000 due to an increase in notes payable to stockholders of $430,000 during October 1997. Interest income for the Company was approximately $3,000 in the period. As a result of the above activities, the Company's loss for the year ended December 31, 1997 increased to $295,000, or $(0.08) per share, from a loss of $41,000, or $(0.01) per share, in the same period in 1996 LIQUIDITY AND CAPITAL RESOURCES Working capital at June 30, 1998 was $2,395,000. The relatively favorable liquidity ratios are primarily due to the successful private placement of 2,000,000 shares of Sharps Common Stock in February 1998. Capital expenditures for the combined Company during the six months ended June 30, 1998 were approximately $131,000 and consisted of the acquisition of patents and trademarks of $101,000 and computers and computer networking related equipment. At June 30, 1998, total long-term debt outstanding was approximately $40,000 for the combined Company. The Company expects to incur substantial costs related to sales, marketing and administrative activities. The amount and timing of anticipated expenditures will depend upon numerous factors both within and outside the Company's control, including the nature and timing of marketing and sale activities. Moreover, the Company's ability to generate income from operations will be dependent upon, among other things, sufficient penetration of the home healthcare, industrial and other markets. Management believes the reorganization and Sharps acquisition will satisfactorily fund operations for the next 12 to 24 months. There can be no assurance that the Company will be able to obtain financing on acceptable terms if at all, to fund operations beyond that time frame. YEAR 2000 ISSUES The Company has been evaluating its computer programs and systems to identify potential Year 2000 readiness problems. The Year 2000 problem refers to the limitations of the programming code in certain existing software programs to recognize date-sensitive information for the Year 2000 and beyond. Unless modified prior to December 31, 1999, such systems may not properly recognize such information and could generate erroneous data or cause a system to fail to operate properly. The Company believes that the Year 2000 problem will not pose a significant operational problem for the Company. However, it is possible that non-compliant third-party computer systems may pose a problem for the Company in the future. The Company's business, financial condition and results of operations would not be materially adversely affected by the Year 2000 problem if it or unrelated parties fail to successfully address this issue. Management of the Company currently anticipates that minimal expenses and capital expenditures would be associated with correcting any of its Year 2000 problems. In the event the Company determines the need in the future to implement a plan to address the Year 2000 problem, the Company may need to devote more resources to developing such plan and additional costs may be incurred, which the Company believes would not have a material adverse effect on the Company's financial condition and results of operations. The Company believes problems encountered by the Company's vendors, customers and other third parties would not have a material adverse effect on the Company's financial condition and results of operations. ITEM 7. FINANCIAL STATEMENTS The financial statements of the Company are annexed to this report and are referenced as pages F-1 to F-16 ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE The information set forth under the caption "Changes in Registrant's Certifying Accountant" on page 13 of the Transitional Report on Form 10-QSB for the transition period January 1, 1998 to March 31, 1998 is incorporated herein by reference. 12 15 PART III ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS OF THE REGISTRANT; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT The information set forth under the caption "Management," Pages 30 through 32, inclusive, of the Registrant's definitive Proxy Statement for Annual Meeting of Stockholders held on July 23, 1998 are incorporated herein by reference. Paragraph 16(a) of the Securities Exchange Act of 1934, as amended, requires the Company's executive officers and directors, and persons who beneficially own more than 10% of the Company's equity securities, to file reports of security ownership and changes in such ownership with the Commission. Officers, directors and greater than 10% beneficial owners also are required by Commission regulations to furnish the Company with copies of all Section 16(a) forms they file. To the Company's knowledge, based solely on review of the copies of such reports furnished to the Company, during the fiscal year ended June 30, 1998, all Section 16(a) filing requirements applicable to its officers, directors and greater than 10% beneficial owners were complied with. ITEM 10. EXECUTIVE COMPENSATION The information set forth under the captions "Management" and "Executive Compensation," Pages 30 through 36, inclusive, of the Registrant's definitive Proxy Statement for Annual Meeting of Stockholders held on July 23, 1998 are incorporated herein by reference. ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information set forth under the captions "Security Ownership of Management" and "Certain Beneficial Owners," Pages 16 through 19, inclusive, of the Registrant's definitive Proxy Statement for Annual Meeting of Stockholders held on July 23, 1998 are incorporated herein by reference. ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information set forth under the caption "Certain Relationships and Related Transactions," Pages 36 and 37, inclusive, of the Registrant's definitive Proxy Statement for Annual Meeting of Stockholders held on July 23, 1998 are incorporated herein by reference. ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibit Number Description of Exhibit 2.1 Plan of Reorganization pursuant to Board of Directors Resolutions dated August 13, 1996. 2.2 Agreement and Plan of Reorganization dated as of February 27, 1998, between and among U.S. Medical Systems, Inc., Sharps Compliance, Inc. and its Stockholders 3.1 Certificate of Domestication of the Company 3.2 Certificate of Incorporation of Company 3.3 Certificate of Amendment 3.4 Bylaws of Company *3.5 Amended and Restated Certificate of Incorporation of U.S. Medical Systems, Inc. *3.6 Certificate of Elimination of the Series "A" Voting Convertible Preferred Stock 13 16 4.1 Escrow Agreement, dated February 7, 1992, between the Company and Pacific Corporate Trust Company ("Pacific Trust") 4.2 Form of 1992 Stock Purchase Warrant 4.3 Warrant Agreement, dated September 10, 1993 Form of Note and Waiver *4.4 Specimen Stock Certificate 10.1 Letter Agreement, dated December 15, 1991, between the Company and 406586 B. C. Ltd., Medical Polymers, a California corporation ("MP") and certain stockholder of MP 10.2 Letter Agreement, dated as of February 7, 1992, between the Company and 405586 B. C. Ltd. 10.3 Amendment to Exhibit 10.2, dated March 20, 1992 10.4 Share Purchase Agreement, dated as of February 7, 1992, between the Company, MP, and the stockholders of MP 10.5 Exclusive Technology License Agreement, dated December 14, 1990, between Dr. Marvin H. Gold and MP 10.6 Assignment, dated March 30, 1992, by Marvin H. Gold 10.7 Letter Agreement, dated March 30, 1992, between Marvin H. Gold and MP 10.8 Assignment, dated March 30, 1992, by Marvin H. Gold and Robert H. Hodam, Jr. 10.9 Letter Agreement, dated March 30, 1992, between Marvin H. Gold and MP 10.10 Letter Agreement, dated March 30, 1992, between Robert H. Hodam, Jr. and MP 10.11 Supply and Distribution Agreement, dated December 18, 1992, between Midwest Dental Products Corporation and MP 10.12 Amendment to 10.11, dated June 9, 1993 10.13 Manufacturing Agreement, dated September 10, 1992, between DPT Laboratories, Inc. and MP 10.14 Research/Development and Laboratory Services Contract, dated March 13, 1993, between NewForm Development Laboratories, Inc. and MP 10.15 Product Formulation Consulting Agreement, dated January 18, 1993, between EcoTech and MP 10.16 Letter Agreement, dated September 4, 1992, between Gibraltar Biological Laboratories and MP 10.17 Amendment to Exhibit 10.16, dated October 20, 1992 10.18 Employment Agreement, dated May 22, 1994, between Lee Cooke and the Company 10.19 Consulting Agreement, dated July 1, 1993, between Parris H. Holmes, Jr. and the Company 10.20 Amendments to Exhibit 10.14, dated April 26, 1995 and August 1, 1994 10.21 Research and Development Contract dated December 22, 1993 between MGB and MP 10.22 Letter of Agreement on consulting services for stock options, dated July 1, 1994, between Wolf Group and MPTI 10.23 Amendment to Exhibit 10.22, dated March 16, 1995 10.24 Consulting Agreement, dated February 1, 1995, between Parris H. Homes, Jr. and the Company 10.25(a) Amendment to Exhibit 10.22, dated March 16, 1995 10.25(b) Amendment pursuant to Board of Directors Resolution, dated August 17, 1995 10.26(a) Form of Warrant, dated March 1, 1995 10.26(b) Form of Note, dated March 1, 1995 10.27 Employment Agreement, dated May 22, 1996, between Lee Cooke and the Company 14 17 10.28 Assignment, dated October 26, 1995, by James W. McGinity, Thomas G. Gerding and Roland Bodmeier 10.29 Employment Agreement effective January 1, 1998 by and between Sharps Compliance, Inc. and Dr. Burt Kunik, and First Amendment to Employment Agreement *10.30 Second Amendment to Employment Agreement dated May __, 1998 *10.31 Exclusive Distributorship Agreement, dated April 1, 1998 between Pro-Tec Containers, Inc. and Sharps Compliance, Inc. *10.32 Purchase Agreement between IVY Green Corporation and Sharps Compliance, Inc., dated June 19, 1998 *10.33 Lease Agreement between Lakes Technology Center, Ltd. and Sharps Compliance, Inc. dated August 1, 1998 *10.34 Severance Agreement, dated September 2, 1998, between C. Lee Cooke, Jr. and Sharps Compliance, Inc. (formerly known as - U.S. Medical Systems, Inc.) 16.1 Letter regarding Change in Certifying Accountant 16.2 Letter regarding Change in Certifying Accountant 16.3 Letter regarding Change in Certifying Accountant to Faske Lay & Co., L.L.P. 16.4 Letter regarding changes in Certifying Accountant to Arthur Andersen LLP *27.1 Financial Data Schedule Notes: * Filed herewith. (b) Reports on Form 8-K The information set forth under the caption "Exhibits and Reports on Form 8-K" on page 14 of the Registrant's Transitional Report on Form 10-QSB for the transition period January 1, 1998 to March 31, 1998 is incorporated herein by reference. SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. REGISTRANT: SHARPS COMPLIANCE CORPORATION Dated: September 28, 1998 By: /s/ Burton J. Kunik ------------------------------------ Dr. Burton J. Kunik, Chairman of the Board, President and Chief Executive Officer By: /s/ Kent Manby ------------------------------------ Kent Manby, Vice President and Chief Financial Officer 15 18 SHARPS COMPLIANCE CORP. AND SUBSIDARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page AUDITED CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Public Accountants............................... F-2 Consolidated Balance Sheets as of June 30, 1998 and December 31, 1997............................................... F-3 Consolidated Statements of Operations for the Six Months Ended June 30, 1998 and 1997 (Unaudited) and the Years Ended December 31, 1997 and 1996.......................................... F-4 Consolidated Statements of Stockholders' Equity (Deficit) For the Year Ended December 31, 1997 and the Six Months Ended June 30, 1998...................................... F-5 Consolidated Statements of Cash Flows for the Six Months Ended June 30, 1998 and 1997 (Unaudited) and the Years Ended December 31, 1997 and 1996................................................................ F-6 Notes to Consolidated Financial Statements............................. F-7
F-1 19 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Sharps Compliance Corp.: We have audited the accompanying consolidated balance sheets of Sharps Compliance Corp. (a Texas corporation) and subsidiaries as of June 30, 1998, and December 31, 1997, and the related consolidated statements of operations, stockholders' equity (deficit) and cash flows for the six months ended June 30, 1998, and the years ended December 31, 1997 and 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Sharps Compliance Corp. and subsidiaries as of June 30, 1998, and December 31, 1997, and the results of their operations and their cash flows for the six months ended June 30, 1998, and the years ended December 31, 1997 and 1996, in conformity with generally accepted accounting principles. /s/ ARTHUR ANDERSEN LLP Houston, Texas August 19, 1998 F-2 20 SHARPS COMPLIANCE CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
June 30, December 31, ASSETS 1998 1997 ------ ------------ ------------ CURRENT ASSETS: Cash and cash equivalents $ 444,498 $ 67,114 Short-term investments 2,600,000 -- Accounts receivable 203,608 111,682 Inventory 171,506 40,316 Prepaids and other 81,258 2,893 ------------ ------------ Total current assets 3,500,870 222,005 PROPERTY AND EQUIPMENT, net of accumulated depreciation of $123,476 and $10,519, respectively 122,351 38,790 INTANGIBLE ASSETS 101,225 -- NOTE RECEIVABLE FROM STOCKHOLDER 400,000 300,000 DEFERRED ISSUANCE COSTS -- 158,600 ------------ ------------ Total assets $ 4,124,446 $ 719,395 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) CURRENT LIABILITIES: Accounts payable and accrued liabilities $ 418,558 $ 69,116 Accrued disposal costs 646,482 441,728 Current maturities of long-term debt 40,707 4,997 Note payable to stockholder -- 400,000 ------------ ------------ Total current liabilities 1,105,747 915,841 LONG-TERM DEBT, net of current maturities 39,980 23,047 ------------ ------------ Total liabilities 1,145,727 938,888 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY (DEFICIT): Preferred stock, $.01 par value per share; 1,000,000 shares authorized, issued and outstanding at June 30, 1998 10,000 -- Common stock, voting, $.01 par value per share; 20,000,000 shares authorized at June 30, 1998; 583,940 and 5,000,000 shares issued and outstanding, respectively 5,839 50,000 Additional paid-in capital 4,287,311 98,900 Accumulated deficit (1,324,431) (368,393) ------------ ------------ Total stockholders' equity (deficit) 2,978,719 (219,493) ------------ ------------ Total liabilities and stockholders' equity (deficit) $ 4,124,446 $ 719,395 ============ ============
The accompanying notes are an integral part of these consolidated financial statements. F-3 21 SHARPS COMPLIANCE CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
For the Six Months For the Year Ended Ended June 30 December 31 -------------------------- -------------------------- 1998 1997 1997 1996 ----------- ----------- ----------- ----------- (Unaudited) REVENUES: Sales, net $ 730,034 $ 318,154 $ 830,211 $ 591,353 Consulting services and other -- -- 4,225 59,093 ----------- ----------- ----------- ----------- Total revenues 730,034 318,154 834,436 650,446 COSTS AND EXPENSES: Cost of revenues 560,071 208,172 625,238 340,370 Selling, general and administrative expenses 1,192,853 200,599 492,126 340,692 Depreciation and amortization 11,701 9,619 7,751 8,515 ----------- ----------- ----------- ----------- Operating loss (1,034,591) (100,236) (290,679) (39,131) INTEREST EXPENSE (6,061) (6,798) (7,570) (2,516) INTEREST INCOME 84,614 74 2,967 -- ----------- ----------- ----------- ----------- Net loss $ (956,038) $ (106,960) $ (295,282) $ (41,647) =========== =========== =========== =========== BASIC AND DILUTED NET LOSS PER SHARE $ (.14) $ (.04) $ (.08) $ (.01) =========== =========== =========== =========== SHARES USED IN COMPUTING BASIC AND DILUTED NET LOSS PER SHARE 6,770,216 3,000,000 3,494,520 3,000,000 =========== =========== =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. F-4 22 SHARPS COMPLIANCE CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
Sharps Compliance Corp. ----------------------------------------------------- Preferred Stock Common Stock ------------------------ ------------------------- Shares Amount Shares Amount ----------- ----------- ----------- ----------- BALANCE, December 31, 1996 -- $ -- -- $ -- Issuance of common stock for consulting services in October 1997 -- -- -- -- Net loss -- -- -- -- ----------- ----------- ----------- ----------- BALANCE, December 31, 1997 -- -- -- -- Private placement of common stock in February 1998 at $2.00 per share, net of offering costs of $161,075 -- -- -- -- Issuance of common stock in February 1998, valued at $2.00 per share, in satisfaction of note payable -- -- -- -- Reverse acquisition in February 1998 1,000,000 10,000 583,944 5,839 Net loss -- -- -- -- ----------- ----------- ----------- ----------- BALANCE, June 30, 1998 1,000,000 $ 10,000 583,944 $ 5,839 =========== =========== =========== ===========
Sharps Compliance Inc. Common Stock Additional Total ------------------------- Paid-In Accumulated Stockholders' Shares Amount Capital Deficit Equity (Deficit) ----------- ----------- ----------- ----------- --------------- BALANCE, December 31, 1996 3,000,000 $ 30,000 $ (26,100) $ (73,111) $ (69,211) Issuance of common stock for consulting services in October 1997 2,000,000 20,000 125,000 -- 145,000 Net loss -- -- -- (295,282) (295,282) ----------- ----------- ----------- ----------- ----------- BALANCE, December 31, 1997 5,000,000 50,000 98,900 (368,393) (219,493) Private placement of common stock in February 1998 at $2.00 per share, net of offering costs of $161,075 1,915,000 19,150 3,649,775 -- 3,668,925 Issuance of common stock in February 1998, valued at $2.00 per share, in satisfaction of note payable 85,000 850 169,150 -- 170,000 Reverse acquisition in February 1998 (7,000,000) (70,000) 369,486 -- 315,325 Net loss -- -- -- (956,038) (956,038) ----------- ----------- ----------- ----------- ----------- BALANCE, June 30, 1998 -- $ -- $ 4,287,311 $(1,324,431) $ 2,978,719 =========== =========== =========== =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. F-5 23 SHARPS COMPLIANCE CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months For the Year Ended Ended June 30 December 31 -------------------------- -------------------------- 1998 1997 1997 1996 ----------- ----------- ----------- ----------- (Unaudited) CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (956,038) $ (106,960) $ (295,282) $ (41,647) Adjustments to reconcile net loss to net cash provided by (used in) operating activities- Depreciation and amortization 11,701 9,619 7,751 8,515 Changes in operating assets and liabilities- (Increase) decrease in accounts receivable 79,074 21,160 (13,310) (83,561) Increase in inventory (108,190) -- (21,190) (11,425) (Increase) decrease in other current assets (24,866) 4,363 1,471 -- Increase in accounts payable and accrued liabilities 333,442 20,200 31,829 175 Increase in accrued disposal costs 204,754 54,757 252,726 151,679 ----------- ----------- ----------- ----------- Net cash provided by (used in) operating activities (460,123) 3,139 (36,005) 23,736 ----------- ----------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Cash acquired in acquisition of business 73,826 -- -- -- Note receivable from stockholder (100,000) -- (300,000) -- Purchases of property and equipment (30,262) -- (4,739) (9,496) Purchases of patents and trademark (101,225) -- -- -- Purchases of short-term investments (2,600,000) -- -- -- ----------- ----------- ----------- ----------- Net cash used in investing activities (2,757,661) -- (304,739) (9,496) ----------- ----------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from notes payable to stockholders -- 430,000 -- Payments on notes payable (232,357) (2,701) (34,703) (5,056) Net proceeds of private placement 3,827,525 -- -- -- ----------- ----------- ----------- ----------- Net cash provided by (used in) financing activities 3,595,168 (2,701) 395,297 (5,056) ----------- ----------- ----------- ----------- NET INCREASE IN CASH AND CASH EQUIVALENTS 377,384 438 54,553 9,184 CASH AND CASH EQUIVALENTS, beginning of period 67,114 12,561 12,561 3,377 ----------- ----------- ----------- ----------- CASH AND CASH EQUIVALENTS, end of period $ 444,498 $ 12,999 $ 67,114 $ 12,561 =========== =========== =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. F-6 24 SHARPS COMPLIANCE CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1998 1. ORGANIZATION AND BACKGROUND: Organization The accompanying consolidated financial statements include the accounts of Sharps Compliance Corp. (SCC) (formerly U.S. Medical Systems, Inc.) and its wholly owned subsidiaries, Sharps Compliance of Texas, Inc., d.b.a. Sharps Compliance, Inc. (Sharps), and U.S. Medical Inc. (USM) (collectively, the Company). All significant intercompany accounts and transactions have been eliminated in consolidation. On February 27, 1998, SCC and Sharps entered into an agreement and plan of reorganization (the Agreement). SCC acquired all of the issued and outstanding common stock, $.01 par value, of Sharps in consideration for the issuance of 1,000,000 shares of preferred stock, $.01 par value, such that each share of Sharps' common stock outstanding on the closing date was exchanged for 0.142858 shares of preferred stock. Under the terms of the Agreement, in July 1998, SCC's stockholders approved a 1-for-5.032715 reverse stock split of its common stock, which has been given retroactive effect in the financial statements. Simultaneously with the reverse stock split, each share of preferred stock was converted into seven shares of common stock of SCC, resulting in the existing stockholders of SCC holding 583,944 shares and the former stockholders of Sharps holding 7,000,000 shares. Had the preferred stock conversion taken place as of June 30, 1998, unaudited pro forma stockholders' equity at June 30, 1998, would have been as follows: Preferred stock $ -- Common stock 75,839 Additional paid-in-capital 4,227,311 Accumulated deficit (1,324,431) ------------ Total stockholders' equity $ 2,978,719 ============ The Agreement is treated as a reverse acquisition for accounting and financial reporting purposes. As such, Sharps is considered the accounting acquiror for accounting and financial reporting purposes, and the net assets of SCC were combined with those of Sharps at their historical basis, which approximated their fair market value on the effective date of the Agreement. Sharps has reflected the ongoing results of operations of SCC in its financial statements from the effective date of the Agreement. Set forth below are unaudited pro forma combined revenues and income data reflecting the pro forma effect of the acquisition on the Company's results of operations for the six months ended June 30, 1998 and 1997, and the year ended December 31, 1997, as if the acquisition had occurred at the beginning of each period presented. These pro forma results are not necessarily indicative of the results which would have actually occurred, nor are they necessarily indicative of future results.
