AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 22, 2005
REGISTRATION NO. 333-127048
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 1 TO
FORM S-4 AND FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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ROCKWELL MEDICAL TECHNOLOGIES, INC.
(Exact name of registrant as specified, and name of small business issuer in its
charter)
MICHIGAN 3845 38-3317208
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
30142 WIXOM ROAD
WIXOM, MICHIGAN 48393
TELEPHONE: (248) 960-9009
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
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30142 WIXOM ROAD
WIXOM, MICHIGAN 48393
(Address of principal place of business or intended principal place of business)
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ROBERT L. CHIOINI
PRESIDENT AND CHIEF EXECUTIVE OFFICER
ROCKWELL MEDICAL TECHNOLOGIES, INC.
30142 WIXOM ROAD
WIXOM, MICHIGAN 48393
TELEPHONE: (248) 960-9009
(Name, address, including zip code, and telephone number, including area code,
of registrant's agent for service)
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COPY TO:
JOHN P. KANAN, ESQ.
HONIGMAN MILLER SCHWARTZ AND COHN LLP
2290 FIRST NATIONAL BUILDING
DETROIT, MICHIGAN 48226-3506
TELEPHONE: (313) 465-7438
TELECOPIER: (313) 465-7439
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APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: As soon as practicable
after this Registration Statement is declared effective.
If the securities being registered on this Form are to be offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
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CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED(1) PRICE PER UNIT OFFERING PRICE FEE
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Warrants..................................... 3,625,000
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Common Shares issuable upon exercise of
Warrants................................... 3,625,000(2) $3.50(3) $12,687,500 $1,493.32
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Total Registration Fee....................... $1,493.32(4)
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(1) Pursuant to Rule 416, there are also being registered such indeterminate
number of additional shares as may become issuable pursuant to the
anti-dilution provisions of the Warrants.
(2) Represents the total number of shares issuable upon exercise of the Warrants
expiring January 26, 2006 with an exercise price of $[ ], assuming all of
the Warrants expiring January 26, 2006 with an exercise price of $4.50 are
exchanged.
(3) Estimated solely for the purpose of computing the registration fee pursuant
to Rule 457(g), based on the value of the warrants expiring January 26, 2006
with an exercise price of $[ ] computed in accordance with Rule 457(f)(1)
and Rule 457(c), based on the average of the high and low sales prices of
the Warrants expiring January 26, 2006 with an exercise price of $4.50, as
quoted on The Nasdaq SmallCap Market, and the value of the common shares
based on the average of the high and low sales prices of the common shares,
as quoted on The Nasdaq SmallCap Market, on July 26, 2005.
(4) Paid with original filing.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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PROSPECTUS
ROCKWELL MEDICAL TECHNOLOGIES, INC.
OFFER TO EXCHANGE
UP TO
3,625,000 COMMON SHARE PURCHASE WARRANTS
WITH AN EXERCISE PRICE OF $[ ] PER SHARE
FOR
3,625,000 CURRENTLY OUTSTANDING COMMON SHARE PURCHASE WARRANTS WITH AN EXERCISE
PRICE OF $4.50 PER SHARE
OFFER OF SALE
UP TO
3,625,000 COMMON SHARES
ISSUABLE UPON EXERCISE OF COMMON SHARE PURCHASE WARRANTS WITH AN EXERCISE PRICE
OF $[ ] PER SHARE
FOR AN AGGREGATE OFFERING PRICE OF [$ ]
THE EXCHANGE OFFER EXPIRES AT 5:00 P.M., EASTERN STANDARD TIME, ON
[ ], 2005, UNLESS EXTENDED.
We have applied for the Common Share Purchase Warrants expiring January 26,
2006 with an exercise price of $[ ] per share to be listed on the Nasdaq
SmallCap Market. Our common shares and Common Share Purchase Warrants expiring
January 26, 2006 with an exercise price of $4.50 per share are traded on the
Nasdaq SmallCap Market under the symbols RMTI and RMTIW, respectively.