Six Months Ended Year Ended June 30 December 31, ------------------------- 1998 1997 1997 ----------- ----------- ----------- Revenue $ 900,834 $ 557,154 $ 1,334,000 Net loss (945,713) (175,960) (367,000) Basic and diluted earnings per share (.14) (.05) (.09)
F-7 25 Business Sharps, which operates as a wholly owned subsidiary of SCC, provides mail disposal services for certain medical sharps products (i.e., needles, razors and syringes). Sharps' products are primarily designed to facilitate small waste generators' compliance with state and federal regulations for the disposal of medical waste. During the years ended December 31, 1997 and 1996, Sharps also provided consulting services related to medical sharps products to other entities. Although Sharps has experienced growth in revenues over the past few years, there is an inherent concentration of credit risk associated with accounts receivable arising from sales to its major customers which are primarily distributors. During the six months ended June 30, 1998, four distributors represented approximately 62 percent of sales; during the year ended December 31, 1997, three distributors represented approximately 74 percent of sales; and, during the year ended December 31, 1996, one distributor represented approximately 50 percent of sales. At June 30, 1998, four distributors comprised approximately 72 percent (or $146,700) of the total accounts receivable balance, and at December 31, 1997, three distributors comprised approximately 80 percent (or $89,741) of the total accounts receivable balance. Sharps may be affected by its dependence on a limited number of distributors. Management believes the risk is mitigated by the long-standing business relationships with and reputation of Sharps' major customers. Further, management believes the loss of any distributor does not necessarily mean the loss of the underlying customer base of that distributor for the Mail Disposal System. Sharps has sole-sourced each of its manufacturing, assembly, transportation and disposal functions. Sharps may be affected by its dependence on the suppliers of these functions. The risk is mitigated by the long-standing business relationships with and reputation of Sharps' suppliers. Although there are no assurances with regard to the future business associations after expirations of certain agreements between Sharps and its suppliers, management believes that alternative sources would be available at similar costs and terms. USM previously developed, produced and marketed products directed at the over-the-counter consumer market and products related to infection prevention for the professional dental care industry. Effective July 23, 1998, USM ceased operating as a subsidiary of SCC (see Note 10). The Company has received limited revenues to date and has incurred cumulative losses since its inception. The future success of the Company is dependent upon many factors, including environmental regulation, continuity of its license agreements, successful completion of its product development activities, the identification of and penetration of markets for its products and services, and obtaining funds necessary to complete these activities (see Note 9). 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Interim Financial Information The interim statement of operations for the six months ended June 30, 1997, is unaudited, and certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, necessary to fairly present the results of operations and cash flows with respect to the interim financial statements have been included. The results of operations for the interim period are not necessarily indicative of the results for the entire fiscal year. F-8 26 Cash Equivalents and Short-Term Investments The Company considers all highly liquid investments with a maturity of three months or less at the time of purchase to be cash equivalents. As of June 30, 1998, cash equivalents consist of certificates of deposit totaling $250,000. Short-term investments consist of certificates of deposit with original maturities greater than three months but less than one year. Short-term investments are classified as held-to-maturity and are classified at amortized cost, which approximates fair value. Inventory Inventory primarily represents finished goods and supplies and is stated at cost using the first-in, first-out method. Cost is not in excess of market. Property and Equipment Property and equipment is stated at cost less accumulated depreciation. Depreciation is computed using the straight-line method based on the estimated useful lives of the assets. Additions, improvements and renewals significantly adding to the asset value or extending the life of the asset are capitalized. Ordinary maintenance and repairs, which do not extend the physical or economic life of the property or equipment, are charged to expense as incurred. Intangible Assets Intangible assets consist of costs related to two patents acquired in June 1998. No amortization expense was recorded through June 30, 1998, as the amount was not significant. The patents will be amortized over their estimated useful lives of five years. Realization of Long-Lived Assets In accordance with Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long Lived Assets to Be Disposed Of," the Company evaluates the recoverability of property and equipment and intangible or other assets, if facts and circumstances indicate that any of those assets might be impaired. If an evaluation is required, the estimated future undiscounted cash flows associated with the asset are compared to the asset's carrying amount to determine if a write-down to market value or discounted cash flow value is necessary. Revenue Recognition Product sales are recognized as revenue when the finished product is shipped to customers. Sales are presented net of estimated refunds to customers for returned merchandise. The Company also recognizes costs, including estimated disposal costs for incineration and postage, at the time the product is shipped. Consulting revenue is recognized as the related services are performed. Income Taxes Through December 31, 1997, Sharps' stockholders elected to have Sharps taxed as an S Corporation for federal and state tax purposes, whereby the stockholders were liable for the entity's taxable income on their individual federal and state income tax returns. Accordingly, the financial statements through December 31, 1997, do not include provisions for income taxes. Effective January 1, 1998, Sharps changed its federal tax status from an S Corporation to a C Corporation and, accordingly, is now subject to federal and certain state income taxes (see Note 7). No pro forma disclosure F-9 27 reflecting income tax expense for periods prior to Sharps' changing its tax status to a C corporation has been presented as the pro forma tax expense for each period is not significant. Net Loss Per Share Earnings per share data for all periods presented has been computed pursuant to Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share," that requires a presentation of basic earnings per share (basic EPS) and diluted earnings per share (diluted EPS). Basic EPS excludes dilution and is determined by dividing income or loss available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted EPS reflects the potential dilution that could occur if securities and other contracts to issue common stock were exercised or converted into common stock. Options outstanding as of June 30, 1998 (see Note 9), have not been included in the calculation of diluted EPS as they would have an anti-dilutive effect on EPS. For the six months ended June 30, 1998, preferred shares have been included in the calculation of basic and diluted EPS on an as-converted basis (see Note 1). There are no differences in basic EPS and diluted EPS for all periods presented. Fair Value of Financial Instruments The Company considers the fair value of all financial instruments not to be materially different from their carrying values at year-end based on management's estimate of the Company's ability to borrow funds under terms and conditions similar to those of the Company's existing debt. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenue and expense during the reporting period. Actual results could differ from those estimates. Specifically, Sharps has estimated the cost and related liability for postage and incineration costs associated with the mail-back of full sharps containers for disposal. These estimates are based on Sharps' experience to date and are reflected in accrued disposal costs on the accompanying consolidated balance sheets. Future results may differ from these estimates. 3. NOTE RECEIVABLE FROM STOCKHOLDER: In November 1997, Sharps entered into a note receivable with a stockholder and officer of Sharps. The note receivable allows the officer to borrow up to $400,000 from Sharps. The note accrues interest at 8 percent per annum, and payments are due over five annual installments equal to one-fifth of the outstanding balance of principal and accrued interest. All unpaid principal and accrued interest are due in November 2002. In November 1997 and February 1998, the stockholder borrowed $300,000 and $100,000, respectively, from Sharps. Pursuant to the officer's employment agreement entered into in January 1998, an annual cash bonus will be paid to the officer equal to one-fifth of the outstanding balance of principal and interest due in 1998 and 1999, with the annual cash bonus to be paid to the officer in 2000 to be equal to the remaining principal and accrued interest due under this note agreement. At June 30, 1998, approximately $42,000 has been accrued for the portion of the annual bonus earned during the six months ended June 30, 1998. In the event the officer withdraws from the Company or is terminated, with or without cause, any remaining principal and interest will remain the obligation of the officer and continue to be due in accordance with the terms of the note agreement. F-10 28 4. PROPERTY AND EQUIPMENT: At June 30, 1998, and December 31, 1997, property and equipment consisted of the following:
June 30, December 31, Useful Life 1998 1997 ------------ ----------- ----------- Furniture and fixtures 3 to 5 years $ 42,767 $ 13,767 Equipment 5 years 81,000 -- Computers and software 3 to 5 years 91,302 4,784 Automobiles 5 years 30,758 30,758 ----------- ----------- 245,827 49,309 Less - Accumulated depreciation (123,476) (10,519) ----------- ----------- Net property and equipment $ 122,351 $ 38,790 =========== ===========
5. DEBT: In July 1995, Sharps entered into a promissory note agreement to finance the purchase of a vehicle. In October 1997, the vehicle was traded in for another vehicle and Sharps entered into a new promissory note agreement, which bears interest at 7.75 percent. The note matures in October 2002 and is due in monthly installments of $581. The acquired automobile secures the new note. The balance outstanding on the note at June 30, 1998, was $25,187 and is due as follows:
Year ending June 30- 1999 $ 5,207 2000 5,625 2001 6,077 2002 6,565 2003 1,713 -------- $ 25,187 ========
In April 1998, the Company entered into a note agreement with a vendor to purchase equipment. The note bears no interest and is due in monthly installments of $2,500 through February 2000. The note was not discounted as the discount was not significant. The balance outstanding on the note at June 30, 1998, was $55,500 and is due as follows:
Year ending June 30- 1999 $ 35,500 2000 20,000 --------- $ 55,500 =========
6. PROMISSORY NOTES WITH STOCKHOLDERS: In September 1997, Sharps entered into a $30,000 unsecured promissory note agreement with a stockholder. The principal and related accrued interest were paid in December 1997. F-11 29 In November 1997, Sharps issued an unsecured promissory note to a stockholder in the amount of $400,000. The note accrues interest at 8 percent annually with principal and interest due monthly beginning April 15, 1998. In connection with a stock offering in February 1998, Sharps retired the note by paying the stockholder $230,000 in cash and issuing the stockholder 85,000 shares of common stock valued at $2.00 per share, which was management's estimate of fair value at the date of issuance (see Note 9). 7. INCOME TAXES: Prior to January 1, 1998, Sharps maintained the status of S Corporation for federal and certain state income tax purposes. As an S Corporation, Sharps was generally not responsible for income taxes. Effective January 1, 1998, Sharps terminated its S Corporation election. Accordingly, the Company is subject to federal and state income taxes from that date forward. Effective with the termination of Sharps' S Corporation status, the Company adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes." SFAS No. 109 requires recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been included in a company's financial statements or tax returns. Under this method, deferred tax liabilities and assets are determined based on the differences between the financial statement carrying amounts and tax bases of assets and liabilities using currently enacted tax rates in effect for the years in which the differences are expected to reverse. Deferred tax assets are evaluated for realization based on a more-likely-than-not criteria in determining whether a valuation allowance should be provided. The reconciliation of the statutory federal income tax rate to the Company's effective income tax rate for the six months ended June 30, 1998, is as follows:
Statutory rate (34.0)% Increase in valuation allowance 36.2 Meals and entertainment 0.7 Other (2.9) ---------- -- % ==========
Significant components of the Company's net deferred tax asset at June 30, 1998, are as follows:
Deferred tax assets relating to- Net operating loss carryforwards $2,283,538 Accrued disposal costs 239,004 ---------- Total deferred tax assets 2,522,542 Deferred tax liability relating to- Cash to accrual adjustment (53,147) Deferred tax valuation reserve (2,469,395) ---------- Net deferred tax asset $ -- ==========
At June 30, 1998, the Company had net operating loss carryforwards for federal income tax purposes of approximately $6.2 million, of which approximately $5.6 million was acquired in the acquisition in February 1998. The Company's ability to utilize these net operating losses to reduce future taxable income may be limited upon a change of ownership and amounts of separate Company taxable income, as defined by the Internal Revenue Code. The carryforwards will begin to expire in 2008 if not otherwise used. A valuation allowance has been established to fully offset the Company's deferred tax assets due to the Company's history of losses since inception. The valuation reserve relates primarily to the Company's net losses. The Company has not made any income tax payments since inception. F-12 30 8. SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid for interest during the six months ended June 30, 1998 and 1997, and the years ended December 31, 1997 and 1996, was $6,062, $6,798, $3,706 and $2,499, respectively. The following noncash financing and investing transactions have been excluded from the consolidated statements of cash flows for the six months ended June 30, 1998 and 1997, and the years ended December 31, 1997 an 1996:
Six Months Year Ended Ended June 30 December 31 ------------------------ ----------------------- 1998 1997 1997 1996 ---------- ---------- ---------- ---------- (unaudited) Deferred issuance costs $ (158,600) $ -- $ 158,600 $ -- Trade-in of automobile and reduction of note payable -- -- 17,409 -- Purchase of equipment through issuance of note payable 66,000 -- -- -- Satisfaction of note payable through issuance of common stock 170,000 -- -- --
9. STOCKHOLDERS' EQUITY: Common Stock In October 1997, Sharps issued a total of 2,000,000 shares of common stock to two consultants for services provided. Management valued the shares at $145,000, which was management's estimate of the fair market value of the services provided. On December 12, 1997, Sharps' stockholders increased the number of authorized shares of common stock of Sharps from 1,000,000 shares to 10,000,000 shares and effected a 300-for-1 stock split of Sharps' common stock outstanding on that date. All common stock and per share information included in the accompanying financial statements has been adjusted to give retroactive effect to the split. In February 1998, Sharps completed a private placement (the Offering) of 1,915,000 shares of common stock for net proceeds of approximately $3,828,000. The proceeds from the Offering were used to support Sharps' sales and marketing program and for other working capital needs. Additionally, Sharps issued 85,000 shares of common stock in partial satisfaction of its $400,000 note payable to a stockholder (see Note 6). In February 1998, SCC acquired Sharps through the issuance of preferred stock in exchange for all of Sharps' outstanding common stock. In July 1998, the preferred stock of SCC was converted to 7,000,000 shares of common stock (see Note 1). Warrants At June 30, 1998, 40,904 warrants to purchase one-half share of common stock at $5.03 per share were outstanding. These warrants expire in January 1999 and have not been assigned a dollar value as management believes the value of the warrants was not significant at the date of issuance. F-13 31 1993 Stock Plan During 1993, SCC established the 1993 Stock Plan (the Plan) covering employees of and consultants to the Company. The Plan, as amended, provides for the granting of options, either incentive or nonstatutory, to purchase up to 1,000,000 shares of the Company's common stock. Options granted vest over a period of up to four years. Options expire five years after the date of grant. At June 30, 1998, 75,140 options with an exercise price of $3.02 per share had been granted and were exercisable. These options expire in January 2002. As of June 30, 1998, no options had been exercised or canceled, no additional grants had been made, and 924,860 shares remained available for grant under the Plan. Pursuant to the Plan, in July 1998, certain employees and consultants were granted 232,500 options with an exercise price of $2.00 per share. 10. COMMITMENTS AND CONTINGENCIES: Insurance Sharps is subject to numerous risks and uncertainties because of the nature and status of its operations. Sharps maintains insurance coverage for events and in amounts that it deems appropriate. Management believes that uninsured losses, if any, will not be materially adverse to Sharps' financial position or results of operations. Sales and Distribution Agreement On June 1, 1995, Sharps entered into a six-year exclusive agreement with American 3CI Complete Compliance Corporation (American 3CI). Among other things, Sharps has agreed to pay a per pound fee up to a maximum of $6.00 for every Sharps by Mail Disposal System (the "Mail Disposal System") that is destroyed at an American 3CI incinerator. Obligations related to Mail Disposal System units sold but not yet incinerated are estimated and included in accrued disposal costs in the accompanying balance sheets, although amounts in excess of minimum payments are not due until incineration has occurred. Payments related to this agreement during the six months ended June 30, 1998, and the years ended December 31, 1997 and 1996, were $32,641, $41,018 and $11,797, respectively. Sharps has guaranteed annual minimum payments to American 3CI of $25,000 through June 30, 2001. Sharps has the option to renew the agreement after 2002 for an additional five-year period at a rate not in excess of 20 percent more than the current disposal rate and the minimum annual payments. Distributor Agreements On August 1, 1996, Sharps entered into an agreement with Ecolab, Inc., for it to be Sharps' exclusive U.S. distributor of the Mail Disposal System in commercial and industrial markets. The price of the system remained constant for the first six months of the agreement. Thereafter, the price was and will be reviewed quarterly and adjusted upon the mutual agreement of the parties. The term of the agreement is for one year with an automatic renewal for one-year periods unless either party provides notice of termination to the other within 120 days prior to expiration of the then current term. On April 1, 1998, the Company entered into an agreement with Lukens Medical Corporation (Lukens), for the Company to be the exclusive domestic distributor of certain of Lukens' medical waste containers. The term of the agreement is for five years, with automatic renewals for two-year periods unless either party provides notice of termination to the other within 90 days prior to the expiration of the then current term. Purchases related to this agreement during the six months ended June 30, 1998 were $60,479. The Company has guaranteed annual purchase commitments under this agreement as follows: Year ending June 30- 1999 $ 157,500 2000 189,000 2001 227,000 2002 277,750 2003 233,250 ---------- Total purchase commitments $1,079,500 ========== Manufacturing Agreement On May 12, 1997, Sharps entered into an agreement with Winfield Medical (Winfield) for it to be Sharps' exclusive manufacturer of a certain line of sharps containers for one specific distributor. The prices of the containers are fixed based upon the number purchased, and Winfield may increase prices, no more than once per year, upon notice to Sharps. Effective March 16, 1998, the agreement was amended to extend its term F-14 32 through January 15, 1999, with an option to further extend the term to December 31, 1999, if certain minimum purchase requirements are established. As of June 30, 1998, these requirements had not been determined and minimal purchases under this agreement had occurred. Licensing and Purchase Agreement On August 13, 1997, Sharps entered into a letter of intent with Novo Nordisk Pharmaceutical, Inc. (Novo), for the exclusive right to develop and use molds, patents, if any, and technical know-how attributable to the manufacturing of plastic sharps containers for use by Novo. The term of the agreement is for five years with automatic renewal periods of one year, unless either party provides notice of termination to the other within 60 days prior to the expiration of the current term. Associated with this agreement, Sharps agreed to pay Novo a per unit royalty to be mutually agreed upon by the companies. At June 30, 1998, no sharps containers relating to this agreement had been sold. Sales Representation Agreements On February 21, 1995, Sharps entered into a sales representation agreement with a sales agency for promotion of the Mail Disposal System exclusively in the veterinary market. The initial term of the agreement was for a two-year period with automatic two-year renewal periods, unless either party notified the other 90 days prior to expiration of the current period of its intent to terminate. The agreement further specifies a 15 percent commission on net sales as defined in the agreement. Commission expense related to this agreement was $1,150, $3,679 and $2,589 for the six months ended June 30, 1998, and the years ended December 31, 1997 and 1996, respectively. On April 1, 1995, Sharps entered into a sales representation agreement with an independent sales agent for promotion of the Mail Disposal System. The initial term of the agreement was for a two-year period with an automatic three-year renewal unless either party notified the other in writing, 90 days prior to expiration, of its intent to terminate at the end of such period. As defined in the agreement, a 10 percent commission was to be paid to the sales representative based on net sales. This agreement was terminated effective December 31, 1997. Commission expense related to this agreement was $12,714 and $4,286 for the years ended December 31, 1997 and 1996, respectively. Operating Leases Sharps leases office space and equipment under operating lease agreements, which expire at various dates through July 2002. Rent expense for the six months ended June 30, 1998, and the years ended December 31, 1997 and 1996, was approximately $8,300, $18,100 and $11,700, respectively. Future minimum lease payments under noncancelable operating leases are as follows:
Year ending June 30- 1999 $ 50,284 2000 51,518 2001 50,060 2002 47,136 2003 3,928 --------- Total minimum lease payments $ 202,926 =========
F-15 33 Severance Agreement Effective July 22, 1998, an employment agreement with the former chief executive officer and president (former officer) of SCC was terminated. Subsequently thereafter and in connection therewith, the former officer received certain assets and assumed certain liabilities of SCC. Additionally, the former officer obtained the rights to all patents and trademarks, products, customer lists and the former corporate name of SCC and received all of the capital stock of USM, a wholly owned subsidiary of SCC (see Note 1). F-16 34 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT -------------- ---------------------- 2.1 Plan of Reorganization pursuant to Board of Directors Resolutions dated August 13, 1996. 2.2 Agreement and Plan of Reorganization dated as of February 27, 1998, between and among U.S. Medical Systems, Inc., Sharps Compliance, Inc. and its Stockholders 3.1 Certificate of Domestication of the Company 3.2 Certificate of Incorporation of Company 3.3 Certificate of Amendment 3.4 Bylaws of Company *3.5 Amended and Restated Certificate of Incorporation of U.S. Medical Systems, Inc. *3.6 Certificate of Elimination of the Series "A" Voting Convertible Preferred Stock 4.1 Escrow Agreement, dated February 7, 1992, between the Company and Pacific Corporate Trust Company ("Pacific Trust") 4.2 Form of 1992 Stock Purchase Warrant 4.3 Warrant Agreement, dated September 10, 1993 Form of Note and Waiver *4.4 Specimen Stock Certificate 10.1 Letter Agreement, dated December 15, 1991, between the Company and 406586 B. C. Ltd., Medical Polymers, a California corporation ("MP") and certain stockholder of MP 10.2 Letter Agreement, dated as of February 7, 1992, between the Company and 405586 B. C. Ltd. 10.3 Amendment to Exhibit 10.2, dated March 20, 1992 10.4 Share Purchase Agreement, dated as of February 7, 1992, between the Company, MP, and the stockholders of MP 10.5 Exclusive Technology License Agreement, dated December 14, 1990, between Dr. Marvin H. Gold and MP 10.6 Assignment, dated March 30, 1992, by Marvin H. Gold 10.7 Letter Agreement, dated March 30, 1992, between Marvin H. Gold and MP 10.8 Assignment, dated March 30, 1992, by Marvin H. Gold and Robert H. Hodam, Jr. 10.9 Letter Agreement, dated March 30, 1992, between Marvin H. Gold and MP 10.10 Letter Agreement, dated March 30, 1992, between Robert H. Hodam, Jr. and MP 10.11 Supply and Distribution Agreement, dated December 18, 1992, between Midwest Dental Products Corporation and MP 10.12 Amendment to 10.11, dated June 9, 1993 10.13 Manufacturing Agreement, dated September 10, 1992, between DPT Laboratories, Inc. and MP 10.14 Research/Development and Laboratory Services Contract, dated March 13, 1993, between NewForm Development Laboratories, Inc. and MP 10.15 Product Formulation Consulting Agreement, dated January 18, 1993, between EcoTech and MP
35
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT -------------- ---------------------- 10.16 Letter Agreement, dated September 4, 1992, between Gibraltar Biological Laboratories and MP 10.17 Amendment to Exhibit 10.16, dated October 20, 1992 10.18 Employment Agreement, dated May 22, 1994, between Lee Cooke and the Company 10.19 Consulting Agreement, dated July 1, 1993, between Parris H. Holmes, Jr. and the Company 10.20 Amendments to Exhibit 10.14, dated April 26, 1995 and August 1, 1994 10.21 Research and Development Contract dated December 22, 1993 between MGB and MP 10.22 Letter of Agreement on consulting services for stock options, dated July 1, 1994, between Wolf Group and MPTI 10.23 Amendment to Exhibit 10.22, dated March 16, 1995 10.24 Consulting Agreement, dated February 1, 1995, between Parris H. Homes, Jr. and the Company 10.25(a) Amendment to Exhibit 10.22, dated March 16, 1995 10.25(b) Amendment pursuant to Board of Directors Resolution, dated August 17, 1995 10.26(a) Form of Warrant, dated March 1, 1995 10.26(b) Form of Note, dated March 1, 1995 10.27 Employment Agreement, dated May 22, 1996, between Lee Cooke and the Company 10.28 Assignment, dated October 26, 1995, by James W. McGinity, Thomas G. Gerding and Roland Bodmeier 10.29 Employment Agreement effective January 1, 1998 by and between Sharps Compliance, Inc. and Dr. Burt Kunik, and First Amendment to Employment Agreement *10.30 Second Amendment to Employment Agreement dated May __, 1998 *10.31 Exclusive Distributorship Agreement, dated April 1, 1998 between Pro-Tec Containers, Inc. and Sharps Compliance, Inc. *10.32 Purchase Agreement between IVY Green Corporation and Sharps Compliance, Inc., dated June 19, 1998 *10.33 Lease Agreement between Lakes Technology Center, Ltd. and Sharps Compliance, Inc. dated August 1, 1998 *10.34 Severance Agreement, dated September 2, 1998, between C. Lee Cooke, Jr. and Sharps Compliance, Inc. (formerly known as - U.S. Medical Systems, Inc.) 16.1 Letter regarding Change in Certifying Accountant 16.2 Letter regarding Change in Certifying Accountant 16.3 Letter regarding Change in Certifying Accountant to Faske Lay & Co., L.L.P. 16.4 Letter regarding changes in Certifying Accountant to Arthur Andersen LLP *27.1 Financial Data Schedule
Notes: * Filed herewith. EX-3.5 2 AMENDED CERTIFICATE OF INCORPORATION U.S. MEDICAL 1 EXHIBIT 3.5 STATE OF DELAWARE SECRETARY OF STATE DIVISION OF CORPORATIONS FILED 03:45 PM 07/23/1998 981287629 - 2316242 AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF U.S. MEDICAL SYSTEMS, INC. This document constitutes an amendment and restatement of the original Certificate of Incorporation of U.S. MEDICAL SYSTEMS, INC. which was filed with the Secretary of State of Delaware on November 17, 1992 under the name Medical Polymers Technologies, Inc. and amended by (i) Certificate of Amendment to the Certificate of Incorporation filed with the Secretary of State of Delaware on August 24, 1993, (ii) Certificate of Amendment of Certificate of Incorporation filed with the Secretary of State of Delaware on December 19, 1996 and (iii) Certificate of Designation, Powers, Preferences and Rights of the Series of the Preferred Stock filed with the Secretary of State of Delaware on February 23, 1998, as corrected by Corrected Certificate of Designation, Powers, Preferences and Rights of the Series of the Preferred Stock filed with the Secretary of State of Delaware on March 5, 1998. This Amended and Restated Certificate of Incorporation was duly adopted in accordance with the provisions of Sections 242 and 245(c) of the Delaware General Corporation Law and shall become effective upon filing with the Secretary of State of Delaware. 1. The name of the corporation is SHARPS COMPLIANCE CORP. 2. The address of its registered office in the State of Delaware is 10th Floor, One Rodney Square, 10th and King Streets, in the City of Wilmington, County of New Castle. The name of its registered agent at such address is RL&F Service Corp. 3. The nature of the business or purposes to be conducted or promoted is: To manufacture, purchase or otherwise acquire, invest in, own, mortgage, pledge, sell, assign and transfer or otherwise dispose of, trade, deal in and deal with goods, wares and merchandise and personal property of every class and description. To acquire, and pay for in cash, stock or bonds of this corporation or otherwise, the good will, rights, assets and property, and to undertake or assume the whole or any part of the obligations or liabilities of any person, firm association or corporation. To acquire, hold, use, sell, assign, lease, grant licenses in respect of, mortgage or otherwise dispose of letters patent of the United States or any foreign country, patent rights, licenses and privileges, inventions, improvements and processes, copyrights, trademarks and trade names, relating to or useful in connection with any business of this corporation. To acquire by purchase, subscription or otherwise, and to receive, hold, own, guarantee, sell, assign, exchange, transfer, mortgage, pledge or otherwise dispose of or deal in and with any of the shares of the capital stock, or any voting trust certificates in respect of the shares of capital stock, scrip, warrants, rights, bonds, debentures, notes, trust receipts, and other securities, obligations, choses in action and evidences of indebtedness or interest issued or 2 created by any corporations, joint stock companies, syndicates, associations, firms, trusts or persons, public or private, or by the government of the United States of America, or by any foreign government, or by any state, territory, province, municipality or other political subdivision or by any governmental agency, and as owner thereof to possess and exercise all the rights, powers and privileges of ownership, including the right to execute consents and vote thereon, and to do any and all acts and things necessary or advisable for the preservation, protection, improvement and enhancement in value thereof. To borrow or raise money for any of the purposes of the corporation and, from time to time without limit as to amount, to draw, make, accept, endorse, execute and issue promissory notes, drafts, bills of exchange, warrants, bonds, debentures and other negotiable or non-negotiable instruments and evidences of indebtedness, or to secure the payment of any thereof and of the interest thereon by mortgage upon or pledge, conveyance or assignment in trust of the whole or any part of the property of the corporation, whether at the time owned or thereafter acquired, and to sell, pledge or otherwise dispose of such bonds or other obligations of the corporation for its corporate purposes. To purchase, receive, take by grant, gift, devise, bequest or otherwise, lease, or otherwise acquire, own, hold, improve, employ, use and otherwise deal in and with real or personal property, or any interest therein, wherever situated and to sell, convey, lease, exchange, transfer or otherwise dispose of, or mortgage or pledge, all or any of the corporation's property and assets, or any interest therein, wherever situated. In general, to possess and exercise all the powers and privileges granted by the General Corporation Law of Delaware or by any other law of Delaware or by this certificate of incorporation together with any powers incidental thereto, so far as such powers and privileges are necessary or convenient to the conduct, promotion or attainment of the business or purposes of the corporation. The business and purposes specified in the foregoing clauses shall, except where otherwise expressed, be in no way limited or restricted by reference to, or inference from, the terms of any other clause in this certificate of incorporation, but the business and purposes specified in each of the foregoing clauses of this article shall be regarded as independent business and purposes. 4A. GENERAL. The corporation shall have authority to issue two classes of stock, and the total number authorized shall be Twenty Million (20,000,000) shares of Common Stock of the par value of One Cent ($0.01) each, and one million (1,000,000) shares of Preferred Stock of the par value of One Cent ($0.01) each. All shares of the Common Stock shall rank equally and all shares of the Preferred Stock shall rank equally, and be identical in all respects regardless of series, except with respect to the Preferred Stock (i) as to terms which may be specified by the board of directors pursuant to the provisions of Section B of this Article 4, and (ii) that shares of any one series issued at different times may differ as to the dates from which dividends thereon shall accrue and be cumulative. A description of the different classes of stock of the corporation and a statement of the designations and the powers, preferences and rights, and the qualifications, limitations or restrictions thereof, in respect of each class of such stock are as follows: 3 4B. ISSUANCE IN SERIES. The Preferred Stock may be issued from time to time in one or more series. The terms of a series shall be as specified in the resolution or resolutions adopted by the board of directors providing for the issue of such series, which resolution or resolutions the board of directors is hereby expressly authorized to adopt. Such resolution or resolutions with respect to a series shall specify, if applicable: (a) the number of shares to constitute such series and the distinctive designation thereof; (b) the annual dividend rate on the shares of such series and the date or dates from which dividends shall accrue, whether such dividends shall be cumulative, and, if cumulative, the date or dates from which dividends shall accumulate; (c) the time or times and price or prices of redemption, if any, of the shares; (d) the terms and conditions of a retirement or sinking fund, if any, for the purchase or redemption of the shares; (e) the amount which the shares shall be entitled to receive in the event of any liquidation, dissolution or winding up of the corporation; (f) the terms and conditions, if any, on which the shares shall be convertible into, or exchangeable for, shares of stock of any other class or classes, or other series of the same class, of the corporation; (g) the voting rights, if any, of shares of stock in addition to those granted herein; (h) the status as to reissuance or sale of such shares redeemed, purchased or otherwise reacquired, or surrendered to the corporation on conversion; (i) the seniority of such series in relation to the Common Stock or to any other series of Preferred Stock in respect of the payment or declaration of dividends, redemptions and payments upon liquidation; (j) the conditions and restrictions, if any, on the payment of dividends or on the making of other distributions on, or the purchase, redemption or other acquisition by the corporation or any subsidiary, of Common Stock or of any other class of stock of the corporation ranking junior to such shares as to dividends or upon liquidation; and (k) such other preferences, rights, restrictions and qualifications as shall not be inconsistent herewith. 4C. DIVIDENDS. Subject to the provisions and on the conditions set forth herein, or in any resolution or resolutions providing for the issue of a series of Preferred Stock, such dividends (payable in cash, stock or otherwise) as may be determined by the board of directors may be declared and paid on the Common Stock from time to time out of any funds legally available therefor. 4D. LIQUIDATION, DISSOLUTION OR WINDING UP. In the event of any liquidation, dissolution or winding up of the affairs of the corporation, after payment to the holders of Preferred Stock of the amount to which they are entitled pursuant to any resolution or resolutions of the board of directors providing for t he issue of a series of Preferred Stock, the holders of Common Stock shall be entitled to share ratably in all assets then remaining and subject to distribution to the stockholders. 4E. GENERAL VOTING RIGHTS. Except when otherwise required by law or as otherwise specifically provided herein or in any resolution of the board of directors providing for the issuance of any particular series of Preferred Stock the exclusive voting power of the corporation shall be vested in the Common Stock of the corporation. Each share of Common Stock shall entitle the holder thereof to one vote at all meetings of the stockholders of the corporation. 4F. SERIES A 10% VOTING CONVERTIBLE PREFERRED STOCK. The corporation is authorized to issue up to 1,000,000 shares Series A 10% Voting Convertible Preferred Stock (such Preferred 3 4 Stock hereinafter being referred to as the "Series A Preferred Stock"). The designations, powers, preferences and relative, participating, optional and other special rights, and qualifications, limitations and restrictions thereof, with respect to the Series A Preferred Stock are as set forth in EXHIBIT "A" attached hereto and incorporated herein for all purposes. 4G. REVERSE STOCK SPLIT. On July 24, 1998, each 5.032715 issued and outstanding shares of previously authorized Common Stock, par value one cent ($.01) per share, of the corporation ("Pre-split Common Stock"), shall thereby and thereupon be combined into one (1) validly issued, fully paid and nonassessable share of Common Stock, par value one cent ($.01) per share, of the corporation ("Post-split Common Stock"). Each certificate that theretofore represented shares of Pre-split Common Stock shall thereafter represent that number of shares of Post-split Common Stock into which the shares of Pre-split Common Stock represented by such certificate shall be combined; provided, however, that each person holding of record a stock certificate or certificates that represented shares of Pre-split Common Stock shall receive, upon surrender of such certificate or certificates, a new certificate or certificates evidencing and representing the number of shares of Post-split Common Stock to which such person is entitled, and provided further that the corporation shall not issue fractional shares with respect to the combination. Each stockholder will receive cash for each fractional interest resulting from such division. 5. The corporation is to have perpetual existence. 6. In furtherance and not in limitation of the powers conferred by the General Corporation Law of Delaware, the board of directors is expressly authorized: To make, alter or repeal the by-laws of the corporation; To authorize and cause to be executed mortgages and liens upon the real and personal property of the corporation; To set apart out of any of the funds of the corporation available for dividends a reserve or reserves for any proper purpose and to abolish any such reserve in the manner in which it was created; By a majority of the whole board, to designate one or more committees, each committee to consist of one or more of the directors of the corporation. The board may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. The by-laws may provide that in the absence of disqualification of a member of a committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the board of directors to act at the meeting in the place of any such absent or disqualified member. Any such committee, to the extent provided in the resolution of the board of directors, or in the by-laws of the corporation, shall have and may exercise all the powers and authority of the board of directors in the management of the business and affairs of the corporation, and may authorize the seal of the corporation to be affixed to all papers which may require it; but no such committee shall have the power of authority in 4 5 reference to amending the certificate of incorporation, adopting an agreement of merger or consolidation, recommending to the stockholders the sale, lease or change of all or substantially all of the corporation's property and assets, recommending to the stockholders a dissolution of the corporation or a revocation of a dissolution, or amending the by-laws of the corporation; and unless the resolution or by-laws expressly so provide, no such committee shall have the power or authority to declare a dividend or to authorize the issuance of stock. When and as authorized by the stockholders in accordance with statute, to sell, lease or exchange all or substantially all of the property and assets of the corporation, including its good will and its corporate franchises, upon such terms and conditions and for such consideration, which may consist in whole or in part of money or property including shares of stock in, and/or other securities of any other corporation or corporations, as its board of directors shall deem expedient and for the best interests of the corporation. 7. Elections of directors need not be by written ballot unless the by- laws of the corporation shall so provide. 8. Meetings of the stockholders may be held within or without the State of Delaware, as the by-laws may provide. The books of the corporation may be kept (subject to any provisions contained in the General Corporation Law of Delaware) outside the State of Delaware at such place or places as may be designated from time to time by the board of directors or in the by-laws of the corporation. 9. The corporation reserves the right to amend, alter, change or repeal any provision contained in this certificate of incorporation, in the manner now or hereafter prescribed by statute, and all rights conferred upon stockholders herein are granted subject to this reservation. 10. A director of this corporation shall not be personally liable to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the Delaware General Corporation Law, or (iv) for any transaction from which the director derived in improper benefit. IN WITNESS WHEREOF, U.S. MEDICAL SYSTEMS, INC. has caused its corporate seal to be hereunto fixed and this Certificate to be signed by Burt Kunik, its Chief Executive Officer and President, this 23rd day of July, 1998. U.S. MEDICAL SYSTEMS, INC. By: /s/ Burt Kunik ----------------------------------------- Name: Burt Kunik Title: Chief Executive Officer and President 5 6 EXHIBIT "A" TERMS OF SERIES A 10% VOTING CONVERTIBLE PREFERRED STOCK A. DESIGNATION OF THE SERIES. There shall be a series of Preferred Stock to be known as "Series A 10% Voting Convertible Preferred Stock" consisting of 1,000,000 shares of Preferred Stock having a par value of $0.01 per share (the "Shares"). Such shares shall constitute the entire Series A Preferred Stock, and no other shares of such Series shall be issued. B. DIVIDENDS. The holders of shares of Series A Preferred Stock shall be entitled to receive, if and when declared by the Board of Directors from funds legally available therefor, cash dividends at the rate of $0.05 per share per annum, payable quarterly on the last day of the months April, July, October and January in each year. In the event a dividend is declared, but unpaid, such dividend shall accrue and be cumulative (whether or not in any quarterly dividends period there shall be funds of the Company legally available for the payment of such dividend) from the first day of July 1998 (unless such day is not a business day, in which event on the next business day), and thereafter from the date of the last quarterly dividend date to which dividends were declared and paid on the Preferred Stock of the Company. Each such dividend shall be paid to the holders of record of the shares of Preferred Stock as they appear on the stock register of the Company on the last day of the month next preceding the payment date thereof. Dividend on account of arrears for any past dividend periods may be declared and paid at any time, without reference to any regular dividend payment date, to holders of record on such date, not exceeding forty-five (45) days preceding the payment date hereof, as may be fixed by the Board of Directors, of the Company or by a committee of said Board of Directors duly authorized to fix such date. Dividends payable on the Preferred Stock for each full quarterly dividends period shall be computed by dividing the annual rate by four (4). Dividends payable on the Preferred Stock for any period less than a full quarterly dividend period and, for the initial dividend period, shall be computed on the basis of a 360-day year of four (4) 90-day quarters, and the actual number of days elapsed on the period for which payable, including the date of the payment. C. CONVERSION. The Series A Preferred Stock shall automatically and immediately be converted into fully paid and nonassessable shares of Common Stock of the Company, without any action or election on the part of the holder thereof, immediately after the Company has effected a one-for-five or greater reverse stock split of its Common Stock ("Automatic Conversion Date"). In addition, so long as the Company has sufficient authorized and unissued shares of Common Stock, each share of Series A Preferred Stock shall be convertible at the option of the holder thereof into the number of fully paid and nonassessable shares of Common Stock provided below. The holders of Series A Preferred Stock hereby acknowledge that as of the date hereof, the Company does not have sufficient authorized and unused shares of Common Stock to effect a conversion of the Series A Preferred Stock into Common Stock. The term "Common Stock" shall refer to the Common Stock, $0.01 par value per share of the Company, as constituted on January 30, 1998, and any stock into which such Common Stock shall have been changed or any stock resulting from any reclassification of such Common Stock. A-1 7 1. CONVERSION RATE. At the Automatic Conversion Date, or upon the exercise of the option to convert described above, each share of Series A Preferred Stock shall be converted into seven (7) shares of Common Stock, as adjusted and readjusted from time to time in accordance with the terms and provisions hereof (the "Conversion Rate"). 2. METHOD OF CONVERSION. As soon as feasible, but in no event later than five (5) days, after the Automatic Conversion Date, the Company shall mail a notice to each holder of record of the shares of the Series A Preferred Stock on the Automatic Conversion Date of the occurrence thereof and informing each holder of the conversion and the number of shares of Common Stock into which such holder's shares of the Series A Preferred Stock shall have been converted. In the event the holder desires to exercise the option to convert, the holder shall give written notice to the Company at its principal corporate office of the election to convert the same. The Company or its transfer agent shall also inform the holder of the procedures for exchanging the certificate or certificates representing shares of Series A Preferred Stock for certificates representing the shares of Common Stock into which the Series A Preferred Stock shall have been converted. Until surrendered to the Company, each outstanding certificate which, prior to the conversion, represents shares of the Series A Preferred Stock will, following such conversion, be deemed for all corporate purposes of the Company to evidence ownership of the number of shares of Common Stock into which the shares of the Series A Preferred Stock shall have been converted. After the Automatic Conversion Date there shall be no further registry of transfers on the records of the Company of the shares of Series A Preferred Stock, and if a certificate representing such shares is presented to the Company, it shall be canceled and exchanged for a certificate representing the number of shares of Common Stock as herein provided. 3. FRACTIONAL SHARES. No fractional shares shall be issued upon the conversion of any shares, share or fractional share of Series A Preferred Stock. All shares of Common Stock, including fractions thereof, issued upon conversion of shares (or fractions thereof) of Series A Preferred Stock by the holder thereof shall be aggregated for purposes of determining whether the conversion would result in the issuance of fractional shares. If, after the aforementioned aggregation, the conversion would result in the issuance of a fractional share of Common Stock, the Company shall, in lieu of issuing any fractional share, pay the holder otherwise entitled to such fraction a sum in cash equal to the Closing Bid Price of the Company's Common Stock on the Nasdaq Bulletin Board on the Automatic Conversion Date multiplied by such fraction. D. VOTING. Prior to the Automatic Conversion Date, and except as otherwise provided by law, the holders of the Series A Preferred Stock will be entitled to 35.190319 votes per share of Series A Preferred Stock, subject to adjustment in accordance with Subsection E below, on all matters subject to a vote of stockholders of the Company, without any regard to classification or series. E. STOCK DISTRIBUTIONS, SPLITS AND COMBINATIONS; ADJUSTMENTS. In case (i) the outstanding shares of Common Stock (or other securities) shall be subdivided into a greater number of shares, (ii) a non-cash dividend in Common Stock (or other securities) shall be paid in A-2 8 respect of Common Stock (or other securities), or (iii) the outstanding shares of Common Stock (or other securities) shall be combined into a smaller number of shares thereof, the number of shares of Common Stock or other securities into which the Preferred Stock (subsequent to such subdivision or combination or at the record date of such dividend or distribution) shall (simultaneously with the effectiveness of such subdivision or combination or immediately after the record date of such dividend or distribution) be convertible into shall be equal to the number of shares of Common Stock or other securities a holder would have owned and had a right to receive as a result of such subdivision, combination, dividend or distribution, if such holder had actually held of record (immediately prior to the effectiveness of such subdivision or combination or immediately prior to the record date of such dividend or distribution) the number of shares of Common Stock or other securities that would have been subject to receipt by the holders upon conversion of the Series A Preferred Stock immediately prior to the effectiveness of such subdivision or combination or the record date of such dividend or distribution. F. LIQUIDATION RIGHTS. In the event of any liquidation or dissolution or winding up of the Company, voluntary or involuntary, the holders of the Series A Preferred Stock shall be entitled to receive, subject to the rights of any other class of stock which makes senior to the Preferred Stock as to distribution of assets on liquidation, but before any distribution is made on any class of stock ranking junior to the Series A Preferred Stock as to the payment of dividends or the distribution of assets, the sum of $4.00 per share, plus any arrearages in dividends thereon. 6. REDEMPTION RIGHTS. There shall be no right of redemption by the holders of the Preferred Stock, except as may be determined by the Board of Directors and approved by a majority of the holders of the Preferred Stock. A-3 EX-3.6 3 CERTIFICATE OF ELIMINATION - SERIES A CONV. PREF. 1 EXHIBIT 3.6 STATE OF DELAWARE SECRETARY OF STATE DIVISION OF CORPORATIONS FILED 10:00 AM 08/14/1998 981319471 - 2316242 CERTIFICATE OF ELIMINATION OF THE SERIES A 10% VOTING CONVERTIBLE PREFERRED STOCK OF SHARPS COMPLIANCE CORP. Pursuant to Section 151(g) of the General Corporation Law of the State of Delaware Sharps Compliance Corp., a corporation organized and existing under the laws of the State of Delaware (the "Company"), in accordance with the provisions of Section 151(g) of the General Corporation Law of the State of Delaware, hereby certified as follows: 1. That, pursuant to Section 151 of the General Corporation Law of the State of Delaware and authority granted in the Certificate of Incorporation of the Company, as theretofore amended, the Board of Directors of the Company, by resolution duly adopted, authorized the issuance of a series of One Million (1,000,000) shares of Series A 10% Convertible Preferred Stock, par value $0.01 per share (the "Series A Preferred Stock"), and established the voting powers, designations, preferences and relative, participating and other rights, and the qualifications, limitations or restrictions thereof, and, on February 23, 1998, filed a Certificate of Designation (the "Certificate of Designation") with respect to such Series A Preferred Stock in the office of the Secretary of State of the State of Delaware. 2. That no shares of said Series A Preferred Stock are outstanding and no shares thereof will be issued subject to said Certificate of Designation. 3. That the Board of Directors of the Company has adopted the following resolutions: WHEREAS, by Unanimous Written Consent dated February 18, 1998, the Board of Directors of the Company authorized the issuance of a series of One Million (1,000,000) shares of Series A 10% Convertible Preferred Stock, par value $0.01 per share (the "Series A Preferred Stock"), and established the voting powers, designations, preferences and relative, participating and other rights, and the qualifications, limitations or restrictions thereof, and, on February 23, 1998, filed a Certificate of Designation (the "Certificate of Designation") with respect to such Series A Preferred Stock in the office of the Secretary of State of the State of Delaware; WHEREAS, as of the date hereof no shares of Series A Preferred Stock are outstanding and no shares of such Series A Preferred Stock will be issued subject to said Certificate of Designation; and WHEREAS, it is desirable that all matters set forth in the Certificate of Designation with respect to such Series A Preferred Stock be 2 eliminated from the Certificate of Incorporation, as heretofore amended, of the Company; NOW, THEREFORE, IT IS HEREBY RESOLVED, that as of the date hereof no shares of such Series A Preferred Stock are outstanding and no shares of such Series A Preferred Stock will be issued subject to said Certificate of Designation; FURTHER RESOLVED, that all matters set forth in the Certificate of Designation with respect to such Series A Preferred Stock be eliminated from the Certificate of Incorporation, as heretofore amended, of the Company; and FURTHER RESOLVED, that the officers of the Company be, and hereby are, authorized and directed to file a Certificate with the office of the Secretary of State of the State of Delaware setting forth a copy of these resolutions whereupon all matters set forth in the Certificate of Designation with respect to such Series A Preferred Stock shall be eliminated from the Certificate of Incorporation, as heretofore amended, of the Company. 4. That, accordingly, all matters set forth in the Certificate of Designation with respect to such Series A Preferred Stock be, and hereby are, eliminated from the Certificate of Incorporation, as heretofore amended, of the Company. IN WITNESS WHEREOF, SHARPS COMPLIANCE CORP. has caused this Certificate to be signed by Burt Kunik, its Chief Executive Officer and President, as of this ____ day of August, 1998. SHARPS COMPLIANCE CORP. By: /s/ Burt Kunik -------------------------------------- Name: Burt Kunik Title: Chief Executive Officer and President EX-4.4 4 SPECIMEN STOCK CERTIFICATE 1 EXHIBIT 4.4 INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE NUMBER SHARPS COMPLIANCE CORP. SHARES ----------------- CUSIP 820017 10 1 ----------------- THIS CERTIFIES THAT is the registered holder of FULLY PAID AND NON-ASSESSABLE SHARES OF COMMON STOCK WITH A PAR VALUE OF $0.01 PER SHARE. in the Capital of the above named Corporation transferable on the books of the Corporation by the registered holder in person or by Attorney duly authorized in writing upon surrender of this certificate properly endorsed. This certificate and the shares represented hereby are subject to the laws of the State of Delaware, and to the Articles of Incorporation and Bylaws of the Corporation, as now or hereafter amended. This certificate is not valid unless countersigned by the Transfer Agent and Registrar of the Corporation. IN WITNESS WHEREOF the Corporation has caused this certificate to be signed on its behalf by the facsimile signatures of its duly authorized officers. DATED /s/ Burt Kunik COUNTERSIGNED AND REGISTERED - -------------------- PACIFIC CORPORATE SERVICES LTD. VANCOUVER President TRANSFER AGENT AND REGISTRAR /s/ [ILLEGIBLE] - -------------------- By SPECIMEN Secretary ------------------------------------------ Authorized Officer The Shares represented by this Certificate are transferable at the offices of Pacific Corporate Services Ltd., Vancouver, B.C. 2 FOR VALUE RECEIVED the undersigned hereby sells, assigns and transfers unto PLEASE INSERT SOCIAL INSURANCE NUMBER OF TRANSFEREE --------- --------- --------- - - --------- --------- --------- - ------------------------------------------------------------------------------- (Name and address of transferee) - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------ shares registered in the name of the undersigned on the books of the Corporation named on the face of this certificate and represented hereby, and irrevocably constitutes and appoints - ------------------------------------------------------------------ the attorney of the undersigned to transfer the said shares on the register of transfers and books of the Corporation with full power of substitution hereunder. DATED: - ---------------------------------- ----------------------------------- (Signature of witness) (Signature of Stockholder) NOTICE: The signature of this assignment must correspond with the name as written upon the face of the certificate, in every particular, without alteration or enlargement, or any change whatsoever, and must be guaranteed by a bank, trust company or a member of a recognized stock exchange. Signature Guaranteed By: EX-10.30 5 2ND AMEND. EMPLOYMENT CONTRACT - BURT KUNIK 1 EXHIBIT 10.30 SECOND AMENDMENT TO EMPLOYMENT AGREEMENT This Second Amendment to Employment Agreement (the "Second Amendment") dated May _____, 1998 by and among Sharps Compliance, Inc., a Texas Corporation, with its principle offices located at 8928 Kirby Drive, Houston, Texas 77054 (hereinafter referred to as "Employer"), and Dr. Burt Kunik, a resident of Harris County, Texas (hereinafter referred to as "Employee"), and hereby amends that certain Employment Agreement entered into effective the 1st day of January, 1998 by and between Employer and Employee (the "Agreement") and hereby amends that certain First Amendment entered into effective the ____ day of April, 1998 by and between Employer and Employee (the "First Amendment"). W I T N E S S E T H WHEREAS, Employer and Employee have previously entered into the certain Employment Agreement and First Amendment. WHEREAS, Employer and Employee hereby desire to further amend the Employment Agreement in accordance with those terms and conditions provided herein by entering into this Second Amendment. THEREFORE, in consideration of the covenants mutual benefits contained herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto, intend to be legally bound, hereby agree as follows: 1. AMENDMENT TO SECTION 3.3 OF THE AGREEMENT. Section 3.3 of the Agreement, as amended, is hereby deleted in its entirety. 2. ENFORCEABILITY OF REMAINING PROVISION. All other provisions of the Agreement and First Amendment shall remain in full force and effect and any inconsistencies between this Second Amendment, First Amendment and the Agreement shall be construed in favor of this Second Amendment. Executed as of the date first written above. COMPANY: SHARPS COMPLIANCE, INC. By: /s/ John Dalton --------------------------------------- Printed Name: John Dalton Title: Board of Director EMPLOYEE: DR. BURT KUNIK /s/ Dr. Burt Kunik --------------------------------------- Dr. Burt Kunik EX-10.31 6 EXCLUSIVE DISTRIBUTORSHIP AGREEMENT 1 EXHIBIT 10.31 EXCLUSIVE DISTRIBUTORSHIP AGREEMENT Agreement made this 1st day of April 1998, between Pro-Tec Containers, Inc., a division of Lukens Medical Corporation, a corporation organized and existing under the laws of the State of New Mexico, (the "Company") and Sharps Compliance, Inc., a corporation organized and existing under the laws of Texas, (the "Distributor"). WHEREAS, the Company is engaged in the business of developing, manufacturing, importing and marketing various medical products; and WHEREAS, the Company is desirous of increasing sales of its products in the human healthcare market through the use of a distributor; and WHEREAS, the Distributor wishes to engage in the business of purchasing and reselling certain of the Company's products to certain of the healthcare market in certain geographical areas, NOW, THEREFORE, in consideration of these premises and the mutual covenants contained herein, the parties hereby agree as follows: l. Definitions. 1.1 Customers shall mean all industrial and healthcare facilities, and diabetic patients. 1.2 Products shall mean the items set forth on Schedule A attached hereto, as amended from time to time. 1.3 Territory shall mean the countries or geographical areas set forth on Schedule B attached hereto, as amended from time to time. In the event any governmental agency in the Territory shall impose new or additional currency restrictions, monetary or exchange controls, export or import regulations, custom levies or other taxes or, through legislation, ordinance, regulation, decree or treaty, shall impose conditions or restrictions that shall take effect during the term hereof and that, in the reasonable opinion of the Company affect materially the commercial feasibility of the transactions contemplated by this Agreement, the Company shall have the right, to unilaterally delete the affected country, state or jurisdiction from the Territory upon ninety (90) days prior written notice to the Distributor and the Company shall have the same limitation as set forth in Section 9 below. 2. Term. 2.1 Commencement. Unless earlier terminated as provided herein, this Agreement shall commence on the date hereof and shall terminate five (5) years from such date. Notwithstanding the foregoing, if the Exclusivity Period (Section 3.2) does not commence prior to 1 2 June 1st 1998, this Agreement shall at the option of the Company, upon thirty (30) days prior written notice, terminate, in which event the provisions of Section 4.2, shall be applicable. 2.2 Minimum Purchases. If the Distributor violates the provisions of Section 7.3(a) relating to annual minimum purchase, and Distributor does not cure within thirty (30) days of receipt of written notice from the Company, the Company shall have the right to terminate the exclusivity in Section 2.2 with ninety (90) days notice to the Distributor. 3. Appointment; Exclusivity and Non-Competition. 3.1 Appointment. Subject to the terms and conditions hereof, the Company hereby appoints Distributor as its exclusive distributor of Products to Customers, and the Distributor accepts appointment as the Company's exclusive distributor to purchase Products from the Company for resale and delivery to Customers in the Territory. 3.2 Exclusivity and Non-Competition. So long as this Agreement shall be in effect, the Company shall refrain from selling Products to any new Customers in the Territory and shall refer to the Distributor all inquiries and orders for Products originating from the new Customers within the Territory, (the "Exclusivity Period"). The Company shall have the right to fill orders outstanding on the date thereof from Customers within the Territory and shall refer all new and existing Customers of the Company to Distributor. During the Exclusivity Period, the Company shall not appoint any new distributor or sales agent for Products whose responsibilities include Customers within the Territory. During the term of this Agreement, the Distributor shall not manufacture, sell or promote for sale in the Territory any product, or part or component thereof, which is the same in size to and has a wide mouth opening of at least three inches (3") or larger as currently found in any of the Products. 3.3 Renewal. So long as the Distributor remains in substantial compliance with each of the material terms of this Agreement, including the provisions of Sections 6.3 and 7.3 hereof relating to payment and minimum purchases respectively, the term of this Agreement shall be automatically renewed for successive two (2) year periods unless terminated by either party upon written notice given at least ninety (90) days prior to the end of the applicable term. 4. Relationship of the Parties. 4.1 Relationship of the Parties. The relationship between the Company and the Distributor shall be that of seller and buyer. Nothing herein shall be construed to create the relationship of employer and employee, master and servant, or principal and agent between the parties hereto, and the Distributor shall be deemed to be an independent contractor at all times with respect to its performance hereunder. The Distributor shall have no right or authority to assume or create any obligation, express or implied, or to make any warranty or representation on behalf of the Company. The Company shall have no right or authority to assume or create any obligation, express or implied, or make any warranty or representation on behalf of the Distributor. 2 3 5. Orders and Shipments. 5.1 Purchase Orders. It is expressly agreed that no printed terms and conditions contained in any purchase order or similar form submitted at any time by the Distributor on the Distributor's form to the Company shall be binding on the Company even though orders given on such forms have previously been accepted or filled by the Company. The terms and conditions stated in the Company's forms and invoices and/or acceptances of the Distributor's orders, together with the terms and conditions stated herein shall govern each sale by the Company to the Distributor hereunder, and, if no terms and conditions appear on such forms, invoices or acceptances, then the terms of this Agreement shall govern. 5.2 Confirmation. Upon receipt of each Purchase Order, the Company shall promptly confirm same in accordance with its usual form or shall advise the Distributor that it cannot accept such Purchase Order. The company shall also advise the Distributor of any excessive lead times and the Distributor shall at that time have the option of canceling orders for line items with excessive (greater than sixty (60) days ) lead times. 5.3 Forecasts. Within fourteen (14) days prior to the first day of each calendar quarter during the term hereof, the Distributor shall send the Company a report with a non-binding forecast of the quantity of Products, by Product code, that the Distributor expects to order in each of the subsequent six (6) months. Such forecasts shall be updated by the Distributor in successive quarterly reports. Failure to provide such forecast shall not be a breach of this Agreement, but may affect the ability of the Company to deliver the requested quantity for the applicable quarter. 5.4 Cancellation. The Company shall have the right to delay shipment if the Distributor is not in compliance with Section 6.3 below. Such withholding of shipments by the Company shall not be construed as a termination or breach of this Agreement by the Company nor shall it relieve the Distributor of its obligations under Section 7.3. Except as elsewhere provided herein, and unless otherwise specified in the Distributor's Purchase Order, shipments shall be by common carrier selected by the Company. Title to all Products sold by the Company to the Distributor shall pass to the Distributor and delivery shall be completed when made F.0.B. the Distributor's loading dock. The Distributor shall pay all applicable transportation and insurance costs. 6. Price and Payment. 6.1 Purchase Price. The initial purchase price to be paid by the Distributor for Products purchased by it shall be as set forth on Schedule C attached hereto. All amounts payable under this Agreement shall be paid in U.S. dollars at the office of the Company. 6.2 Price Changes. The Company shall have the right from time to time upon ninety (90) days' prior written notice to the Distributor to change the prices of any or all Products. 3 4 Price changes shall be effective for all Products ordered for delivery on or after the effective date specified in the notice of such change. Price increases shall be negotiated on an annual basis. There will be no price increases for the first twelve (12) months of the Agreement. 6.3 Payment. The Distributor shall pay the Company for all Products sold to it payable with a 2% discount if paid within ten (10) days, or net thirty (30) days after the date of the relevant, bill of lading. These terms may only be amended by the Company in writing. Any amounts due the Company which are not paid within such period shall accrue interest at the rate of one and one-half percent (1 1/2%) each month. 7. Duties of the Distributor. 7.1 Sales Effort. The Distributor agrees to use reasonable efforts to maximize sales of Products to Customers in the Territory and to provide Customers with satisfactory service reasonably expected by such purchasers. 7.2 Minimum Purchases. During each year of the term hereof Distributor shall purchase from the Company and pay for Products in an amount at least equal to the Distributor's assigned quota (the "Guaranteed Minimum") as shown on Schedule D for such year. 7.3 Compliance With Laws. The Distributor agrees to comply with all applicable laws, ordinances, rules and regulations relating in any way to its performance hereunder, to obtain all necessary import licenses, permits or governmental approvals necessary for the importation and distribution of Products in the Territory, and to pay all applicable taxes, fees, charges and assessments imposed by any governmental authority in connection with the distribution of the Products in the Territory. The Distributor agrees to defend, Indemnify and hold harmless the Company from and against any and all damages or expenses, including reasonable attorneys' fees, incurred directly as a consequence of the Distributor's failure to comply with any such laws, ordinances, rules or regulations. This obligation shall survive the termination of this Agreement for one (1) year. 7.4 No Representation. The Distributor agrees to make no representations, guarantees or warranties concerning the Products which have not been authorized in writing by the Company, and agrees to defend, indemnify and hold harmless the Company from and against any and all damages or expenses, including reasonable attorneys' fees, incurred directly as a result of a breach of the provisions of this Section 7.7. This obligation shall survive the termination of this Agreement for six months. 8. Duties of the Company. 8.1 Quantities. The Company shall promptly ship Products to the Distributor in accordance with purchase orders accepted by the Company. In the event that orders for Products 4 5 exceed the Company's ability to promptly manufacture and deliver them, the Company will take all reasonable steps necessary to secure additional production, including retention of sub-contractors. If the Company cannot meet Distributor's demand for two (2) consecutive months, Distributor shall be entitled to secure Products from third parties until production demands can be met by the Company. 8.2 Labeling. All Products supplied to Distributor hereunder shall bear the Company's trademarks and trade names specified by it. 8.3 Quality Standards. All Products shall be manufactured by the Company in a good and workmanlike manner of good quality material made for the purpose to pass U.S. Postal Service specifications for permit. 8.4 Compliance With Laws. The Company agrees to comply with all applicable laws, ordinances, rules and regulations relating in any way to its performance hereunder, and to pay all applicable taxes, fees, charges and assessments imposed by any governmental authority in connection with the distribution of the Products in the Territory. The Company agrees to defend, Indemnify and hold harmless the Distributor from and against any and all damages or expenses, including reasonable attorneys' fees, incurred directly as a consequence of the Company's failure to comply with any such laws, ordinances, rules or regulations. This obligation shall survive the termination of this Agreement for one (1) year. 8.5 Products Liability Insurance. Lukens shall maintain product liability insurance to cover the Products being sold by Lukens and shall carry a broad form vendor's endorsement naming the Distributor as an additional insured. 9. Product Changes/Deletions. The Company reserves the right at any time or from time to time upon ninety (90) days' notice to discontinue the sale of any or all of the Products and parts thereof, and to change the design of the Products and parts thereof, without notice to the Distributor, and the Distributor shall have no claim for damages against the Company as a result of any such change, or discontinuance. If the Company discontinues sales of the Products for any reason, and subsequently begins producing Products within one (1) year of discontinuation, the Company shall grant the Distributor the right to enter into a new Agreement on the same terms as provided herein. 10. Trademarks, Trade Names and Copyrights. 10.1 Distributor. The Distributor may state in its advertising that it is an authorized "Pro-Tec", "Lukens" or "Lukens Medical Corporation" distributor. 10.2 No Removal. The Distributor shall not under any circumstances remove or alter (i) any trademark of the Company affixed to any Product or (ii) any carton, container or literature supplied by the Company with such Product. 5 6 10.3 Approval. Any advertising, packaging or promotional or display material, including Distributor's catalog, prepared by or to be used by or for Distributor, which refers in any to the Company, bears any Company trademark, or uses any material copyrighted by the Company, shall be subject to-the prior written approval of the Company as to the use of such reference, trademark, or copyrighted material. 10.4 Acknowledgment. The Distributor acknowledges the Company's title to the name "Lukens" and "Lukens Medical Corporation" and all other trademarks and trade names of the Company (including those with respect to the Products), and all copyrights used in connection with such trademarks and trade names (collectively, the "Lukens Trademarks") on all materials provided by the Company to the Distributor. In addition, the Distributor agrees it shall never do any thing which will in any way impair the Company's title to or rights in the Lukens Trademarks. For purposes of this Agreement, Lukens Trademarks shall also be deemed to include the design of the labeling and packaging of the Products as it applies to the Company. The Company acknowledges that "Sharps Compliance, Inc." and "SCI" and all other trademarks and trade names of Distributor (including those with respect to the Products), and all copyrights used in connection with such trademarks and trade names (collectively the "SCI Trademarks") on all the materials provided by Distributor to the Company. In addition the Company agrees it shall never do anything which will in any way impair the Distributor's title to or rights in the SCI Trademarks. For purposes of this Agreement, SCI Trademarks shall also be deemed to include the design of the labeling and packaging of the Products as it applies to SCI. This Section 10.4 shall survive any termination or expiration of this Agreement. 10.5 Infringement Action. The Distributor shall promptly notify the Company of any and all infringements or attempted infringements of any of the Company's Trademarks or patents that may come to its attention and shall assist the Company in taking such action against such infringers as the Company, in its discretion, may elect. In addition, the Distributor shall promptly notify the Company in writing of any suit or proceeding brought against the Distributor insofar as such suit or proceeding is based upon any claim that the Products or any part thereof, excluding the Trademarks, infringe the patent or propriety rights of any person or entity. The Company shall defend such suit or proceeding and shall indemnify and hold the Distributor harmless from and against damages, costs, and expenses arising directly from such suit or proceeding provided that (i) the Company is notified in writing of such suit or proceeding, (ii) the Distributor has granted the Company complete authority to defend the suit or proceeding as it deems appropriate, and (iii) the Distributor fully cooperates with the Company in connection with such suit or proceeding and provides the Company with all reasonable assistance in connection therewith. 11. Restrictions on Solicitation. The Distributor shall not solicit sales of products from, or make any sales to, Customers outside the Territory and/or human healthcare market. 6 7 12. Confidential Information; Modification to Products. 12.1(a) Confidential Information of the Company. It is understood that during the term hereof the Company may disclose to the Distributor, or the Distributor may otherwise learn of, certain technical or other information related to the Company or the Products. With the exception of such information that is clearly a matter of public knowledge (other than as a result of disclosure by the Distributor) or is already known to the Distributor on the date hereof from a legitimate source other than the Company, all of such technical and other information shall be deemed by the Company and the Distributor to be "confidential" and a "trade secret" of the Company (any and all of such information being hereinafter referred to as the "Confidential Information"). The Distributor hereby agrees than during and after the term hereof it shall keep secret and not make any direct or indirect commercial use of (other than in the performance of its duties hereunder), or otherwise disclose, the Confidential Information. The Distributor shall disclose the Confidential Information only to these of its employees who must have knowledge of it in order to perform the Distributor's duties hereunder, and the Distributor shall take all necessary steps and use its best efforts to insure that such employees will likewise keep secret and not make any direct or indirect commercial use of, or otherwise disclose, the Confidential Information. With the Company's express prior written consent, the Distributor shall have the right to disclose during the term hereof such of the Confidential Information as may be reasonably required solely in connection with performance of its duties hereunder. The Distributor shall notify the Company in writing immediately, and as far in advance of disclosure as possible, whenever it becomes obligated by governmental regulation or by order of any court or governmental body to disclose Confidential Information. The Distributor hereby acknowledges the Company's sole and exclusive ownership of and right to the Confidential Information and agrees that it does not have and shall not have, and that nothing herein shall be deemed to give it, any license or other rights in or with respect to Confidential Information. The Distributor agrees that upon termination of this Agreement by either party and for whatever reason it shall promptly return to the Company all records containing such Confidential Information, regardless of whether such records were supplied by the Company or were prepared by the Distributor from information supplied by the Company. 12.1(b) Confidential Information of the Distributor. It is understood that during the term hereof the Distributor may disclose to the Company, or the Company may otherwise learn of, certain technical or other information related to the Distributor or the Products. With the exception of such information that is clearly a matter of public knowledge (other than as a result of disclosure by the Company) or is already known to the Company on the date hereof from a legitimate source other than the Distributor, all of such technical and other information shall be deemed by the Distributor and the Company to be "confidential" and a "trade secret" of the Distributor (any and all of such information being hereinafter referred to as the "Confidential Information"). 7 8 The Company hereby agrees than during and after the term hereof it shall keep secret and not make any direct or indirect commercial use of (other than in the performance of its duties hereunder), or otherwise disclose, the Confidential Information. The Company shall disclose the Confidential Information only to these of its employees who must have knowledge of it in order to perform the Company's duties hereunder, and the Company shall take all necessary steps and use its best efforts to insure that such employees will likewise keep secret and not make any direct or indirect commercial use of, or otherwise disclose, the Confidential Information. With the Distributor's express prior written consent, the Company shall have the right to disclose during the term hereof such of the Confidential Information as may be reasonably required solely in connection with performance of its duties hereunder. The Company shall notify the Distributor in writing immediately, and as far in advance of disclosure as possible, whenever it becomes obligated by governmental regulation or by order of any court or governmental body to disclose Confidential Information. The Company hereby acknowledges the Distributor's sole and exclusive ownership of and right to the Confidential Information and agrees that it does not have and shall not have, and that nothing herein shall be deemed to give it, any license or other rights in or with respect to Confidential Information. The Company agrees that upon termination of this Agreement by either party and for whatever reason it shall promptly return to the Distributor all records containing such Confidential Information, regardless of whether such records were supplied by the Distributor or were prepared by the Company from information supplied by the Distributor. The obligations of the Distributor under this Section 12 shall survive the termination of this Agreement. 13. Warranties. The Company represents, warrants and agrees that all Products will be free from defects caused by faulty material or poor workmanship for a period of twelve (12) months after delivery to Distributor, and the Company agrees to repair any such defects or at its discretion to replace such defective Products, which such defects shall have come to the attention of Distributor and a claim therefore is made against the Company within twelve (12) months after delivery. All such repair and replacement shall be at the Company's sole expense without any charge to Distributor, including all shipping and transportation expenses for defective Products. The Company shall repair or replace any such defective Products as soon as practicable, it being agreed that the standard is repair or replacement and delivery to a carrier for shipment to Distributor within forty-five (45) days after receipt thereof by the Company. THE FOREGOING WARRANTY IS IN LIEU OF ALL OTHER WARRANTIES, EXPRESS OR IMPLIED, INCLUDING BUT NOT LIMITED TO THE IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE. To the extent permitted by law, in no case shall the Company, on account of the breach of any warranty, be liable for any special, incidental or consequential damages including, but not limited to, loss of profits, loss of revenues or claims of third parties, including customers. 8 9 Any action for breach of warranty must be brought within twelve (12) months following delivery of the Product, the occurrences of the breach or discovery thereof (or the date such occurrence should have been discovered in the exercise of ordinary care), whichever is later. The foregoing warranties can be modified only in writing. No agent, representative or employee of the Company is authorized to make any in addition to those set forth above. 14. Termination and Default. 14.l Termination. In the event either party hereto defaults in the performance of any obligation hereunder and such default is not cured within sixty (60) days after the defaulting party receives written notice from the non-defaulting party specifying the nature of the default, the non-defaulting party shall have the right, in addition to any other rights and remedies it may have, to terminate the distributorship granted hereunder immediately by mailing to the defaulting party written notice of such termination. If either party is entitled to terminate the Exclusivity portion of this Agreement, the party who wishes to terminate will give no less than one hundred eighty (180) days notice in writing of such termination. The distributorship granted hereunder shall automatically be terminated if the provisions of Section 2.2 shall be applicable, and may be terminated immediately upon written notice by the Company after the expiration of all cure periods, or if the Distributor breaches Section 12 hereof or if the Distributor fails to pay any sums due the Company within sixty (60) days after written notice by the Company to the Distributor of such failure to pay. In addition, either party may terminate this Agreement immediately upon written notice thereof if: (a) the other party become insolvent or makes a general assignment for the benefit of creditors; (b) bankruptcy or similar proceeding is filed by or against the other party and is not dismissed within sixty (60) days thereafter; (c) the other party's assets are levied upon or attached under process and such levy or attachment is not discharged within sixty (60) days thereafter; (d) a permanent receiver is appointed for the property or assets of the other party; or (e) liquidation proceedings are commenced by or against the other party. 14.2 Effect of Termination. Upon termination of the distributorship granted hereunder, the Distributor shall thereafter in no way represent itself as acting on behalf of the 9 10 Company with respect to the Products. Within ten (10) days after termination, the Distributor shall promptly return to the Company all papers, price lists, samples, bulletins, displays, or other data or material pertaining to the Company, its Products or any Confidential Information. Following termination of the distributorship granted hereunder for any reason other than a breach of the Agreement by the Distributor, the Company shall continue to honor orders placed prior to the effective date of termination which shall be one hundred eighty (180) days from delivery of notice of termination. Upon termination of the distributorship by the Company due to a breach of the Agreement by the Distributor, no payments shall be made by the Company to the Distributor for loss of future sales, goodwill, creation of clientele, termination of employees, salaries of employees, advertising costs, or like expenses. Upon such termination, the Company may, but shall have no obligation to, repurchase any of its Products which the Distributor may then have in inventory. The price of any Products to be repurchased hereunder shall be the Company's then current list price or the selling price thereof to the Distributor, whichever is lower, less a fifteen percent (15%) charge for restocking and relabeling. The product must be in saleable condition. No special products will be considered. No termination shall release either party from any then outstanding obligations to the other under this Agreement nor shall it terminate the obligations of the Distributor under Section 7.11 or 12. 15. Binding Effect; Assignment. This Agreement shall be binding upon and inure to the benefit of the parties and their respective successors and assigns. 16. Force Majeure. If the performance of this Agreement or of any obligation hereunder by either party is prevented, restricted or interfered with by reason of war, revolution, civil commotion, acts of public enemies, blockade, embargo, strikes, any law, order, proclamation, regulation, ordinance, demand, or requirements having a legal effect of any government or any judicial authority or representative of any such government, or any other act whatsoever, whether similar or dissimilar to those referred to in this clause, which is beyond the reasonable control of the party affected, then the party so affected shall, upon giving prior written notice to the other party, be excused from such performance to the extent of such prevention restriction, or interference, provided that the party so affected shall use its best effects to avoid or remove such causes of nonperformance, and shall continue performance hereunder with the utmost dispatch whenever such causes are removed. 17. Notice. All notices required or permitted hereunder shall be sent, return receipt requested, postage prepaid, by registered or certified mail by telex or facsimile transmission (followed immediately by a letter of confirmation delivered in accordance with other provisions of this Section), by Federal Express or similar courier service, or by hand, addressed to the Company or the Distributor, as the case may be, at the address set forth below or at such other address as such 10 11 party shall have designated in the manner provided for in this section: If to the Company: Pro-Tec Containers A Division of Lukens Medical Corporation 3820 Academy Parkway North, NE Albuquerque, NM 87109 Attn: President & CEO If to the Distributor: Sharps Compliance, Inc. 8928 Kirby Drive Houston, Texas 77054 Attn: President If given by telex, facsimile transmission, Federal Express or similar courier service, or by hand, any such notice shall be deemed given when received and, if mailed, such notice shall be deemed given seven (7) days after mailing. 18. Arbitration. Any dispute, controversy or claim arising out of or relating to this agreement, or the breach, termination or invalidity of it, shall be settled by arbitration in accordance with rules of conciliation and arbitration of the International Chamber of Commerce (ICC). The arbitration authority shall be the American Arbitration Association. In any arbitration pursuant to this section the award shall be rendered by majority of the members of a Board of Arbitration consisting of three (3) members, one being appointed by each party and the third being appointed by mutual agreement; if both arbitrators fail to appoint the third, the matter shall be referred to the president of ICC for appointment. 19. Governing Law. This Agreement shall be governed by the laws of the State of New Mexico, U.S.A. 20. Entire Agreement. This Agreement sets forth the entire agreement and understanding of the parties with respect to the subject matter hereof and supersedes and replaces all prior agreements and understandings, whether written or oral. This Agreement may not be modified or amended in any way except by an instrument in writing executed by a duty authorized officer of the Company and the Distributor. 21. Schedules. The schedules attached hereto form part of and are an integral part of this Agreement. 22. Severability. If any provision of this Agreement or the application thereof to any party or circumstance shall be declared invalid, illegal or unenforceable, the remainder of this Agreement shall be valid and enforceable to the extent permitted by applicable law, in such event, the parties shall use their best efforts to replace the invalid or unenforceable provision with a 11 12 provision that, to the extent permitted by applicable law, achieves the purposes intended under the invalid or unenforceable provision. Any deviation by either party from the terms and provisions of this Agreement in order to comply with applicable laws, rules, or regulations shall not be considered a breach of this Agreement. 23. Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed to be an original and all of which together shall be deemed to be the same instrument. 24. Waiver of Compliance. Any failure by any party hereto to enforce at any time any term or condition of this Agreement shall not be considered a waiver of that party's right to enforce each and every term and condition hereof. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be signed by authorized officers or representatives on the date of the signature of this Agreement. LUKENS MEDICAL CORPORATION SHARPS COMPLIANCE, INC. By: /s/ GARY K. PORTER By: /s/ BURT J. KUNIK ----------------------------------- -------------------------------- Gary K. Porter Burt J. Kunik Title: V.P., Sales and Marketing Title: President 12 13 SCHEDULE A EXCLUSIVE DISTRIBUTORSHIP AGREEMENT between LUKENS MEDICAL CORPORATION and Sharps Compliance, Inc. Products "Products" means the following items: Pro-Tec brand 1, 2 and 3 gallon sharps containers made from polyethylene, in the standard large opening configuration with non-vented lids, used for the purpose to pass U.S. Postal Inspection. The product codes are defined as below: #1G REDNVHDPE #2G REDNVHDPE #3G REDNVHDPE All other products are EXCLUDED from this Agreement and are free to be purchased on the open market. 13 14 SCHEDULE B to the EXCLUSIVE DISTRIBUTORSHIP AGREEMENT between LUKENS MEDICAL CORPORATION and Sharps Compliance, Inc. Territory "Territory" shall mean the following countries or geographical areas: United States of America 14 15 SCHEDULE C to the EXCLUSIVE DISTRIBUTORSHIP AGREEMENT between LUKENS MEDICAL CORPORATION and Sharps Compliance, Inc. Pricing Pricing shall be based on Lukens current published list price less the following discounts: 15 16 SCHEDULE D to the EXCLUSIVE DISTRIBUTORSHIP AGREEMENT between LUKENS MEDICAL CORPORATION and Sharps Compliance, Inc. Guaranteed Minimums For purposes of Section 7.3 of this Agreement, the first year of the term shall begin on the date of the Agreement and each succeeding year shall begin on the anniversary date thereof. The Guaranteed Minimums for the Territory granted to the Distributor are as follows: Year 1 $150,000 Year 2 $180,000 Year 3 $216,000 Year 4 $260,000 Year 5 $311,000 16 EX-10.32 7 PURCHASE AGREEMENT - IVY GREEN CORP. 1 EXHIBIT 10.32 PURCHASE AGREEMENT 1. PARTIES: IVy Green Corporation, an Illinois corporation ("Seller") agrees to sell and convey to Sharps Compliance, Inc., a Texas corporation ("Buyer") and Buyer agrees to buy from Seller the Assets only of the business operations of Pitch It, Pitch It, Jr. and other disposable IV poles (collectively, the "Business") located at 83 Ambrogio, Suite B, Gurnee, Illinois 60031. 2. PRICE AND TERMS: Seller shall convey the Assets (as described below) to Buyer on the Closing Date, and shall execute a Bill of Sale, in form attached hereto as Exhibit "A", and those other documents described in Section 12, below. The total purchase price for the Assets shall be $100,000, payable and due at Closing. In accordance with paragraph 2 of that certain Letter of Intent previously entered into between Buyer and Seller, Buyer has previously tendered $12,500 to Seller as earnest money, which earnest money shall be applied to the Purchase Price or in the absence of a Closing, as provided in the Letter of Intent. Simultaneously herewith, Buyer has tendered $87,500 in readily available funds. 3. ASSETS INCLUDED: Seller agrees to sell, transfer, convey and assign to Buyer at Closing the following: (a) all personal property, leases, contracts, rights under or pursuant to all warranties, representations and guaranties made by suppliers in connection with products, materials or services, permits, plans, licenses and licensing agreements and any other agreements or undertakings of any kind of Seller relating exclusively to the Business; (b) all trade secrets, know-how, patents, applications for patents, trademarks, inventions, engineering drawings, licenses and other intellectual property and intangible assets in, developed for exclusive use in, or under development for exclusive use in the Business as set forth on Exhibit "B"; (c) all customer lists, and vender and supplier information as set forth on Exhibit "C"; (d) all prototypes, plans, designs and test results of any and all disposable IV poles manufactured or designed by Seller including the Pitch It and Pitch It, Jr., and all other disposable IV poles under development ("Disposable IV Poles"); and (e) all files, records, information and data directly relating to any of the Assets. Items (a) through (e) are hereafter collectively referred to as "Assets". Assets shall not include accounts receivable of Seller. 4. NO ASSUMPTION OF LIABILITIES: Buyer is not assuming and does not agree to pay any liabilities incurred by Seller or incurred by the Business or the Assets prior to Closing. Seller indemnifies Buyer and agrees to defend and hold Buyer harmless from and against any 1 2 and all claims, causes of action, debts, obligations and liabilities incurred or arising prior to Closing for two (2) years from the date hereof. 5. WARRANTIES AND COVENANTS OF SELLER: a. Authority. The execution and delivery of this Agreement and the consummation by Seller of the transactions contemplated herein and therein (i) have been duly authorized by the Board of Directors of Seller; (ii) are not prohibited by, and do not violate any provisions or result in the breach of, or accelerate or permit the acceleration of the performance required by the terms of (a) the Articles of Incorporation or Bylaws, or other governing documents of Seller; (b) any applicable law, rule, regulation or other requirement of the United States, any state, municipality or subdivision therein, or of any authority, department, commission, board, bureau, agency or instrumentality thereof; or (c) any contract, indenture, agreement or commitment to which Seller is a party or is bound or by which any of the Assets are bound, and (iii) have not resulted and will not result in the creation or imposition of any lien, encroachment, easement, encumbrances, mortgage, hypothecation, equity, charge, restriction, possibility of reversion or other similar conflicting ownership or security interest in favor of any third party on any of the Assets. b. Title. Seller has and will have at Closing and will transfer, convey and deliver to Buyer at Closing good and marketable title to the Assets, free and clear of all liens and encumbrances and claims of any third persons. c. Compliance with Law. To the best of Seller's knowledge, Seller has conducted and is now conducting Seller's business in compliance with all applicable regulatory, federal, state or local laws, statutes and regulations the violation of which would have a material and adverse effect upon Seller's business or the Assets. d. Litigation. No litigation, including any arbitration, investigation or other proceeding of or before any court, arbitrator or governmental or regulatory official body or authority is pending or, to the best knowledge of Seller, threatened against Seller or which relates to the Assets of Seller or the transactions contemplated by this Agreement. Seller does not know of any reasonable likelihood for the basis of any such litigation, arbitration, investigation or proceeding, the result of which could adversely affect Seller, the Assets or the transactions contemplated hereby. e. Consents. No consent, approval, authorization or order of any governmental agency or body or other persons are required for the consummation of the transactions contemplated by this Agreement. f. Referrals. Seller hereby covenants and agrees that it shall immediately forward to Buyer any and all indications of interest to acquire any of the products subject to the Business. 2 3 6. FURTHER ASSURANCES: At the Closing, and at all times thereafter as it may be necessary, Seller shall execute and deliver to Buyer such other instruments of transfer as shall be reasonably necessary or appropriate to vest in Buyer good and indefeasible title to all of the Assets individually and/or in the aggregate including execution of all documents necessary to assign all rights in and to United States Letters Patent No(s). DES 390,952 and DES 390,953. 7. SPECIAL CONDITIONS: In addition to the agreements described herein, Buyer agrees to grant to Wren Medical Systems the right to (a) acquire Pitch It and Pitch It, Jr. from Buyer at a price equal to five percent (5%) below the amount paid by other distributors, and (b) acquire the Pump Pole from Buyer at a price, equal to the lesser of (i) five percent (5%) less than other distributors, or (ii) a twenty-five (25) point mark-up over cost. Seller agrees that all calls relating to the sale and distribution of Disposable IV Poles shall be referred to Buyer at 1-800-772-5657, except for sales to regional companies whose base of operation are in the states of Illinois, Indiana, Wisconsin, Minnesota and Michigan, which shall be referred to Wren Medical Systems. Seller and Wren Medical Systems shall grant Buyer the right to audit Seller's and Wren Medical Systems' sales of all Disposable IV Poles. Distribution rights granted to Wren Medical Systems herein shall only be applicable (i) for so long as Wren Medical Systems actively markets and sells Disposable IV Poles, and (ii) for sales originated by Wren Medical Systems to new customers in the States of Illinois, Indiana, Wisconsin, Minnesota and Michigan. Wren Medical Systems hereby acknowledges that Buyer shall be its exclusive manufacturer of Disposable IV poles. Furthermore, in consideration of the pricing schedule above, Wren Medical Systems hereby agrees that it shall not manufacture, for itself or on behalf of others, any Disposable IV Poles. Buyer acknowledges that Seller shall not be liable for a breach by Wren Medical Systems of this Section 7, unless Seller shall have directly contributed to such breach by Wren Medical Systems. 8. CONTINGENCIES: This contract and Buyer's obligations hereunder shall be contingent upon satisfaction of the following: a. all covenants, warranties, representations and agreements of Seller hereunder shall be true and correct at the time of execution of this contract and at closing of the transaction described herein; b. Seller shall have performed all of Seller's obligations hereunder; 9. CLOSING DATE: The closing of the sale shall be on or before June 19, 1998 in the offices of DiCecco, Fant & Burman, L.L.P. or any other place or by any other means as may be agreed upon by the parties. 10. POSSESSION: The possession of the Assets shall be delivered to Buyer, in its present condition, ordinary wear and tear excepted, at Closing. 11. EFFECTIVE DATE: The effective date of sale shall be at closing. The effective date of this Contract shall be the date of execution by all parties hereto. 3 4 12. CLOSING DOCUMENTS: Closing documents to be executed and delivered at Closing shall consist of the following: a. Bill of Sale; b. Assignment of Patents in the form attached hereto as Exhibit "D"; c. Assignment of Contracts in the form attached hereto as Exhibit "E"; d. Assignment of Tradename in the form attached hereto as Exhibit "F"; e. Any other documents deemed reasonably necessary or appropriate to close this transaction. 13. SALES, TRANSFER AND DOCUMENTARY TAXES: Seller shall pay all federal, state and local sales, documentary and other transfer taxes, if any, due as a result of the purchase, sale or transfer of the Assets in accordance herewith whether imposed by law on Seller or Buyer and Seller shall indemnify, reimburse and hold harmless Buyer in respect of the liability for payment of or failure to pay any such taxes or the filing of or failure to file any reports required in connection therewith. 14. WARRANTY: Seller warrants that the Business and assets being sold and conveyed to Buyer will be sold, assigned, conveyed and transferred free and clear of all debts, liens, taxes (including payroll, sales and excise taxes) and/or any other encumbrances, except those specifically disclosed herein/agreed to by Buyer, as of the Closing Date. 15. GENERAL INDEMNIFICATION OF SELLER: From the Closing Date, and for two (2) years thereafter, Seller will (i) reimburse, indemnify and hold harmless Buyer and its successors and assigns against and in respect of any and all damages, losses, deficiencies, liabilities, costs and expenses incurred or suffered by Buyer as a result of Seller's operations or ownership of the Assets prior to Closing; (ii) any misrepresentation, breach of warranty or nonfulfillment of any agreement or covenant on the part of Seller under this Agreement, or from any misrepresentation in or omission from any certificate, schedule, exhibit, statement, document or instrument furnished to Buyer pursuant hereto or in connection with the negotiation, execution or performance of this Agreement and the attached Exhibits; and (iii) any and all actions, suits, claims, proceedings, investigations, demands, assessments, audits, filings, judgments, costs and other expenses (including without limitation, reasonable legal fees, costs and expenses) incident to Seller's operations or ownership of the Assets prior to Closing or to the enforcement of this Section 15. From the Closing Date, and for two (2) years thereafter, Buyer will reimburse, indemnify and hold harmless Seller and its successors and assigns against and in respect of any and all damages, losses, deficiencies, liabilities, costs and expenses incurred or suffered by Seller as a result of Buyer's operations or ownership of the Assets after the Closing. 16. COVENANT NOT TO COMPETE: For three (3) years from execution of this Agreement, Seller, its officers, directors, stockholders and affiliates, (collectively "Seller Parties" agree that it shall not, directly or indirectly, engage in the business operations of Pitch It, Pitch It, Jr. and other Disposable IV Poles. Furthermore, Seller Parties shall not contact any customers of the Buyer for the same time period specified above in connection with the sale of Disposable Poles, except as required in Section 7 above. Seller Parties shall be deemed 4 5 to be in competition with Buyer and in violation of this Agreement if payments for activities prohibited under this Agreement are received by (a) Seller Parties, (b) any partnerships, corporations, affiliates or other entities in which Seller Parties owns ten percent (10%) or greater interest therein, or (c) any family members of Seller Parties, with respect to competitive activities of such corporation as authorized herein. Notwithstanding anything to the contrary herein, this Agreement shall not (i) restrict Seller Parties from participating or engaging in the business of manufacturing and selling non-disposable IV poles, so long as said corporation confines its business to same and in no way engages in the same or similar business as Buyer, or (ii) restrict Wren Medical Systems from its distribution rights set forth in Section 7. 17. ATTORNEY'S FEES: Any signatory to this contract who is the prevailing party in any legal proceeding against any other signatory brought under or with relation to this contract or transaction shall be additionally entitled to recover court costs and reasonable attorney's fees from the non-prevailing party. 18. BENEFIT: This contract shall inure to the benefit of and be binding on the parties hereto, their heirs, executors, legal representatives, successors and assigns. 19. SURVIVAL: All the terms, conditions, provisions, and obligations under this contract, and all instruments related to this transaction, shall survive the Closing for one (1) year. 20. GOVERNING LAW: This Agreement shall be governed by and interpreted and enforced in accordance with the laws of the State of Texas, and the venue for all proceedings shall be Harris County, Texas. 21. EXPENSES: Except as otherwise provided in this Agreement, each party hereto shall pay its own expenses incidental to the preparation of this Agreement, the carrying out of the provisions of this Agreement and the consummation of the transactions contemplated hereby. 22. BROKER FEES: There are no broker fees to be paid in connection with the consummation of this transaction. Each party shall indemnify the other party from and against any claims by any brokers in connection with this transaction. 23. NOTICES: Any notice, request, demand, waiver, consent, approval or other communication which is required or permitted hereunder shall be in writing and shall be deemed given if personally delivered or sent by registered or certified mail to the party at the address set forth below. 24. SEVERABILITY: Any provision of this Agreement which is invalid or unenforceable in any jurisdiction shall be unaffected to the extent of such invalidity or unenforceability without invalidating or rendering unenforceable the remaining provisions hereof, and any such invalidity or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 5 6 25. COUNTERPARTS: This Agreement may be executed in any number of counterparts and any party hereto may execute any such counterpart, each of which when executed and delivered shall be deemed to be an original and all of which counterparts taken together shall constitute one in the same instrument. BUYER: SELLER: SHARPS COMPLIANCE, INC. IVY GREEN CORPORATION By: /s/ BURT KUNIK By: -------------------------- -------------------------- Name: BURT KUNIK Name: Title: President ------------------------- Title: ------------------------ ADDRESS: ADDRESS: 8928 Kirby Drive 83 Ambrogio, Suite B Houston, Texas 77054 Gurnee, Illinois 60031 Attn: Dr. Burt Kunik Attn: ------------------------- Wren Medical Systems hereby executes this Agreement solely for acknowledging its agreement to the terms and conditions described in Section 7 above. WREN MEDICAL SYSTEMS By: -------------------------- Name: ------------------------ Title: ----------------------- ADDRESS: - ----------------------------- - ----------------------------- - ----------------------------- 6 7 EXHIBIT A BILL OF SALE THE STATE OF ILLINOIS ) ) KNOW ALL MEN BY THESE PRESENTS COUNTY OF LAKE ) THAT IVY GREEN CORPORATION, an Illinois corporation ("Seller"), for and in consideration of the purchase price provided for in, and the other terms and conditions of, that certain Purchase Agreement, dated June ___, 1998, by and among SHARPS COMPLIANCE, INC., a Texas corporation ("Buyer"), and Seller (the "Agreement") (capitalized terms used and not otherwise defined herein shall have the meanings ascribed to them in the Agreement) has bargained and sold, and by these presents Seller does sell, assign, transfer and convey unto Buyer all of Seller's right, title and interest in the Assets. Seller hereby acknowledges and agrees that this Bill of Sale is made pursuant to and subject to all the terms and conditions of the Agreement, including without limitation, Buyer's rights of indemnification under the Agreement. Seller hereby represents and warrants to Buyer that Seller is the absolute owner of the Assets, that the Assets are free and clear of any and all liens, charges and encumbrances of any kind whatsoever, and that Seller has full right, power and authority to sell the Assets to Buyer and to make this Bill of Sale. Seller hereby binds itself, its successors and assigns to WARRANT AND FOREVER DEFEND the title to the Assets to Buyer, and Buyer's successors and assigns, against the lawful claim or claims of any and all persons. The parties hereto agree that this Bill of Sale shall be governed by and construed in accordance with the laws of the State of Texas, without resort to the conflict of law principles thereof. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK.] 8 EXECUTED effective the ____day of June, 1998. BUYER: SELLER: SHARPS COMPLIANCE, INC. IVY GREEN CORPORATION a Texas corporation an Illinois corporation By: /s/ DR. BURT KUNIK By: --------------------------- ------------------------- Dr. Burt Kunik, Name: , President ----------------------- Title: ---------------------- 9 EXHIBIT B LIST OF PATENTS, TRADEMARKS, ETC. PATENTS: U.S. Design Patent No. Des. 390,952 U.S. Design Patent No. Des. 390,953 TRADEMARKS: Pitch It Pitch It, Jr. 10 EXHIBIT C LIST OF CUSTOMERS, VENDORS AND SUPPLIERS CUSTOMERS: List attached VENDORS/SUPPLIERS: Sierra Pacific Co., Ltd. Address: 3F-4, No. 14, Ta Ing St. Nan Twen District, Taichung Taiwan, R. O. C. Phone: 011-886-4-381-2053 Fax: 011-886-4-382-8530 Email: spec8488@ms4.hinet.net Contact: Fred Lin Ingrid Bank Information: Bank of Taiwan Liming Branch 6-1 No. 37, 37 Liming Road Taichung Taiwan ROC Circle International (Freight forwarder) Address: Bensenville, IL Phone: 630-766-9220 Contact: Kim Hund Note: Will need to establish account with Houston office. Kim will provide referral information. 11 EXHIBIT D ASSIGNMENT OF PATENTS STATE OF ILLINOIS ) ) COUNTY OF LAKE ) WHEREAS IVY GREEN CORPORATION ("Assignor"), an Illinois corporation with offices at 83 Ambrogio, Suite B, Gurnee, Illinois 60031 is the owner of the entire right, title, and interest to the United States Letters Patent No(s). DES. 390,952 and DES. 390,953 (the "Patents") and the inventions covered by the Patents (the "Inventions"); AND WHEREAS SHARPS COMPLIANCE, INC., ("Assignee"), a Texas corporation with offices at 8928 Kirby Drive, Houston, Texas 77054, is desirous of acquiring the entire right, title, and interest in and to the Inventions in the United States and foreign countries and the Patents; NOW THEREFORE, for good and valuable consideration, the receipt of which is hereby acknowledged, and intending to be legally bound hereby, Assignor hereby assigns and transfers to Assignee the entire right, title, and interest in and to the Inventions in the United States and foreign countries and the Patents, including but not limited to all reissues, divisions, continuations and extensions of the Patents, all rights of action arising from the Patents, all claims for damages by reason of past infringement of the Patents and the right to sue and collect damages for such infringement, to be held and enjoyed by the Assignee for its own use and benefit and for its successors and assigns as the same would have been held by Assignor had this assignment not been made. Dated: June ___, 1998. ASSIGNOR: By: ------------------------- Title: ---------------------- Subscribed and sworn to before me on June ___, 1998. Notary Public: ------------------------------ Printed Name: ------------------------------- 12 EXHIBIT E ASSIGNMENT OF CONTRACTS AND WARRANTIES THE STATE OF ILLINOIS ) ) KNOW ALL MEN BY THESE PRESENTS: COUNTY OF LAKE ) That IVY GREEN CORPORATION, (hereinafter called the "Assignor" whether one or more), for and in consideration of the sum of Ten and No/100 Dollars ($10.00) and other good and valuable consideration paid to the Assignor by SHARPS COMPLIANCE, INC. (hereinafter called the "Assignee" whether one or more), the receipt and sufficiency of which consideration are hereby confessed and acknowledged by the undersigned, has SOLD, ASSIGNED, TRANSFERRED and CONVEYED and by these presents does hereby SELL, ASSIGN, TRANSFER and CONVEY unto Assignee, and Assignee's heirs, legal representatives, successors and assigns, all of Assignor's right, title and interest in and to all contracts, agreements, and to the extent assignable, all guaranties, warranties and service contracts with respect to all or any portion of the products known as Pitch It and Pitch It, Jr. TO HAVE and TO HOLD all of Assignor's right, title and interest in and to said contracts and agreements unto the Assignee and Assignee's heirs, legal representatives, successors and assigns forever. EXECUTED effective the ___ day of June, 1998. ------------------------------ Name: ------------------------- ------------------------------ Name: ------------------------- 1 13 THE STATE OF ILLINOIS ) ) COUNTY OF LAKE ) BEFORE ME, the undersigned authority, on this date personally appeared ________________________, known to me to be the person whose name is subscribed to the foregoing instrument, and acknowledged to me that he/she executed the same for the purposes and consideration therein expressed. SWORN TO AND SUBSCRIBED BEFORE ME on this ___ day of June, 1998. ----------------------------- Notary Public My Commission Expires: - ----------------------------- ----------------------------- (Print Name) 2 14 EXHIBIT F ASSIGNMENT OF TRADENAME THE STATE OF ILLINOIS ) ) KNOW ALL MEN BY THESE PRESENTS: COUNTY OF LAKE ) That IVY GREEN CORPORATION, (hereinafter called the "Assignor" whether one or more), for and in consideration of the sum of Ten and No/100 Dollars ($10.00) and other good and valuable consideration paid to the Assignor by SHARPS COMPLIANCE, INC., (hereinafter called the "Assignee" whether one or more), the receipt and sufficiency of which consideration are hereby confessed and acknowledged by the undersigned, has SOLD, ASSIGNED, TRANSFERRED, and CONVEYED and by these presents does hereby SELL, ASSIGN, TRANSFER, and CONVEY unto the Assignee, and Assignee's heirs, legal representatives, successors and assigns, all of Assignor's right, title and interest in and to the tradename Pitch It and Pitch It, Jr. including, without limitation, the exclusive right to use and enjoy such tradename to the fullest extent that the Assignor may lawfully grant such exclusive right. TO HAVE and TO HOLD all of Assignor's right, title and interest in and to said tradename unto the Assignee and Assignee's heirs, legal representatives, successors and assigns forever. Executed effective the ___ day of June, 1998. ------------------------------ Name: ------------------------- ------------------------------ Name: ------------------------- 1 15 THE STATE OF ILLINOIS ) ) COUNTY OF LAKE ) BEFORE ME, the undersigned authority, on this date personally appeared ________________________, known to me to be the person whose name is subscribed to the foregoing instrument, and acknowledged to me that he/she executed the same for the purposes and consideration therein expressed. SWORN TO AND SUBSCRIBED BEFORE ME on this ___ day of June, 1998. ----------------------------- Notary Public My Commission Expires: - ----------------------------- ----------------------------- (Print Name) 2 EX-10.33 8 LEASE AGREEMENT - LAKES TECHNOLOGY CENTER, LTD. 1 EXHIBIT 10.33 LEASE AGREEMENT (triple net lease) STATE OF TEXAS COUNTY OF HARRIS This lease agreement ("Lease"), made and entered into by and between Lakes Technology Center, Ltd. , hereinafter referred to as "Landlord", and Sharps Compliance, Inc. , hereinafter referred to as "Tenant", upon the following terms and conditions: A G R E E M E N T 1. LEASED PREMISES. In consideration of the rents reserved and the covenants and agreements herein contained on the part of Tenant to be observed and performed, Landlord hereby demises, lets and leases unto Tenant, and Tenant hereby rents from Landlord, those certain premises consisting of a space containing an area of approximately 7,274 square feet (hereinafter called the "Leased Premises") and constituting a part of the office/warehouse building (hereinafter called the "Building") located at 9050 Kirby Drive, Houston, Harris County, Texas which Building is located upon the lot, tract or parcel of land more particularly described on Exhibit "A" attached hereto and made a part hereof for all purposes. If the Building is in a development containing one or more other buildings, such buildings together with all related site land, improvements, parking facilities, common areas, driveways and landscaping, together with the Building, shall be referred to as the "Project". The purpose of the site plan attached as Exhibit "B" is to show the approximate location of the Leased Premises. Landlord reserves the right at any time to relocate, vary and adjust the size of the various buildings, covenants, automobile parking areas, and other common areas as shown on said site plan. The use and occupancy by Tenant of the Leased Premises shall include the use, in common with others entitled thereto, of the common service areas, loading facilities, pedestrian walks, automobile driveways and parking areas, all as shown on the site plan attached hereto as Exhibit "B". In determining the number of square feet of area of the Leased Premises, Tenant acknowledges that the Leased Premises includes the usable area, without deduction for columns or projections, multiplied by a load factor to reflect a share of certain areas, which may include lobbies, corridors, mechanical, utility, janitorial, boiler and service rooms and closets, restrooms and other public, common and service areas of the Building. 2. TERM. To have and to hold the Leased Premises for a term commencing on August 1, 1998 , ("Commencement Date") and ending on July 31, 2002. However, if for any reason, Landlord is unable to deliver possession of the Leased Premises on the Commencement Date, Landlord shall not be liable for any damage caused by the delay, nor shall this Lease be void or voidable, but, rather, it is agreed that the Lease term shall commence upon the date Landlord tenders possession of the Leased Premises to Tenant, and unless Landlord elects otherwise, the expiration date of the Lease shall be extended by the number of days delayed from the original Commencement Date as set out above. If this Lease is executed before the Leased Premises become vacant or otherwise available and ready for occupancy, or if any present tenant or occupant of the Leased Premises holds over, and Landlord cannot acquire possession of the Leased Premises prior to the date above recited as the Commencement Date of this Lease, Landlord shall not be deemed to be in default hereunder, and Tenant agrees to accept possession of the Leased Premises at such time as Landlord is able to tender the same, which date shall thenceforth be deemed the Commencement Date, and Landlord hereby waives payment of rent covering any period prior to the tendering of possession to Tenant hereunder. 3. ACCEPTANCE OF LEASED PREMISES. Tenant acknowledges that Landlord has not made any representations or warranty with respect to the condition or quality of the Leased Premises or Building. Tenant has inspected and accepts the Leased Premises and Building in their present condition as suitable for the purpose for which the Leased Premises are leased. Taking of possession by Tenant shall be deemed conclusively to establish that the Leased Premises, Building and common areas are in good and satisfactory condition as of when possession was taken. Tenant further acknowledges that no representations as to the repair of the Leased Premises or Building nor promises to alter, remodel or improve the Leased Premises or Building have been made by Landlord, unless such are expressly set forth in this Lease. After the Commencement Date Tenant shall, upon demand, execute and deliver to Landlord a letter of acceptance of delivery of the Leased Premises. If the leasehold improvements outlined on Addendum One and Exhibit "C" attached hereto are not substantially completed by September 1, 1998 as determined by Landlord's architect and such delay in the substantial completion date was not caused by Tenant, Tenant shall have the right to cancel this Lease Agreement only if Tenant provides Landlord written notice of its intent to cancel this Lease Agreement by September 5, 1998 and only if Tenant pays to Landlord a lump sum payment of $20,000.00 due along with such notice outlined above. It is further agreed that Tenant's right to cancel the Lease Agreement is Tenant's sole and exclusive remedy. 4. BASE RENT AND SECURITY DEPOSIT. a) Tenant agrees to pay to Landlord rent for the Leased Premises in advance, without demand, deduction or set off, for the entire term hereof at the rate of Three Thousand Nine Hundred Twenty Eight and no/100---- per month. One such monthly installment shall be due and payable on the date hereof and a like monthly installment shall be due and payable on or before the first day of each calendar month succeeding the Commencement Date recited above during the hereby demised term, except that the rental payment for any fractional calendar month at the commencement or end of the Lease period shall be prorated. b) In addition, Tenant agrees to deposit with Landlord on the date hereof the sum of Three Thousand Nine Hundred Twenty Eight and no/100----, which sum shall be held by Landlord, without obligation for interest, as security for the performance of Tenant's covenants and obligations under this Lease, it being 1 2 expressly understood and agreed that such deposit is not an advance rental deposit or a measure of Landlord's damages in case of Tenant's default. Upon the occurrence of any event of default by Tenant, Landlord may, from time to time, without prejudice to any other remedy provided herein or provided by law, use such fund to the extent necessary to make good any arrears of rent or other payments due Landlord hereunder, and any other damage, injury, expense or liability caused by such event of default; and Tenant shall pay to Landlord on demand the amount so applied in order to restore the security deposit to its original amount. Although the security deposit shall be deemed the property of Landlord any remaining balance of such deposit shall be returned by Landlord to Tenant at such time after termination of this Lease that all of Tenant's obligations under this Lease have been fulfilled. 5. TENANT'S PRO RATA SHARE OF BUILDING COSTS Subject to all of the provisions of this Lease relevant hereto, Tenant promises and agrees to pay, as additional rent hereunder and as provided herein, at the office of the Landlord or at such other place designated by Landlord, without any prior demand therefor and without any deduction or set-off throughout the term of this Lease, Tenant's Pro Rata Share of certain Building expenditures made by Landlord, as follows: (1) Real Estate Taxes, as defined in Article 6; (2) Common Area Maintenance Costs, as defined in Article 7; and (3) Building Insurance Costs, as defined in Article 8. (4) Management Fees, as defined in Article 7. The amounts due from Tenant as Tenant's Pro Rata Share of Real Estate Taxes, Common Area Maintenance Costs and Insurance shall be estimated by Landlord for each calendar year and paid by Tenant in equal installments of one-twelfth (1/12) of such estimated amount, monthly in advance, upon the first day of each calendar month provided, however, if the term shall commence upon a day other than the first day of the calendar month, Tenant shall pay upon the commencement date of this Lease a portion of Tenant's Pro Rata Share of said expenses calculated on a per diem basis with respect to the fractional month preceding the commencement of the first full calendar month of the term of this Lease. Said amounts shall be adjusted between Landlord and Tenant annually and at the expiration or earlier termination of this Lease, and payment shall be made to, or refund made by, Landlord, as the case may be, and Landlord shall receive the precise amount due as Tenant's Pro Rata Share of the actual cost of said Real Estate Taxes, Common Area Maintenance Costs and Insurance for the preceding calendar year or any fractional calendar year. Tenant will pay Landlord the sum of the following per month, in advance, payable at the same time and place as the minimum rent is payable, as estimated charges for Tenant's Pro Rata Share of Real Estate Taxes, Common Area Maintenance Costs and Insurance Costs: (1) Real Estate Taxes. . . . . . . . . . . . . . . . . . . . . $ 509.00 (2) Common Area Maintenance Costs. . . . . . . . . . . . . . . $ 472.00 (3) Insurance Costs . . . . . . . . . . . . . . . . . . . . . . $ 175.00 (4) Management Fees . . . . . . . . . . . . . . . . . . . . . . $ 125.00 --------- Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,281.00
The estimated charges as set out above are subject to changes from time to time throughout the Lease term. Failure to pay any one or all of Tenant's Pro Rata Share of Building Costs shall be constitute an event of default hereunder. 6. TAXES (1) "Tax Year" means the calendar and/or fiscal year basis upon which taxes and/or special assessments are assessed upon the Building throughout the term of this Lease. (2) "Real Estate Taxes" means the amount (in dollars) of taxes and/or special assessments levied or assessed against the land and improvements of the Building, said taxes to be either ad valorem taxes or a substitution therefor which may be designated as appropriate by applicable governing authorities, in any tax year or fractional part thereof. Excluded are all estate or death, succession, income or franchise taxes. (3) "Tenant's Pro Rata Share of Real Estate Taxes" means that amount obtained by multiplying the Real Estate Taxes by a fraction, the numerator of which is the square foot area of the Leased Premises and the denominator of which is the gross leasable area of the Building. (4) "Building" means all of the real estate and the buildings and other improvements actually constructed thereon, including common areas, as more specifically shown on the Site Plan attached hereto as Exhibit "B". LANDLORD'S PAYMENT. Subject to the limitations, conditions and agreements contained in this Article, Landlord shall pay annually, all Real Estate Taxes. On or before one hundred eighty (180) days after the end of the Tax Year, Landlord shall render a statement showing the total of Tenant's Estimated Tax Payments made in advance during the preceding Tax Year, and the balance, if any, then due from Tenant. At the time of rendering the statement, Landlord shall submit to Tenant a true copy of the tax bills. Taxes and/or special assessments for a fractional year, if any, shall be prorated. Landlord's failure to provide the statements shall not relieve Tenant of any liability hereunder. TENANT'S LIABILITY. Tenant promises and agrees to pay Tenant's Estimated Pro Rata Share of Real Estate Taxes, monthly in advance, on the first day of each calendar month, in an amount estimated by Landlord as provided above. ANNUAL ADJUSTMENT. Within ten (10) days after the receipt of Landlord's statement showing the total amount paid in advance by Tenant and a copy of the paid tax bills showing the actual taxes paid or to be paid by Landlord, there shall be an adjustment between Landlord and Tenant. Tenant shall pay to Landlord on demand the difference between the amount paid by Tenant and the actual amount due. If the total amount paid by Tenant 2 3 hereunder for any such calendar year shall exceed such actual amount due from Tenant for such calendar year, the excess shall be credited by Landlord against any amounts then due and owing by Tenant to Landlord, and any remaining net surplus shall then be refunded by Landlord to Tenant. Failure of Tenant to pay Tenant's Pro Rata Share of Real Estate Taxes in the manner and time provided herein shall constitute an event of default hereunder. 7. COMMON AREA MAINTENANCE. Landlord agrees to maintain and repair throughout the term hereof the common areas and facilities of the Building, including, without limitation, the automobile entrances, exits, driveways, parking areas, pedestrian walks, landscaped areas, public toilets, meeting rooms, lighting facilities, service areas and Building signs not otherwise the responsibility of Tenant as set out in this Lease (said areas hereinafter called the "Common Area"). Landlord's maintenance and repairs shall include all repairs and replacements and the supplies and materials therefor, which in Landlord's reasonable judgment are necessary to preserve the utility of the Common Area and facilities in the condition same were in at the time of completion, reasonable wear and tear only excepted. As used herein, the term "Common Area Maintenance Costs" shall mean all costs and expenses of every kind paid or incurred during the term of this Lease in connection with the operation and upkeep of the Common Area and facilities within the Building, and where necessary, the cost of replacing any of said common facilities and the cost of policing and protecting same. In addition to the foregoing, the Common Area Maintenance Costs may include a reserve fund of ten percent (10%) of the aggregate Common Area Maintenance Costs, which reserve fund will be put into an escrow account and accrue interest until such time as a major repair such as resurfacing the parking lot or major concrete drive replacement, where it shall be applied against such "Major Repair Cost". Also, in addition to the foregoing, the Common Area Maintenance Costs shall include but not limited to, maintenance and repair costs, management fees, wages and fringe benefits payable to employees of Landlord whose duties are connected with the operation and maintenance of the Building and common areas, all services, supplies, repairs, replacements or other expenses for maintaining and operating the Building. Tenant's Pro Rata Share of the Common Area Maintenance Costs means that amount obtained by multiplying said Costs by a fraction, the numerator of which is the square foot area of the Leased Premises and the denominator of which is the gross leasable area of the Building. Tenant promises to pay Tenant's Pro Rata Share of Common Area Maintenance Costs monthly in advance, on the first day of each calendar month in an amount estimated by Landlord as provided above. Landlord's failure to provide the statements shall not relieve Tenant of any liability hereunder. ANNUAL ADJUSTMENT. Within ten (10) days after the receipt of Landlord's statement showing the total amount paid in advance by Tenant and a copy of the Common Area Maintenance bills showing the actual monies paid or to be paid by Landlord, there shall be an adjustment between Landlord and Tenant. Tenant shall pay to Landlord on demand the difference between the amount paid by Tenant and the actual amount due. If the total amount paid by Tenant hereunder for any such calendar year shall exceed such actual amount due from Tenant for such calendar year, the excess shall be credited by Landlord against any amounts then due and owing by Tenant to Landlord and any remaining net surplus shall then be refunded by Landlord to Tenant. Failure of Tenant to pay Tenant's Common Area Maintenance Costs in the manner and time provided herein shall constitute an event of default hereunder. 8. INSURANCE TENANT'S LIABILITY INSURANCE. Tenant agrees, at Tenant's sole cost, to maintain in force during the term of this Lease a policy or policies of comprehensive public liability insurance, including property damage, written by one or more responsible insurance companies approved by Landlord (and such approval shall not be unreasonably withheld) and licensed to do business in Texas, which insurance companies shall be rated not less than A-13 by Best Guide Rating, insuring Tenant and naming, as additional named insured, Landlord and such other person, firms or corporations as are designated by Landlord and acceptable to said insurance companies, insuring against loss of life, bodily injury and/or property damage with respect to the Leased Premises and the business operated by Tenant and any subtenant, licensee, concessionaire or assignee of Tenant in the Leased Premises or Building, in which the limit of public liability shall not be less than ONE MILLION AND NO/100 DOLLARS ($1,000,000.00) single limit bodily injury and in which the limit of property damage liability shall be not less than FIVE HUNDRED THOUSAND AND NO/100 DOLLARS ($500,000.00). Additionally, Tenant shall maintain at Tenant's sole cost, plate glass insurance on the windows and door or doors of the Leased Premises. Each such policy shall be noncancellable for any cause without first giving Landlord thirty (30) days prior written notice. Subject to all of the foregoing, the insurance coverage required to be furnished by Tenant pursuant to this Section B may be in a blanket policy covering all of Tenant's operations. A copy of each such policy, or a certificate of such insurance together with a receipt showing all premiums paid thereon for at least one (1) year in advance, shall be delivered to Landlord upon the commencement of the term of this Lease and annually thereafter upon the first day of each lease year throughout the term hereof. LANDLORD'S LIABILITY INSURANCE. Landlord agrees to maintain in force during the term of this Lease a policy or policies of comprehensive public liability insurance, including property damage, written by one or more responsible insurance companies approved by Landlord and licensed to do business in Texas insuring Landlord against loss of life, bodily injury and/or property damage with respect to the common areas of the Building and the operation of the Building, in which the limit of public liability shall be not less than FIVE HUNDRED THOUSAND AND NO/100 DOLLARS ($500,000.00) single limit bodily injury and in which the limit of property damage liability shall be not less than ONE HUNDRED THOUSAND AND NO/100 DOLLARS ($100,000.00). In addition, Landlord may maintain in force such umbrella policy or policies of public liability insurance as Landlord, in its sole discretion, may deem appropriate. LANDLORD'S FIRE AND EXTENDED COVERAGE INSURANCE. Landlord agrees to procure and keep in effect during the term of this Lease a policy or policies of fire and extended coverage insurance covering the Building, or separate fire rating division as determined by the State Board of Insurance which includes the Leased Premises, including rent abatement, vandalism and malicious mischief coverage, written by an insurance company authorized to do business within the State of Texas, and in an amount equal to not less than eighty percent (80%) of the replacement cost of the premises covered. Such insurance shall provide protection against losses so insured against for the benefit of Landlord and any first mortgagee of Landlord, subject to the terms and provisions 3 4 of this Lease and any first mortgage; provided, however, that all proceeds payable by any insurance company under such policy or policies shall be payable to such mortgagee, if any, and shall be applied in accordance with the terms of such mortgage; or, if there is no mortgage, the full amount of such proceeds shall be payable to Landlord, and Tenant shall not be entitled to, and shall have no interest in, such proceeds or any part thereof. Such policy or policies shall contain a provision or endorsement with respect to mutual waiver of right of subrogation. The premium on said insurance shall be paid at lease one (1) year in advance, and Landlord shall, upon request, furnish Tenant proof of such insurance. TENANT'S LIABILITY FOR BUILDING INSURANCE COSTS. At the commencement of the term of this Lease and within one hundred eighty (180) days after the commencement of each calendar year (or partial calendar year) thereafter, Landlord shall furnish Tenant a statement, together with a true copy of the premium statement, showing the Building Insurance Costs for the calendar year in which the term commences or the applicable calendar year thereafter and any deductible amount incurred in any loss. Landlord's failure to provide the statement shall not relieve Tenant of any liability hereunder. As used herein, the term "Building Insurance Costs" shall mean the actual premium costs of public liability and fire and extended coverage insurance, including rent abatement insurance required by this Lease to be maintained by Landlord and any deductible incurred in any loss. Tenant's Pro Rata Share of public liability insurance shall be determined by multiplying the total cost of such insurance by a fraction, the numerator of which is the square foot area of the Leased Premises and the denominator of which is the gross leasable area of the Building. Tenant's Pro Rata Share of fire and extended coverage insurance shall be determined by multiplying said total cost of such insurance by a fraction, the numerator of which is the square foot area of the Leased Premises and the denominator of which is the gross leasable area of the Building. Tenant's Pro Rata Share of Building Insurance Costs shall be paid as provided above. ANNUAL ADJUSTMENT. Within ten (10) days after the receipt of Landlord's statement showing the total amount paid in advance by Tenant and a copy of the insurance bills showing the actual monies paid or to be paid by Landlord, there shall be an adjustment between Landlord and Tenant. Tenant shall pay to Landlord on demand the difference between the amount paid by Tenant and the actual amount due. If the total amount paid by Tenant hereunder for any such calendar year shall exceed such actual amount due from Tenant for such calendar year, the excess shall be credited by Landlord against any amounts then due and owing by Tenant to Landlord and any remaining net surplus shall then be refunded by Landlord to Tenant. Failure of Tenant to pay Tenant's Insurance Costs in the manner and time provided herein shall constitute an event of default hereunder. MUTUAL WAIVER OF SUBROGATION. Notwithstanding any provision in this Lease to the contrary, Landlord and Tenant each hereby waive any and all rights of recovery, claim, action or cause of action, against the other, its officers, employees or agents, for any loss or damage that may occur to the Leased Premises, or any improvements thereto, or the Building or any improvements thereto, or any personal property of such party therein, by reason of fire, the elements, or any other cause is insured against under the terms of standard fire and extended coverage general liability insurance policies, regardless of cause or origin, including negligence of the other party hereto, its officers, employees or agents, and each covenants that no insurer shall hold any right of subrogation against such other party. 9. USE. The Leased Premises shall be used only for the purpose of receiving, storing, shipping and selling (other than retail) products, materials and merchandise made and/or distributed by Tenant and for such other lawful purposes as may be incidental thereto. Outside storage, including, without limitation, trucks and other vehicles, is prohibited without Landlord's prior written consent. Tenant shall at its own costs and expense obtain any and all licenses and permits necessary for any such use. Tenant shall comply with all governmental orders and directives for the correction, prevention and abatement of nuisances in or upon, or connected with, the Leased Premises all at Tenant's sole expense. Tenant shall not permit any objectionable or unpleasant odors, smoke, dust, gas, noise or vibrations to emanate from the Leased Premises, nor take any other action which would constitute a nuisance or would disturb or endanger any other tenants of the Building or Project or unreasonably interfere with the use of their respective premises. Without Landlord's prior written consent, Tenant shall not receive, store or otherwise handle any product, material or merchandise which is explosive or highly inflammable. Tenant will not permit the Leased Premises to be used for any purpose or in any manner (including, without limitation, any method of storage) which would render the insurance thereon void or the insurance risk more hazardous or cause the State Board of Insurance or other insurance authority to disallow any sprinkler credits. Landlord will not construct any structures or make any improvements to the common areas that would adversely affect the ingress and egress to the leased premises and the visability of the leased premises. 10. LANDLORD'S REPAIRS. Landlord shall at its expense maintain only the roof, foundation and the structural soundness of the exterior walls of the Building in good repair, reasonable wear and tear excepted. Tenant shall repair and pay for any damage caused by Tenant, or Tenant's employees agents or invitee, or caused by Tenant's default hereunder. The term "walls" as used herein shall not include windows, glass or plate glass, doors, special store fronts or office entries. Tenant shall immediately give Landlord written notice of defect or need for repairs, after which Landlord shall have reasonable opportunity to repair same or cure such defect. Landlord's liability with respect to any defects, repairs or maintenance for which Landlord is responsible under any of the provisions of this Lease shall be limited to the cost of such repairs or maintenance or the curing of such defect. 11. TENANT'S REPAIRS a) Tenant shall at its own cost and expenses keep and maintain all parts of the Leased Premises (except those for which Landlord is expressly responsible under the terms of this Lease) in good condition, promptly making all necessary repairs and replacements, including but not limited to, windows, glass, plate glass doors, any special office entry, interior walls and finish work, floors and floor covering, downspout, gutters, heating and air conditioning systems, lighting, electrical systems, dock boards, truck doors, door bumpers, paving, plumbing lines, equipment, and fixtures, termite and pest extermination, regular removal of trash and debris, including rail spur areas, keeping the theses areas, parking areas, driveways, alleys and the whole of the 4 5 Leased Premises in a clean and sanitary condition, and maintaining any spur track serving the Leased Premises (Tenant agrees to sign a joint maintenance agreement with the railroad company servicing the Leased Premises, if requested by the railroad company). Tenant shall not be obligated to repair any damage caused by fire, tornado or other casualty covered by the insurance to be maintained by Landlord except with respect to tornado or hurricane damage. b) Tenant shall not damage any demising wall or disturb the integrity and support provided by any demising wall and shall, at its sole cost and expense, promptly repair any damage or injury to any demising wall caused by Tenant or its employees, agents or invitee. c) In the event the Leased Premises constitute a portion of a multiple occupancy building. Tenant and its employees, customers and licensees shall have the exclusive right to use the parking areas, if any, as may be designated by Landlord in writing, subject to such reasonable rules and regulations as Landlord may from time to time prescribe and subject to rights of ingress and egress of other tenants. Landlord shall not be responsible for enforcing Tenant's [exclusive parking rights] against any third parties. Further, in multiple occupancy buildings, Landlord shall perform the paving and landscape maintenance, and reserves the right to perform exterior painting and common sewage line plumbing which are otherwise Tenant's obligations under subparagraph (a) above with respect to such items, and Tenant shall be liable for its proportionate share (as defined in subparagraph (a) above) of the cost and expense of the care for the grounds around the Building, including but not limited to the mowing of grass, care of shrubs, general landscaping, maintenance of parking areas, driveways, and alleys, exterior repainting and common sewage line plumbing; provided, however, that Landlord shall have the right to require Tenant to pay such other reasonable proportion of said mowing, shrub care and general landscaping costs as may be determined by Landlord in its sole discretion; and further provided that if Tenant or any other particular tenant of the Building can be clearly identified as being responsible for obstructions or stoppage of the common sanitary sewage line, then Tenant, if Tenant is responsible, or such other responsible tenant, shall pay the entire cost thereof, upon demand, as additional rent. Tenant shall pay its share, determined as aforesaid, of such costs and expenses in the event Landlord elects to perform or caused to be performed such work which sum shall be due and payable ten (10) days after receipt of a statement thereafter. d) In the event the Leased Premises constitute a portion of a multiple occupancy building, Landlord shall have the right to coordinate any repairs and other maintenance of any rail tracks serving or to serve the Building, and if Tenant uses the rail tracks, Tenant shall reimburse Landlord from time to time upon demand, as additional rent, for a share of the costs of the repairs and maintenance and any other sums specified in any agreement to which Landlord is a party respecting the tracks, such share to be a fraction, the numerator of which is the space contained in the Leased Premises, and the denominator of which is the entire space occupied by rail users in the Building which sum shall be due and payable ten (10) days after receipt of a statement thereafter. e) Tenant shall, at its own costs and expense, enter into a regularly scheduled preventive maintenance/service contract with a maintenance contractor for servicing all hot water, heating and air conditioning systems and equipment within the Leased Premises. The maintenance contractor and the contract must be approved by Landlord and such approval shall not be unreasonably withheld. The service contract must include all services suggested by the equipment manufacturer within the operation/maintenance manual and must become effective (and a copy thereof delivered to Landlord) within thirty (30) days of the date Tenant takes possession of the Leased Premises. 12. TENANT IMPROVEMENTS AND ALTERATIONS Tenant shall not make any alterations, additions or improvements to the Leased Premises (including but not limited to roof and wall penetrations) or Building without the prior written consent of Landlord, and such consent shall not be unreasonably withheld. All Tenant alterations, additions and/or improvements shall comply with insurance requirements and with all applicable laws, ordinances, and regulations. Additionally, all Tenant alterations, additions and/or improvements shall be in accordance with Landlord's specifications. All Tenant alterations, additions and/or improvements shall be constructed in a good and workmanlike manner. All plans and specifications for Tenant's alterations, additions and/or improvements shall be submitted to Landlord for Landlord's written approval. Tenant agrees that Landlord may monitor all phases of Tenant's construction. Tenant shall reimburse Landlord for Landlord's reasonable expenses for reviewing plans and documents and in monitoring construction. Landlord's review of plans and monitoring construction shall be solely for Landlord's own benefit and shall impose no duty or obligation on Landlord to confirm that the plans and specifications and/or construction comply with applicable laws, codes, rules, or regulations. At Landlord's request, Tenant shall obtain payment and performance bonds approved by Landlord, for any Tenant construction which bonds shall be delivered to Landlord prior to commencement of construction. Upon completion of Tenant's construction, Tenant shall deliver to Landlord sworn statements setting forth the names of all contractors and subcontractors who performed work along with final lien waivers from such contractors and subcontractors. Tenant may, without the consent of Landlord, but at its own cost and expense and in a good workmanlike manner, erect such shelves, bins, machinery, and trade fixtures as it may deem advisable, without altering the basic character of the Building or improvements and without overloading or damaging such Building or improvements, and in each case complying with all applicable governmental laws, ordinances, regulations and other requirements. All alterations, additions, improvements and partitions erected by Tenant shall be and remain the property of Tenant during the term of this Lease and Tenant shall, unless Landlord otherwise elects as hereinafter provided, remove all alterations, additions, improvements and partitions erected by Tenant and restore the Leased Premises to its original condition by the date of termination of this Lease or upon earlier vacating of the Leased Premises; provided, however, that if Landlord so elects prior to termination of this Lease or upon earlier vacating of the Leased Premises, such alterations, additions, improvements and partitions shall become the property of Landlord as of the date of termination of this Lease or upon earlier vacating of the Leased Premises and shall be delivered up to the Landlord with the Leased Premises. All shelves, bins, machinery and trade fixtures installed by Tenant may be removed by Tenant prior to the termination of this Lease if Tenant so elects, and shall be removed by the date of termination of this Lease or upon earlier vacating of the Leased Premises if required shall be accomplished in a good workmanlike manner so as not to damage the primary structure or structural qualities of the buildings and other improvements situated on the Leased Premises. 5 6 13. SIGNS Tenant shall have the right to install signs upon the Leased Premises only when first approved in writing by Landlord and subject to any applicable governmental laws, ordinances, regulations, Landlord's or other architectural controls, and other requirements. Tenant shall remove all such signs by the termination of this Lease. Such installations and removals shall be made in such manner as to avoid injury or defacement of the Building and other improvements, and Tenant shall repair any injury or defacement, including, without limitation, discoloration, caused by such installation and/or removal. 14. INSPECTION Landlord and Landlord's agents and representatives shall have the right to enter and inspect the Leased Premises and Building at any reasonable time, and subject to advance notice to Tenant, during business hours, for the purpose of ascertaining the condition of the Leased Premises or in order to made such repairs as may be required or permitted to be made by Landlord under the terms of this Lease. During the period that is six (6) months prior to the end of the term hereof, Landlord and Landlord's agents and representatives shall have the right to enter the Leased Premises at any reasonable time during business hours for the purpose of showing the Leased Premises and shall have the right to erect on the Leased Premises a suitable sign indicating the Leased Premises are available. Tenant shall give written notice to Landlord at least thirty (30) days prior to vacating the Leased Premises and shall arrange to meet with Landlord for a joint inspection of the Leased Premises prior to vacating. In the event of Tenant's failure to give such notice or arrange to meet with Landlord for a joint inspection of the Leased Premises prior to vacating, Landlord's inspection at or after Tenant's vacating the Leased Premises shall be conclusively deemed correct for purposes of determining Tenant's responsibility for repairs and restoration. 15. UTILITIES Landlord agrees to provide at Landlord's cost water, electricity and telephone service connections into the Leased Premises; but Tenant shall pay for all water, gas, heat, light, power, telephone, sewer, sprinkler charges and other utilities and services used on or from the Leased Premises, together with any taxes, penalties, surcharges or the like pertaining thereto and any maintenance changes for utilities, as well as shall furnish all electric light bulbs and tubes. If any such services are not separately metered to Tenant, Tenant shall pay Tenant's reasonable proportion, as determined by Landlord, of all charges jointly metered with other premises. Landlord shall in no event be liable for any interruption or failure of utility services on the Leased Premises. 16. ASSIGNMENT AND SUBLETTING a) Tenant will not assign this Lease, or allow same to be assigned by operation of law or otherwise, or sublet the Leased Premises or any part thereof without the prior written consent of Landlord, and such consent shall not be unreasonably withheld. Notwithstanding any permitted assignment or subletting. Tenant shall at all times remain directly, primarily and fully responsible and liable for the payment of the rent herein specified and for compliance with all of its other obligations under the terms, provisions and covenants of this Lease. If the Leased Premises or any part thereof are then assigned or sublet, Landlord, in addition to any other remedies herein provided or provided by law, may at its option collect directly from such assignee or subtenant all rents becoming due to Tenant under such assignment or sublease and apply such rent against any sums due to Landlord from Tenant hereunder, and no such collection shall be construed to constitute a novation or a release of Tenant from the further performance of Tenant's obligations hereunder. For purpose of this Lease and transfer of more than fifty percent (50%) of the beneficial interest in Tenant or of the control of Tenant (if Tenant is a partnership, corporation, limited liability, company, trust, or other type of business, organization or entity) shall constitute an assignment of this Lease. b) If Tenant shall propose to sublet or assign this Lease, it shall so notify Landlord in writing not less than thirty (30) days prior to the date of the proposed assignment or subletting. The notice shall set forth the name of the proposed subtenant or assignee, the term, use, rental rate and other particulars of the proposed subletting or assignment, including without limitation, proof satisfactory to Landlord that the proposed subtenant or assignee is financially responsible and will immediately occupy and hereafter use the entire Leased Premises (or any sublet portion thereof) for the remaining term of this Lease (or for the entire term of the sublease, if shorter). d) Landlord agrees to approve any assignment by Tenant to any corporation succeeding to substantially all the business and assets of Tenant by merger, consolidation, purchase of assets or otherwise, or the any assignment or subletting to a corporation which is an affiliate of tenant. In other cases, provided that there is no event of default on the part of Tenant (or circumstances which, with the passing of time, giving of notices, or both, would constitute an event of default, Landlord agrees not to unreasonably withhold approval of any proposed subletting or assignment as to which Landlord declines its rights 6 7 of cancellation hereunder provided the proposed transaction is consummated within thirty (30) days after Landlord's approval, is upon the same terms and conditions disclosed to Landlord in Tenant's notice, and the assignment or subletting is with another financially responsible party whose use of the Leased Premises will not depreciate the value of the Leased Premises, or the value of the property adjacent thereto, or will not be extra hazardous with reference to the risk of fire or other hazards, and shall not result in any additional environmental risk for the Project. Any assignment or subletting without Landlord's approval, where required hereunder, shall be void and of no effect. e) Landlord shall have the right to transfer and assign, in whole or in part, any of its rights under this Lease, and in the Building or Project referred to herein; and to the extent that such assignee assumes Landlord's obligations hereunder, Landlord shall by virtue of such assignment be released from such obligation. 17. FIRE AND CASUALTY DAMAGE a) If the Building should be damaged or destroyed by fire, tornado or other casualty, Tenant shall give immediate written notice thereof to Landlord. b) If the Building should be totally destroyed by fire, tornado or other casualty, or if they should be so damaged, thereby that rebuilding or repairs cannot in Landlord's estimation be completed within two hundred (200) days after the date upon which Landlord is notified by Tenant of such damage, this Lease shall terminate and the rent shall be abated during the unexpired portion of this Lease, effective upon the date of the occurrence of such damage. c) If the Building should be damaged by any peril covered by the insurance to be provided by Landlord this Lease, but only to such extent that rebuilding or repairs can in Landlord's estimation be completed within two hundred (200) days after the date upon which Landlord is notified by Tenant of such damage, this Lease shall not terminate, and Landlord shall at its sole costs and expense thereupon proceed with reasonable diligence to rebuild and repair the Building to substantially the condition in which it existed prior to such damage, except that Landlord shall not be required to rebuild, repair or replace any part of the partitions, fixtures, additions and other improvements which may have been placed in, on or about the Leased Premises by Tenant. If the Leased Premises are untenantable, the rent owed by Tenant shall not be abated but shall be reduced to such extent as may be fair and reasonable under all of the circumstances. In the event that Landlord shall fail to complete such repairs and rebuilding within two hundred (200) days after the date upon which Landlord is notified by Tenant of such damage, Tenant may at its option terminate this Lease by delivering written notice of termination to Landlord within ten (10) days after expiration of such two hundred (200) day period as Tenant's exclusive remedy, whereupon all rights and obligations hereunder shall cease and terminate. Failure by Tenant to timely terminate this Lease as set forth in the preceding sentence shall be deemed a waiver by Tenant of its right to do so. d) Notwithstanding anything herein to the contrary, in the event the holder of any indebtedness secured by a mortgage or deed of trust covering the Leased Premises requires that the insurance proceeds be applied to such indebtedness, than Landlord shall have the right to terminate this Lease by delivering written notice of termination to Tenant within fifteen (15) days after such requirement is made by any such holder, whereupon all rights and obligations hereunder shall cease and terminate. 18. CONDEMNATION a) If the whole or any substantial part of the Leased Premises should be taken from any public or quasi-public use under governmental law, ordinance or regulation, or by right of eminent domain, or by private purchase in lieu thereof and the taking would prevent or materially interfere with the use of the Leased Premises for the purposes for which they are being used, this Lease shall terminate and the rent shall be abated during the unexpired portion of this Lease, effective when the physical taking of the Leased Premises shall occur. b) If part of the Leased Premises shall be taken for any public or quasi-public use under any governmental law, ordinance or regulation, or by right of eminent domain, or by private purchase in lieu thereof, and this Lease is not terminated as provided in the subparagraph above, this Lease shall not terminate but the rent payable hereunder during the unexpired portion of this Lease shall be reduced to such extent as may be fair and reasonable under all of the circumstances. c) In the event of any such taking or private purchase in lieu thereof, Landlord and Tenant shall each be entitled to receive and retain such separate awards and/or portions of lump sum awards as may be allocated to their respective interests in any condemnation proceedings. 19. HOLDING OVER Tenant agrees that at the termination of this Lease by lapse of time or otherwise, yield up immediate possession to Landlord. If Tenant holds over after the expiration or termination of this Lease, unless the parties hereto otherwise agree in writing on the terms of such holding over, the hold over tenancy shall be subject to termination by Landlord at any time upon not less than five (5) days advance written notice, or by Tenant at any time upon not less than thirty (30) days advance written notice. During the hold over, all of the other terms and provisions of this Lease shall be applicable during that period, except that Tenant shall pay Landlord from time to time upon demand, as rental for the period of any holdover, an amount equal to two (2) times the rent in effect on the termination date, computed on a daily basis for each day of the hold over period. No holding over by Tenant, whether with or without consent of Landlord, shall operate to extend this Lease except as otherwise expressly provided. The preceding provisions of this paragraph shall not be construed as Landlord's consent for Tenant to hold over. 20. QUIET ENJOYMENT Landlord covenants that it now has, or will acquire before Tenant takes possession of the Leased Premises, good title to the Leased Premises, free and clear of all liens and encumbrances, excepting only the lien for current taxes not yet due, such mortgage or mortgages as are permitted by the terms of this Lease, 7 8 zoning ordinances and other building and fire ordinances and governmental regulations relating to the use of such property, and easements, restrictions and other conditions of record. In the event this Lease is a sublease, then Tenant agrees to take the Leased Premises subject to the provisions of the prior leases. Landlord represents and warrants that it has full right and authority to enter into this Lease and that Tenant, upon paying the rentals herein set forth and performing its other covenants and agreements herein set forth, shall peaceably and quietly have, hold and enjoy the Leased Premises for the term hereof without hindrance or molestation from Landlord, subject to the terms and provisions of this Lease. 21. TENANT'S EVENTS OF DEFAULT The following events shall be deemed to be events of default by Tenant under this Lease: a) Tenant shall fail to pay any installment of the rent herein reserved when due, or any payment with respect to Tenant's pro rata share of Building Costs hereunder when due, or any other payment or reimbursement to Landlord required herein when, due, and such failure shall continue for a period of five (5) days from the date such payment was due. b) Tenant shall become insolvent, or shall make a transfer in fraud of creditors, or shall make an assignment for the benefit of creditors. c) Tenant shall be adjudged bankrupt or insolvent in proceedings filed against Tenant. d) A receiver or trustee shall be appointed for all or substantially all of the assets of Tenant. e) Tenant shall desert or vacate any substantial portion of the Leased Premises. f) Tenant shall fail to comply with any term, provision or covenant of this Lease (other than the foregoing in this Paragraph), and shall not cure such failure within twenty (20) days after written notice thereof to Tenant. 22. LANDLORD'S REMEDIES Upon the occurrence of any such events of default described in Paragraph 19 hereof, Landlord shall have the option to pursue any one or more of the following remedies without any notice or demand whatsoever: a) Terminate this Lease, or terminate Tenant's rights to possession of the Leased Premises under this Lease (but not the Lease, itself ), and in either event Landlord shall have the right to immediate possession of the Leased Premises and may reenter the Leased Premises, change the locks and remove all persons and property therefrom using all force necessary for this purpose without being guilty in any manner of trespass or otherwise; and any and all damages to Tenant, or persons holding under Tenant, by reason of such re-entry are hereby expressly waived; and any such termination or re-entry on the part of Landlord shall be without prejudice to any remedy available to Landlord for arrears of rent, breach of contract, damages or otherwise, nor shall the termination of this Lease or of Tenant's rights of possession under this Lease by Landlord acting under this subsection be deemed in any manner to relieve Tenant from the obligation to pay the rent and all other amounts due or to become due as provided in this Lease for and during the entire unexpired portion then remaining of the Lease term. In the event of termination of this Lease or of Tenant's rights of possession under this Lease by Landlord as provided in this subparagraph, Landlord shall have the further right (but not the obligation) to relet the Leased Premises upon such terms, conditions and covenants as are deemed proper by Landlord for the account of Tenant, and in such event, Tenant shall pay to Landlord all costs of renovating and altering the Leased Premises for a new tenant or tenants in addition to all brokerage and/or legal fees incurred in connection therewith. Landlord shall credit Tenant only for such amounts as are actually received from such reletting during the then remaining Lease term. Alternatively, at the election of Landlord, Tenant covenants and agrees to pay as damages to Landlord, upon any such termination by Landlord of this Lease or of Tenant's rights of possession under this Lease, such sum as at the time of such termination equals the amount of the excess, if any, of the then present value of all the rent which would have been due and payable hereunder during the remainder of the full Lease term (had Tenant kept and performed all agreements and covenants of Tenant set forth in this Lease) over and above the then present rental value of the Leased Premises for said remainder of the Lease term. For purposes of present value calculations, Landlord and Tenant stipulate and agree to a discount rate of six (6) percent per annum. b) Without terminating this Lease, to enter upon the Leased Premises and without being guilty in any manner of trespass or otherwise and without liability for any damage to Tenant or persons holding under Tenant by reason of such re-entry, all of which are hereby expressly waived, and to do or perform whatever Tenant is obligated hereunder to do or perform under the terms of this Lease; and Tenant shall reimburse Landlord on demand for any expenses or other sums which Landlord may incur or expend plus fifteen percent (15% ) thereof to cover Landlord's overhead and administrative cost, pursuant to this subparagraph, and Landlord shall not be liable for any damages resulting to Tenant from such action, whether caused by the negligence of Landlord or otherwise; provided, however, nothing in this subsection shall be deemed an obligation or undertaking by Landlord to remedy any such defaults of Tenant. c) Without waiving such event of default, apply all or any part of the security deposit to cure the event of default or to any damages suffered as a result of the event of default to the extent of the amount of damages suffered. Tenant shall reimburse Landlord for the amount of such depletion of the security deposit on demand. d) In addition to any of the remedies noted above or hereinafter, Landlord is entitled and authorized to enter upon and take possession of the Leased Premises and remove any property that may be found within the Leased Premises. Landlord shall have the right to change any and all locks and other security devices restricting access to the Leased Premises. To the extent permitted by law, Tenant hereby waives: (i) any notices of Landlord's intent to re-enter or re-take possession of the Leased Premises; (ii) any notice provided by statute or otherwise of such re-entry or repossession or changing of locks; (iii) any claim or cause of action, whether based on trespass, conversion, or otherwise, against Landlord or Landlord's agents, employees, officers, or contractors for any damages caused by the alteration of any locks or re-entry or repossession by 8 9 Landlord, whether or not caused by the negligence of Landlord or otherwise; and (iv) any right of redemption, re-entry, or repossession of Tenant and any notice of legal proceeding for re-entry, including actions for forcible detainer and entry. Provided that Landlord has not terminated the Lease in writing or permanently excluded Tenant from the Leased Premises, Landlord shall not be obligated to provide a new key to Tenant except during Landlord's normal business hours, and only after the following: (1) Tenant cures all events of default existing at the time of lock-out, including payment of late charges and reasonable expenses of lock-out (which shall include the cost of security services and removal of old locks and installation of new locks), and (2) Tenant has provided Landlord additional security or further assurances of Tenant's future performance of all Tenant's obligations arising under the Lease, such security or assurances to be satisfactory to Landlord in the exercise of Landlord's sole and absolute discretion, which security may include, but is not limited to, a requirement that the security deposit be increased to an amount equal to three (3) months rent. Such lock-out should not be deemed to be a termination of the Lease unless Landlord gives a written notice of termination to Tenant. It is agreed that if Tenant abandons or vacates the Leased Premises, Landlord may take such steps as Landlord deems necessary, appropriate, or desirable to protect the Leased Premises and the property therein from deterioration, including but not limited to, the lock-out of Tenant as described herein. In the event Tenant fails to pay any installment of rent or any reimbursement, additional rental, or any other payment hereunder as and when such payment is due, to help defray the additional cost to Landlord for processing such late payments Tenant shall pay to Landlord on demand a late charge in an amount equal to five percent (5%) of such installment, reimbursement, additional rental or any other payment and the failure to pay such late charge within ten (10) days after demand therefor shall be an event of default hereunder. The provision for such late charge shall be in addition to all of Landlord's other rights and remedies hereunder or at law and shall not be construed as liquidated damages or as limiting Landlord's remedies in any manner. Pursuit of any of the forgoing remedies shall not preclude pursuit of any of the other remedies herein provided or any other remedies provided by law, nor shall pursuit of any remedy herein provided constitute a forfeiture or waiver of any rent due to Landlord hereunder or of any damages accruing to Landlord by reason of the violation of any of the terms, provisions and covenants herein contained. No act or thing done by the Landlord or its agents during the term hereby granted shall be deemed a termination of this Lease or an acceptance of the surrender of the Leased Premises, and no agreement to terminate this Lease or accept a surrender of the Leased Premises shall be valid unless in writing signed by Landlord. No waiver by Landlord of any violation or breach of any of the terms, provisions and covenants herein contained. Landlord's acceptance of the payment of rental or other payments hereunder after the occurrence of an event of default shall not be construed as a waiver of such default, unless Landlord so notifies Tenant in writing. Forbearance by Landlord to enforce one or more of the remedies herein provided upon an event of default shall not be deemed or construed to constitute a waiver of such default or of Landlord's right to enforce any such remedies with respect to such default or any subsequent default. If, on account of any breach or default by Tenant in Tenant's obligations under the terms and conditions of this Lease, it shall become necessary or appropriate for Landlord to employ or consult with any attorney concerning or to enforce of defend any of Landlord's rights or remedies hereunder, Tenant agrees to pay any reasonable attorney's fees so incurred. All sums due and owing by Tenant to Landlord under this Lease shall bear interest from the date due until paid at the lesser of (a) the maximum non-usurious rate permitted by law or (b) the greater of (i) two percent (2%) above the "prime rate" per annum of Texas Commerce Bank National Association or its successor in effect on said due date or (ii) eighteen percent (18%) per annum. In either case, such interest to be compounded daily; provided, however, in no event shall the rate of interests hereunder exceed the maximum non-usurious rate of interest (hereinafter called the "Maximum Rate") permitted by the applicable laws of the State of Texas or the United States of America, whichever shall permit the higher non-usurious rate, and as to which Tenant could not successfully assert a claim or defense of usury. To the extent that the Maximum Rate is determined by reference to the laws of the State of Texas, the Maximum Rate shall be the indicated rate ceiling (as defined and described in Texas Revised Civil Statutes, Article 5069-1.04, as amended at the applicable time in effect. 23. LANDLORD'S LIEN Any statutory lien for rent is not hereby waived, the express contractual lien herein granted being in addition and supplementary thereto. 24. SUBORDINATION This Lease and all rights of Tenant hereunder are subject and subordinate (i) to any mortgage or deed of trust, blanket or otherwise, which does now or may hereafter affect the Building (and which may also affect other properties) and (ii) to any and all increases, renewals, modifications, consolidations, replacements and extensions of any such mortgage or deed of trust. This provision is hereby declared by Landlord and Tenant to be self-operative and no further instruments shall be required to effect such subordination of this Lease. Tenant shall, however, upon demand at any time or times execute, acknowledge and deliver to Landlord any and all instruments and certificates that may be necessary or proper to more effectively subordinate this Lease and all rights of Tenant hereunder to any such mortgage or deed of trust or to confirm or evidence such subordination. In the event Tenant shall fail or neglect to execute, acknowledge and deliver any subordination agreement or certificate, Landlord in addition to any other remedies it may have, as the agent and attorney in fact of Tenant, execute, acknowledge and deliver the same and Tenant hereby irrevocably nominates, constitutes 9 10 and appoints Landlord Tenant's proper and legal agent and attorney in fact for such purposes. Such power of attorney shall not terminate on disability of the principal. Tenant covenants and agrees, in the event any proceedings are brought for the foreclosure of any such mortgage or if the Building is sold to any purchaser, to attorn to and recognize such purchaser as the Landlord under this Lease. Tenant agrees to execute and deliver at any time and from time to time, upon the request of Landlord or of any holder(s) of any of the indebtedness or other obligations secured by any of the mortgages or deeds of trust be necessary or appropriate in any such foreclosure proceeding or otherwise to evidence such attornment. Tenant hereby irrevocably appoints Landlord and the holders of the indebtedness or other obligations secured by the aforesaid mortgages and/or deeds of trust jointly and severally the agent and attorney shall not terminate on disability of the principal. Tenant further waives the provisions of any statute or rule of law, now or hereafter in effect, which may give or purport to give Tenant any right or election to terminate or otherwise adversely affect this Lease and the obligation of Tenant hereunder in the event any such foreclosure proceedings is brought or trustee's sale occurs and agrees that this Lease shall not be affected in any way whatsoever by any such foreclosure proceeding or trustee's sale unless the holder(s) of the indebtedness or other obligations secured by said mortgages and/or deeds of trust shall declare otherwise. In the event Landlord places a mortgage, deed of trust or otherwise on the building or project, Landlord shall provide Tenant a non-disturbance agreement in a form reasonably satisfactory to Landlord, Tenant and Landlord's creditor. 25. LANDLORD'S DEFAULT Landlord shall only be deemed to be in default on the terms of the Lease in the event Landlord shall violate, neglect, or fail to observe, keep or perform any covenant or agreement which is not observed, kept, or performed by Landlord within thirty (30) days after the receipt by Landlord of Tenant's written notice of such breach which notice shall specifically set out the breach. Landlord shall not be considered in default so long as Landlord commences to cure the breach in a diligent and prudent manner and is allowed such additional time as reasonably necessary to correct the breach. Notwithstanding any provisions to the contrary contained in this Lease, no personal liability of any kind or character whatsoever shall attach or at any time hereafter attach under any conditions to Landlord or any subsidiary, affiliate or partner of Landlord or their respective officers, directors, stockholders, or employees for payments of any amounts due under this Lease or for the performance of any obligation under this Lease. The exclusive remedies of Tenant for failure of Landlord to perform any of its obligations under this Lease shall be to proceed against the interest of Landlord in and to the Leased Premises it being understood that in no event shall a judgment for any deficiency or monetary claim be sought, obtained or enforced against Landlord or any subsidiary, affiliate or partner of Landlord or their respective officers, directors, stockholders or employees. In no event shall Landlord be liable for any consequential, special, punitive or exemplary damages. 26. MECHANIC'S LIENS Tenant shall have no authority, express or implied, to create or place any lien or encumbrance of any kind or nature whatsoever upon, or in any manner to bind, the interest of Landlord in the Leased Premises or to charge the rentals payable hereunder for any claim in favor of any person dealing with Tenant, including those who may furnish materials or perform labor for any construction or repairs, and each such claim shall affect and each such lien shall attach to, if it all, only the leasehold interest granted to Tenant by this instrument. Tenant covenants and agrees that it will pay or cause to be paid all sums legally due and payable by it on account of any labor performed or materials furnished in connection with any work performed on the Leased Premises on which any lien is or can be validly and legally asserted against its leasehold interest in the Leased Premises or the improvements thereon and that it will indemnify, defend and save and hold Landlord harmless from any and all loss, cost or expense based on or arising out of asserted claims or liens against the leasehold estate or against the right, title and interest of the Landlord in the Leased Premises or under the terms of this Lease. 27. NOTICES Each provision of this instrument or of any applicable governmental laws, ordinances, regulations and other requirements with reference to the sending, mailing or delivery of any notice or the making of any payment by Landlord to Tenant or with reference to the sending, mailing or delivery of any notice or the making of any payment by Tenant to Landlord shall be deemed to be complied with when and if the following steps are taken: a) All rent and other payments required to be made by Tenant to Landlord hereunder shall be payable to Landlord at the address hereinbelow set forth or at such other address as Landlord may specify from time to time by written notice delivered in accordance herewith. Tenant's obligation to pay rent and any other amounts to Landlord under the terms of this Lease shall not be deemed satisfied until such rent and other amounts have been actually received by Landlord. b) All payments required to be made by Landlord to Tenant hereunder shall be payable to Tenant at the address hereinbelow set forth, or at such other address within the continental United States as Tenant may specify from time to time by written notice delivered in accordance herewith. c) Any notice or document required or permitted to be delivered hereunder shall be deemed to be delivered whether actually received or not, when deposited in the United States Mail, postage prepaid, Certified or Registered Mail, addressed to the parties hereto at the respective addresses set out below, or at such other address as they have heretofore specified by written notice delivered in accordance herewith:
Landlord: Tenant: --------- ------- Lakes Technology Center, Ltd. Sharps Compliance, Inc. c/o Transwestern Property Company 9050 Kirby Drive 6671 Southwest Fwy #200 Houston, TX 77054 Houston, TX 77074
If and when included within the term "Landlord", as used in this instrument, there are more than one person, firm or corporation, all shall jointly arrange among themselves for their joint execution of such a notice 10 11 specifying some individual at some specific address for their receipt of notices and payments to Landlord; if and when included within the term "Tenant" as used in this instrument, there are more than one person, firm or corporation, all shall jointly arrange among themselves for their joint execution of such a notice specifying some individual at some specific address within the continental United States for the receipt of notices and payments to Tenant. All parties included within the terms "Landlord" and "Tenant", respectively, shall be bound by notices given in accordance with the provisions of this paragraph to the same effect as if each had received such notice. 28. MISCELLANEOUS a) Words of any gender used in this Lease shall be held and construed to include any other gender, and words in the singular number shall be held to include the plural, unless the context otherwise requires. b) The terms, provisions and covenants and conditions contained in this Lease shall apply to, inure to the benefit of, and be binding upon, the parties hereto and upon their respective heirs, legal representatives, successors and permitted assigns, except as otherwise herein expressly provided. Each party agrees to furnish to the other, promptly upon demand, a corporate resolution, proof of due authorization by partners, or other appropriate documentation evidencing the due authorization of such party to enter into this Lease. c) The captions inserted in this Lease are for convenience only and in no way define, limit or otherwise describe the scope or intent of this Lease, or any provision hereof, or in any way affect the interpretation of this Lease. d) Tenant agrees from time to time within ten (10) days after request of Landlord, to deliver to Landlord, or Landlord's designee, an estoppel certificate stating that this Lease is in full force and effect, the date to which rent has been paid, the unexpired term of this Lease and such other matters pertaining to this Lease as may be requested by Landlord. It is understood and agreed that Tenant's obligation to furnish such estoppel certificates in a timely fashion is a material inducement for Landlord's execution of this Lease. e) This Lease may not be altered, changed or amended except by an instrument in writing signed by both parties hereto. f) All obligations of Tenant hereunder not fully performed as of the expiration or earlier termination of the term of this Lease shall survive the expiration or earlier termination of the term hereof, including, without limitation, all payments obligations with respect to taxes and insurance and all obligations concerning the condition of the Leased Premises. Upon the expiration or earlier termination of the term hereof, and prior to Tenant vacating the Leased Premises, Tenant shall pay to Landlord any amount reasonably estimated by Landlord as necessary to put the Leased Premises, including without limitation all heating and air conditioning systems and equipment therein, in good condition and working order. Tenant shall also, prior to vacating the Leased Premises, pay to Landlord the amount, as estimated by Landlord, of Tenant's obligation hereunder for Tenant's pro rata share of Building Costs for the year in which the Lease expires or terminates. All such amounts shall be used and held by Landlord for payment of such obligations of Tenant hereunder, with Tenant being liable for any additional costs therefor upon demand by Landlord, or with any excess to be returned to Tenant after all such obligations have been determined and satisfied, as the case may be. Any security deposit held by Landlord shall be credited against the amount payable by Tenant under this Paragraph. g) If any clause or provision of this Lease is illegal, invalid or unenforceable under present or future laws effective during the term of this Lease, then and in that event, it is the intention of the parties hereto that the remainder of this Lease shall not be affected thereby, and it is also the intention of the parties to this Lease that in lieu of each clause or provision of this Lease that is illegal, invalid or unenforceable, there be added as a part of this Lease contract a clause or provision as similar in terms to such illegal, invalid or unenforceable clause or provision as may be possible and be legal, valid and enforceable. h) Because the Leased Premises are on the open market and are presently being shown, this Lease shall be treated as an offer with the Leased Premises being subject to prior lease and such offer to withdrawal or non-acceptance by Landlord or to other use of the Leased Premises without notice, and this Lease shall not be valid or binding unless and until accepted by Landlord in writing. i) All referenced in this Lease to "the date hereof" or similar referenced shall be deemed to refer to the last date, in point of time, on which all parties hereto have executed this Lease. j) It is expressly stipulated and agreed that none of the obligations to be undertaken by Landlord hereunder shall constitute any form of warranty, express or implied, all such obligations being contractual covenants of performance. Without limiting the generality of the foregoing, THERE IS NO WARRANTY AS TO SUITABILITY, HABITABILITY, MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE GIVEN IN CONNECTION WITH THIS LEASE. This disclaimer of express and implied warranties and the provisions of Paragraph 8 under which Tenant assumes responsibility for repairs, are provisions bargained for by the parties entering into this Lease. Were warranties undertaken by the Landlord hereunder or were the Landlord agrees to perform repairs beyond that contemplated to be performed by Landlord hereunder, the economics of this Lease would have been affected and it would require an increase in Minimum Rent from that payable hereunder. 29. EXHIBITS AND ATTACHMENT All Exhibits, attachments, riders and addenda referred to in this Lease are incorporated in this Lease and made a part hereof for all intents and purposes. 30. TENANT'S INDEMNITY Tenant covenants and agrees to indemnify and hold Landlord harmless from and against any and all costs, liability or expense arising out of any claims of any person or persons, or imposed by reason of any violation of law or ordinance on account of any occurrence in, upon or at the Leased Premises, or resulting from the 11 12 occupancy or use thereof by Tenant or by any person or persons holding thereunder, or by reason of the use or misuse of the parking area of any other common facility in the Building by Tenant or by any person or persons holding or using the Leased Premises, or any part thereof, under Tenant, including, without limitation, Tenant's customers, invitees, agents, contractors, employees, servants, subtenants, assignees, licensees or concessionaires. 31. HAZARDOUS MATERIALS a) Tenant shall not, without Landlord's prior written consent, cause or permit any Hazardous Materials (hereinafter defined) to be stored, used or disposed of in or about the Leased Premises or Project by Tenant, its agents, employees, contractors or invitees, nor shall the use which Tenant makes of the Leased Premises result in any Hazardous Materials Contamination (hereinafter defined). For purposes of this Lease, the following terms shall have the meanings herein specified: (1) "Hazardous Materials" shall mean (i) any "hazardous waste" as defined by the Resource Conservation and Recovery Act of 1976 (42 U.S.C.A. Sections 6901 et seq.), as amended from time to time, and regulations promulgated thereunder ("RCRA"); (ii) any "hazardous substance" as defined by the Comprehensive Environmental Response, Compensation and Liability Act of 1980 (42 U.S.C.A. Sections 9601 et seq.), as amended from time to time, and regulations promulgated thereunder ("CERCLA") ; (iii) any hazardous substances as defined by the Texas Natural Resource Conservation Commission ("TNRCC"); (iv) asbestos, polychlorinated biphenyls or other substances specifically regulated under the Toxic Substances Control Act (15 U.S.C. Sections 2601 et seq.), as amended from time to time, and regulations promulgated thereunder ("TSCA"); (v) pesticides specifically regulated under the Federal Insecticide, Fungicide and Rodenticide Act (7 U.S.C.A. Sections 135 et seq.), as amended from time to time, and regulations promulgated thereunder ("FIFRA"); (vi) storage tanks, whether or not underground and whether empty, filled or partially filled with any substance; (vii) the presence of oil, petroleum products, and their by-products; (viii) any substance the presence of which in or about the Property is prohibited by any governmental authority or which is hereafter classified by any governmental authority as a hazardous or toxic waste, material, substance or similar phraseology; and (ix) any other substance which by any governmental authority requires special handling or notification of any governmental authority in its collection, storage, treatment, or disposal. (2) "Hazardous Materials Contamination" shall mean the spillage, leakage, emission or disposal of Hazardous Materials (whether presently existing or hereafter occurring) in or about the buildings, facilities, soil, groundwater, air or other elements in or about the Property or any other property as a result of Hazardous Materials at any time emanating from the Leased Premises. b) Notwithstanding the foregoing, Tenant shall be permitted to store, use and dispose of deminimis amounts of Hazardous Materials which are incidental to Tenant's business so long as such amounts does not increase the Landlord's insurance or change the occupancy class of the Building. Such Hazardous Materials and all containers therefore, shall be stored, used and disposed of in a manner that complies with all federal, state and local laws or regulations applicable to such Hazardous Materials. Tenant shall be liable for all costs and expenses related to the storage, use and disposal of such deminimis amounts of Hazardous Materials incidental to Tenant's business and shall indemnify, defend and hold Landlord harmless from any claims or liabilities relating thereto. c) At the commencement of each "Lease Year" (the term "Lease Year" as used in this Lease shall mean any twelve (12) month period beginning with the Commencement Date and each twelve (12) month period beginning on any anniversary date thereof), Tenant shall disclose to Landlord the names and approximate amounts of all Hazardous Materials which Tenant intends to store, use or dispose of in or about the Leased Premises in the coming Lease Year. In addition, at the commencement of each Lease Year (beginning with the second Lease Year), Tenant shall disclose to Landlord the names and amounts of all Hazardous Materials that to Tenant's knowledge were actually stored, used or disposed of in or about the Leased Premises, if such materials were not previously identified to Landlord at the commencement of the previous Lease Years. d) Tenant shall give written notice to Landlord immediately upon Tenant's acquiring knowledge of the presence of any Hazardous Materials in or about the Leased Premises (subject to the provisions of paragraph b. hereof) or of any Hazardous Materials Contamination with a full description thereof. Landlord shall have the right, but not the obligation, without in any way limiting Landlord's other rights and remedies under the Lease, to enter onto the Leased Premises or to take such other actions as it deems necessary or advisable to cleanup, remove, resolve or minimize the impact of, or otherwise deal with, any Hazardous Materials or Hazardous Materials Contamination on the Project following receipt of any notice from any person or entity asserting the existence of any Hazardous Materials or Hazardous Materials Contamination pertaining to the Leased Premises or any part of the Project which, if true, could result in an order, suit, imposition of a lien on the Project, or other action and/or which, in Landlord's sole opinion, could jeopardize Landlord's security under the Lease. e) TENANT HEREBY AGREES THAT TENANT SHALL DEFEND, INDEMNIFY AND HOLD HARMLESS LANDLORD, ITS AGENTS AND EMPLOYEES FROM AND AGAINST ANY CLAIMS, DEMANDS, PENALTIES, FINES, LIABILITIES, SETTLEMENTS, DAMAGES, COSTS OR EXPENSES (INCLUDING WITHOUT LIMITATION, ATTORNEYS' AND CONSULTANTS' FEES, COURT COSTS AND LITIGATION EXPENSES) OF WHATEVER KIND OR NATURE, KNOWN OR UNKNOWN, CONTINGENT OR OTHERWISE, ARISING OUT OF OR IN ANY WAY RELATED TO (A) THE PRESENCE, DISPOSAL, RELEASE OR THREATENED RELEASE AND SUBSEQUENT REMEDIATION OF ANY HAZARDOUS MATERIALS OR ANY HAZARDOUS MATERIALS CONTAMINATION FROM THE LEASED PREMISES; (B) ANY PERSONAL INJURY (INCLUDING WRONGFUL DEATH) OR PROPERTY DAMAGE (REAL OR PERSONAL) ARISING OUT OF OR RELATED TO SUCH HAZARDOUS MATERIALS OR HAZARDOUS MATERIALS CONTAMINATION; OR (C) THE APPLICABILITY OF ANY LAWS RELATING TO HAZARDOUS MATERIALS ON THE LEASED PREMISES OR CAUSED BY TENANT. THE PROVISIONS OF THIS PARAGRAPH E. SHALL BE IN ADDITION TO ANY OTHER OBLIGATIONS AND LIABILITIES TENANT MAY HAVE TO LANDLORD AT LAW OR IN EQUITY AND SHALL SURVIVE THE EXPIRATION OF THIS LEASE OR THE TERMINATION THEREOF. 12 13 32. MITIGATION OF DAMAGES a) GENERAL DUTY TO MITIGATE. Both Landlord and Tenant shall each use commercially reasonable efforts to mitigate any damages resulting from a default of the other party under this Lease. b) LANDLORD'S DUTY TO MITIGATE DAMAGES. Landlord's obligation to mitigate damages after a default by Tenant under this Lease shall be satisfied in full if Landlord undertakes to lease the Leased Premises to another tenant (a "Substitute Tenant") in accordance with the following criteria: (i) Landlord shall have no obligation to solicit or entertain negotiations with any other prospective tenants for the Leased Premises until Landlord obtains full and complete possession of the Leased Premises including, without limitation, the final and unappealable legal right to relet the Leased Premises free of any claim of Tenant. (ii) Landlord shall not be obligated to offer the Leased Premises to a prospective tenant when other premises in the Project suitable for that prospective tenant's use are (or soon will be) available. (iii) Landlord shall not be obligated to lease the Leased Premises to a Substitute Tenant for a rental less than the current fair market rental then prevailing for similar office space in comparable office/warehouse buildings in the same market area as the Project, nor shall Landlord be obligated to enter into a new lease under other terms and conditions that are unacceptable to Landlord under Landlord's then current leasing policies for comparable space in the Project. (iv) Landlord shall not be obligated to enter into a lease with any proposed tenant whose use would: a. Violate any restriction, covenant, or requirement contained in the lease of another tenant of the Project; b. Adversely affect the reputation of the Project; or c. Be incompatible with the operation of the Project as a first-class office/warehouse building. (v) Landlord shall not be obligated to enter into a lease with any proposed Substitute Tenant which does not have, in Landlord's reasonable opinion, sufficient financial resources or operating experience to operate the Leased Premises in a first-class manner. (vi) Landlord shall not be required to expend any amount of money to alter, remodel, or otherwise make the Leased Premises suitable for uses by a proposed Substitute Tenant unless: a. Tenant pays any such sum to Landlord in advance of Landlord's execution of a Substitute Lease with such Substitute Tenant (which payment shall not be in lieu of any damages or other sums to which Landlord may be entitled as a result of Tenant's default under this Lease); or b. Landlord, in Landlord's sole discretion, determines that any such expenditure is financially justified in connection with entering into any such Substitute Lease. c. EFFECT OF RELEASING. Upon compliance with the above criteria regarding the releasing of the Leased Premises after a default by Tenant, Landlord shall be deemed to have fully satisfied Landlord's obligation to mitigate damages under this Lease and under any law or judicial ruling in effect on the date of this Lease or at the time of Tenant's default, and Tenant waives and releases, to the fullest extent legally permissible, any right to assert in any action by Landlord to enforce the terms of this Lease, any defense, counterclaim, or rights of set off or recoupment respecting the mitigation of damages by Landlord, unless and to the extent Landlord maliciously or in bad faith fails to act in accordance with the requirements of this Paragraph 32. d. TENANT'S RIGHTS. Tenant's right to seek damages from Landlord as a result of a default by Landlord under this Lease, shall be conditioned on Tenant taking all actions reasonably required, under the circumstances, to minimize any loss or damage to Tenant's property or business, or to any of Tenant's officers, employees, agents, invitees, or other third parties that may be caused by any such default of Landlord. THE PARTIES EXECUTING this Lease represent and warrant that each such party possesses all lawful rights and authority to enter into this Lease; that there are no judgments, decrees, or outstanding orders of any court prohibiting the execution of this Amendment; and that all required approvals, consents and resolutions necessary to effectuate the terms and provisions of this Lease have been obtained. Executed on the dates indicated below. Effective on the latter of the dates indicated below. LANDLORD: LAKES TECHNOLOGY CENTER, LTD. Transwestern Investment Company, L.L.C. as Agent Attest/Witness By: /s/ DIRK DEGENAARS ------------------------------------------- /s/ Rosa Betty Villarreal Its: Vice President - ------------------------------ ------------------------------------------- Date: 7/1/98 ------------------------------------------- TENANT: SHARPS COMPLIANCE, INC. Attest/Witness By: /s/ John W. Dalton ------------------------------------------- /s/ [ILLEGIBLE] Its: Director - ------------------------------ ------------------------------------------- Date: 6/24/98 ------------------------------------------- 13 14 Addendum One to Lease Agreement by and between Lakes Technology Center, Ltd. and Sharps Compliance, Inc. 1. Landlord shall provide the building standard leasehold improvements outlined on the architectural plan attached hereto as Exhibit "C". The building standard leasehold improvements shall include the following: a. New ceiling tile in the area outlined in yellow on Exhibit "C". b. Building standard "cut pile" 30 oz. carpet in the areas outlined in yellow on Exhibit "C". The balance of the office space shall have "level loop" 26 oz. carpet as indicated in red on Exhibit "C". c. New building standard paint in existing office areas. d. All lights and electrical and plumbing systems shall be in good working order prior to commencement date. e. The existing heating and air-conditioning systems shall be in good working condition prior to the commencement date. f. Three (3) 3' x 9' glass panels shall be provided in three (3) offices outlined on Exhibit "C". g. Landlord shall have the right to relocate two (2) existing 3' x 9' doors at the existing "storage" offices for new offices to be constructed in the premises. h. Landlord and Tenant acknowledge that the leasehold improvement cost preliminary pricing outlined as Exhibit "D" and attached hereto was prepared as a guideline for the leasehold improvements. Tenant acknowledges and agrees that the attached construction pricing is not an allowance and any cost savings shall be retained only by Landlord. Except as provided herein, Tenant agrees to accept the premises in its "as is", "where is" condition. 2. While this Lease is in full force and effect, provided that Tenant is not in default of any of the terms, covenants and conditions thereof, Tenant shall have the right or option to extend the original term of this Lease for one further term of sixty (60) months. Such extension or renewal of the original term shall be on the same terms, covenants and conditions as provided for in the original term except that the rental during the extended term shall be at the fair market rental then in effect on equivalent properties, of equivalent size, in equivalent areas. Notice of Tenant's intention to exercise the option must be given to Landlord in writing at least one hundred eighty (180) days prior to the expiration of the original term of this Lease. 3. Landlord is the owner of the herein demised premises, (outlined in red on Exhibit "A" attached hereto), as well as the adjacent 7,390 square foot space (outlined in green on said Exhibit "A"). In the event that the existing tenant, Lincare, Inc., or its assigns, does not renew the Lease with Landlord in such adjacent space, it is agreed that, for a term of 48 months from the date hereof, Tenant shall have the right of first refusal to lease the adjacent space from the Landlord, which Lease shall be at the same price and on the same terms as contained in any bona fide offer for the lease of the adjacent space received by Landlord, which Landlord desires to accept. Upon receipt of such an offer, Landlord shall notify Tenant thereof, in the manner provided herein for notice, whereupon Tenant shall have five (5) days after receipt of such notice in which to elect to exercise Tenant's right of first refusal. In the event Tenant fails to give Landlord written notice of Tenant's election to lease said adjacent space within said five (5) day period, Tenant shall have no further right, title or interest in the said adjacent space and this right of first refusal shall terminate and be of no further force and effect. If, on the other hand, Tenant exercises its right of first refusal in the manner provided above, then the Lease of the said adjacent space shall be consummated, in accordance with the terms set forth in said bona fide offer. It is understood and agreed that this right of first refusal shall become null and void at the expiration from the date hereof of the number of months recited above. 4. Provided Tenant is not in default of any terms and conditions of the Leas Agreement, Landlord shall warrant the good working conditions of only the existing compressors that are a part of the existing heating and air-conditioning units for a period not to exceed six (6) months from the commencement date. In consideration for this six (6) month warranty for compressors, it is agreed and understood that Tenant shall maintain the heating and air-conditioning units as outlined and required in paragraph 11(e) of the Lease Agreement. After such six (6) month period, Tenant shall be responsible for all obligations of the existing heating and air-conditioning systems as outlined in the Lease Agreement. 5. In regard to Paragraph 13 of the Lease Agreement, it is agreed by Landlord and Tenant that the sign on the leased premises shall be approximately 3' x 6' in size and subject to the terms and conditions of such Paragraph 13. 14 EX-10.34 9 SEVERANCE AGREEMENT - C. LEE COOKE, JR. 1 EXHIBIT 10.34 SEVERANCE AGREEMENT This Severance Agreement is entered into between C. Lee Cooke, Jr. ("Cooke") and Sharps Compliance Corp. (formerly known as U.S. Medical Systems, Inc.) ("Sharps") and sets forth the Agreement as to the terms and conditions for severance of Cooke's employment as Chief Executive Officer and President, the termination of Cooke's Employment Agreement dated August 27, 1997 and all benefits, rights and obligations arising from this Agreement. In consideration of the mutual promises, covenants and agreements set forth below, the adequacy and sufficiency of which are hereby acknowledged, the parties agree as follows: 1. Cooke will cease employment with Sharps for all purposes effective at the end of business July 22, 1998. Cooke will submit the attached letter of resignation from his position as Chief Executive Officer/President of Sharps. Cooke agrees to be available to management for consulting on matters of Sharps through September 5, 1998. 2. Cooke will receive the following compensation: (a) All cash in U.S. Medical Systems, Inc. ("Medical") at July 31, 1998 ("Valuation Date"), that being approximately $50,000, after giving effect to a $40,000 payment to Sharps. (b) All accounts receivable in Medical at the Valuation Date, that being approximately $14,000 and as more specifically set forth on Schedule A attached hereto. (c) Personal property located at the offices of Medical in Austin at the Valuation Date and as more specifically described on Schedule B attached hereto, said value being approximately $4,000. (d) All patents and trademarks of Medical as they exist at the Valuation Date and as more specifically described on Schedule C attached hereto, said patents and trademarks to be conveyed to Cooke pursuant to the terms of the Assignment of Patent and Trademarks attached hereto as Exhibit 1 and incorporated herein for all purposes. (e) Rights to the products of Medical as they exist at the Valuation Date and as more specifically described on Schedule D attached hereto. (f) Rights to the customer list as the customer list of Medical exists at the Valuation Date and as more specifically listed on Schedule E. (g) Rights to the corporate name U.S. Medical Systems, Inc. (h) All of the capital stock of Medical Polymers, Inc. 2 The rights entitled to the cash, accounts receivable, personal property, products, customer list and corporate name and capital stock of Medical Polymers, Inc. will be conveyed to Cooke pursuant to the terms of the Bill of Sale attached hereto as Exhibit 2 and incorporated herein for all purposes. 3. Cooke hereby agrees to assume and pay all of the liabilities and obligations of Medical, including existing accounts payable and contingent liabilities of Medical as such contingent liabilities pertain to unknown accounts payable or contingent liabilities pertaining to products of Medical, as such products exist at the Valuation Date, including those set forth on Schedules F and G attached hereto. 4. After the Valuation Date, the parties agree that Sharps and its 401(k) Retirement Plan, Executive Deferred Compensation Plan or other existing plans have no further obligation or liability to Cooke and his beneficiaries under any such plans, any such liability or obligation being hereby expressly waived by Cooke. 5. Notwithstanding anything to the contrary contained in paragraph 3 herein, Cooke agrees to cooperate fully with Sharps, its accountants and legal counsel, in investigating, analyzing or defending any pending or future claims against or litigation involving Sharps. Cooke agrees to maintain in strict confidence any information or knowledge he has regarding pending or future claims against or litigation involving Sharps. 6. Subject to Cooke's obligations created in Paragraph 3 herein, Sharps hereby releases and forever discharges Cooke from any and all claims or causes of action it has against or may have against Cooke for his actions or failure to act while employed in his capacity as an employee, officer and director of Sharps occurring prior to the Valuation Date of this Agreement. 7. Cooke hereby releases and forever discharges Sharps and all predecessor, related and affiliated entities and all officers, directors, employees, representatives and agents thereof (in all capacities, including individually) from any claims, demands, actions or causes of action which he may have had or now has, whether known or unknown, contingent or otherwise, whether at law or in equity, including, without limitation, any and all claims relating to his employment with and separation from Sharps; any compensation or benefits relating to his employment; any claim of discrimination based upon his race, color, creed, sex, age, national origin, disability or handicap, if any; any claims relating to the discussions between Sharps and its representatives regarding elimination of his position or any other separation of the parties' employment relationship; any claim that Sharps has violated any federal, state or local statute, regulation or ordinance with respect to his employment or separation thereof, including without limitation, Title VII of the Civil Rights Act of 1964, the Americans With Disabilities Act or the Texas Commission on Human Rights Act. 8. Cooke hereby indemnifies and holds Sharps harmless from and against, and shall promptly reimburse Sharps for any and all loss, expense, damage, deficiency, liability or obligation, including investigative and settlement costs and attorney's fees, arising out of or in connection with the loss by Sharps of any accounts payable or liabilities associated with the products of Medical and conveyed to Cooke as such payables and contingent liabilities pertaining to the products exist at the Valuation Date. Page 2 3 9. This Agreement shall be governed by the substantive laws of the State of Texas without regard to conflict of laws principles. If any provision is determined to be invalid or unenforceable by a court of competent jurisdiction, the remaining provisions shall continue in full force and effect. 10. Any dispute between the parties concerning the interpretation, application or claimed breach of this Agreement shall be submitted to confidential, binding arbitration in Travis County, Texas, before an arbitrator appointed by the American Arbitration Association in accordance with its published rules and regulations. Prior to submitting the matter to arbitration, the parties shall first attempt to resolve the matter by the claimant notifying the other party in writing of the claim, by giving the other party the opportunity to respond in writing to the claim within ten (10) days of receipt of the claim, and by giving the other party the opportunity to meet and confer. If the matter is not resolved in this manner, the dispute then may proceed to arbitration at the request of either party. The parties shall bear equally the arbitrator's fees and expenses, as well as the administrative costs assessed by the American Arbitration Association. The prevailing party shall be entitled to reasonable actual damages, specific performance, costs and attorney's fees. This agreement to arbitrate and the arbitrator's award shall be enforceable in any court of competent jurisdiction pursuant to the Texas General Arbitration Act. 11. In entering into the Severance Agreement, both parties have relied on the valuation appraisal opinion of CFO Services, Inc., dated March 20, 1998, as such opinion pertained to the valuation of the products of Medical, a copy of which is attached hereto as Exhibit 3. 12. Cooke's right, title and interest in and under this Agreement and all transaction documents may be subsequently assigned and/or conveyed by Cooke. 13. The Closing of this transaction shall take place at the office of the Company on or after September 2, 1998. SHARPS COMPLIANCE CORP. (Formerly known as U.S. Medical Systems, Inc.) By: /s/ BURT KUNIK /s/ C. LEE COOKE, JR. ---------------------------------- ------------------------------ Burt Kunik C. Lee Cooke, Jr. Chairman of the Board Date: 9-14-98 and Chief Executive Officer ------------------------ Date: 9-8-98 --------------------------------- Page 3 4 Schedule A ------------------- Accounts Receivable 7/31/98
Albertsons $ 3,627.88 American Sales 1,365.12 Bathurst Sales 3,724.80 Fleming Companies, Inc. 2,398.56 Genovese Drugs 1,128.96 H.E. Butt Grocery Co. 1,893.60 ---------- Total 14,138.92
5 Schedule B -------------------- Real Property Assets
Book Value ---------- AT&T Phone System 1,962.86 Printing Dies - Miracle Grip(2) 492.95 Rotary Dies - Mark Andy 298.33 Art Work - Miracle Grip 1,631.37 ---------- Total $ 4,385.51
6 Schedule C ------------------ Patents/Trademarks Patents
Patent Date of Name Number Patent ---- ------ ------- 1. Disinfectant Mixture Containing 5,326,492 July 5, 1994 Water Soluble Lubricating and Cleaning Agents and Methods 2. Water-Based Human Tissue 5,342,617 Aug 30, 1994 Lubricant 3. Polymer-Based Cleaning and 5,348,678 Sept 20, 1994 Lubricating Composition 4. Stick Formulations for 5,597,849 January 28, 1997 Topical Drug Delivery of Therapeutic Agents and Uses Thereof 5. Stick Formulations for 5,622,993 Apr 22, 1997 Topical Drug Delivery of Therapeutic Agents and Uses Thereof
Registration Date of Trademark Number Registration - --------- ------------ ------------- 1. PDS 1,912,066 Aug 15, 1995 2. Miracle Grip 2,018,144 Nov 19, 1996
7 Schedule D ------------------------ Product Description (commercial products) 1. PDS Clean, a dental handpiece cleaner. 2. Miracle Grip, a polymer-based denture adhesive. 3. QUITCH, a 1% hydrocortisone Anti-Itch product. 4. QUITCH-D, a 2% diphenhydramine itch and pain relief product. 8 Schedule E -------------- Customer Lists Midwest Dental Products, Inc Albertsons, Inc H.E. Butts Grocery Co American Sales Stores Bathurst Sales (Canada) Fleming Companies, Inc. Genovese Drug Stores McKeeson Drug Company Texas A&M University 9 Schedule F ---------------------- CONTINGENT LIABILITIES 7/31/98 American Drug Stores $ 14,500.00 Eckerd Drug Stores $ 38,418.00 Walgreens Drug Stores $ 20,000.00 Shop-N-Save $ 3,400.00 Phar-Mor Drug Stores $ 700.00 Wal-Mart $ 6,800.00 Bank One $ 1,600.00 Sharps Compliance $ 40,000.00 Pitney Bowes Credit Corp. $ 398.00 Snyder Drug Stores $ 2,200.00 Payco $ 700.00 TOTAL $128,716.00
10 Schedule G ------------------------------- Operational Payables at 7/31/98
Vendor Balance Due ------ ----------- Ameripac $ 822.80 Bank One 1,623.75 Burnet Storage 130.00 Martin Cook (Accounting) 1,155.00 Dahill Industries, Inc 81.19 Faske, Lay & Co, LLP. 604.00 Fedex 186.64 Gold Family Trust (Royalty) 3,675.11 Robert Hodan (Royalty) 3,675.11 Lewis Label 1,000.00 Kimberly Lyon (Office Mgr) 784.00 Phoenix Home Life 398.20 TX Workers Compensation Fund 590.00 USLD Communications 141.72 ---------- Total $14,867.32
11 BILL OF SALE THE STATE OF TEXAS ) ) KNOW ALL MEN BY THESE PRESENTS COUNTY OF HARRIS ) THAT SHARPS COMPLIANCE CORP. (formerly U.S. Medical Systems, Inc.), a Delaware corporation ("Seller"), for and in consideration of the purchase price provided for in, and the other terms and conditions of, that certain Severance Agreement dated September 2, 1998, by and between C. LEE COOKE, JR. ("Buyer") and Seller (the "Agreement") (capitalized terms used and not otherwise defined herein shall have the meanings ascribed to them in the Agreement) has bargained and sold, and by these presents Seller does sell, assign, transfer and convey unto Buyer all of Seller's right, title and interest in the following (collectively, the "Assets"): (a) All cash in U.S. Medical Systems, Inc. ("Medical") at July 31, 1998, (the "Valuation Date"), after giving effect to a $40,000 payment to Seller. (b) All accounts receivable in Medical at the Valuation Date, as more specifically set forth on Schedule A attached hereto. (c) Personal property located at the offices of Medical in Austin at the Valuation Date and as more specifically described on Schedule B attached hereto. (d) All patents and trademarks of Medical as they exist at the Valuation Date and as more specifically described on Schedule C attached hereto, said patents and trademarks to be conveyed to Buyer pursuant to the terms of the Assignment of Patent and Trademarks attached hereto as Exhibit 1 and incorporated herein for all purposes. (e) Rights to the products of Medical as they exist at the Valuation Date and as more specifically described on Schedule D attached hereto. (f) Rights to the customer list as the customer list of Medical exists at the Valuation Date and as more specifically listed on Schedule E. (g) Rights to the corporate name U.S. Medical Systems, Inc. (h) All of the capital stock of Medical Polymers, Inc. Seller hereby acknowledges and agrees that this Bill of Sale is made pursuant to and subject to all the terms and conditions of the Agreement, including without limitation, Buyer's rights of indemnification under the Agreement. 12 ASSIGNMENT OF PATENTS AND TRADEMARKS THE STATE OF TEXAS ) ) COUNTY OF HARRIS ) WHEREAS, SHARPS COMPLIANCE CORP. (formerly U.S. Medical Systems, Inc.), a Delaware corporation with offices at 9050 Kirby, Houston, Texas 77054 ("Seller"), is the owner of the entire right, title and interest to United States Patent Nos. 5,326,492 registered July 5, 1994; 5,342,617 registered August 30, 1994; 5,348,678 registered September 20, 1994; 5,597,849 registered January 28, 1997; and 5,622,993 registered April 22, 1997 (the "Patents"), the inventions covered by the Patents (the "Inventions") and United States Trademark Nos. 1,912,066 registered August 15, 1995 and 2,018,144 registered November 19, 1996 (the "Trademarks") and Internet copyrights related to the Trademarks; and WHEREAS, C. LEE COOKE, JR., a resident of Austin, Travis County, Texas whose mailing address is Post Office Box 50442, Austin, Texas 78763 ("Assignee"), is desirous of acquiring the entire right, title and interest in and to the Patents, Inventions and Trademarks; NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and intending to be legally bound hereby, Assignor hereby assigns and transfers to Assignee the entire right, title and interest in and to the Patents, Inventions and Trademarks, including but not limited to all reissues, divisions, continuations and extensions of the Patents and Trademarks, all rights of action arising from the Patents and Trademarks, all claims for damages by reason of past infringement of the Patents and Trademarks and the right to sue and collect damages for such infringement, to be held and enjoyed by the Assignee for his own use and benefit and for his successors and assigns as the same would have been held by Assignor had this assignment not been made. DATED this 8th day of September, 1998. ASSIGNOR: SHARPS COMPLIANCE CORP. a Delaware corporation By: /s/ BURT KUNIK --------------------------- Burt Kunik Chairman of the Board and Chief Executive Officer SUBSCRIBED and SWORN TO before me this 8th day of September, 1998. /s/ PHYLLIS S. ROSS -------------------------------- [NOTARY] EX-27 10 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) THE BALANCE SHEET AS OF JUNE 30, 1998 AND THE STATEMENT OF OPERATIONS FOR THE SIX MONTHS THEN ENDED AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH (B) FINANCIAL STATEMENTS 1 6-MOS JUN-30-1998 JAN-01-1998 JUN-30-1998 3,044,498 0 203,608 0 171,506 3,500,870 245,827 123,476 4,124,446 1,105,747 0 0 10,000 5,839 2,962,880 4,124,446 730,034 730,034 560,071 1,752,924 0 0 6,061 (956,038) 0 (956,038) 0 0 0 (956,038) (.14) (.14)
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