We are making this offer upon the terms and subject to the conditions
described in this prospectus and in the related Letter of Transmittal (which
together, as they may be amended from time to time, constitute the "Exchange
Offer"). This offer is not conditioned upon a minimum number of warrants being
exchanged.
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THIS IS A RISKY INVESTMENT. YOU SHOULD NOT INVEST IN THIS OFFERING UNLESS
YOU CAN AFFORD TO LOSE YOUR ENTIRE INVESTMENT. SOME OF THE RISKS OF THIS
INVESTMENT ARE DESCRIBED UNDER THE CAPTION "RISK FACTORS" BEGINNING ON PAGE 6.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECRETARY OF
STATE OF ILLINOIS OR THE STATE OF ILLINOIS, NOR HAS THE SECRETARY OF STATE OF
ILLINOIS OR THE STATE OF ILLINOIS PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
NO BROKER-DEALER, SALESMAN, AGENT OR ANY OTHER PERSON HAS BEEN AUTHORIZED
TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS, IN CONNECTION WITH THE
OFFERING HEREBY MADE, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS.
---------------------
This prospectus is dated , 2005.
TABLE OF CONTENTS
PAGE
----
Additional Information...................................... i
Forward Looking Statements.................................. ii
Prospectus Summary.......................................... 1
Risk Factors................................................ 6
The Exchange Offer.......................................... 12
Use of Proceeds............................................. 20
Determination of Offering Price............................. 21
Capitalization.............................................. 22
Dividend Policy............................................. 23
Management's Discussions and Analysis of Financial Condition
and Results of Operations................................. 24
Business.................................................... 31
Management.................................................. 43
Security Ownership of Certain Beneficial Owners and
Management................................................ 47
Description of Securities................................... 48
Plan of Distribution........................................ 51
Legal Matters............................................... 51
Experts..................................................... 51
Index to Financial Statements............................... F-1
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ADDITIONAL INFORMATION
This prospectus is a part of a registration statement on Forms S-4 and SB-2
that we have filed with the Securities and Exchange Commission (the "SEC")
pertaining to the warrants and common shares being offered by this prospectus.
As permitted by SEC rules, this prospectus does not contain all of the
information contained in the registration statement and accompanying exhibits
and schedules we file with the SEC. You may refer to the registration statement
and the exhibits and schedules for more information about us, the warrants and
the common shares. The registration statement, exhibits and schedules are
available at the SEC's public reference rooms and through its EDGAR database on
the Internet.
We file annual, quarterly and current reports, proxy statements and other
information with the Securities and Exchange Commission (the "SEC"). You can
inspect and copy such reports at the SEC's Public Reference Room at 450 Fifth
Street, N.W., Washington, D.C. 20549. You may obtain information on the
operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The
SEC also maintains an Internet site that contains reports, proxy and information
statements and other information regarding issuers that file electronically with
the SEC (which includes us), which site can be found at http://www.sec.gov.
This prospectus incorporates important business and financial information
about the Company that is not included in or delivered with the prospectus.
Information that is incorporated in this prospectus is available without charge
to you upon written or oral request. Such requests should be directed to
Rockwell Medical Technologies, Inc., 30142 Wixom Rd., Wixom, Michigan 48393,
Attn: Thomas E. Klema, Secretary, (248) 960-9009. IN ORDER TO OBTAIN TIMELY
DELIVERY OF REQUESTED MATERIALS, YOU MUST REQUEST THE INFORMATION NO LATER THAN
FIVE BUSINESS DAYS BEFORE [ ], 2005, UNLESS THE COMPANY EXTENDS THE
EXCHANGE OFFER AT ITS SOLE DISCRETION (THE EXPIRATION DATE).
FORWARD LOOKING STATEMENTS
This prospectus contains forward-looking statements that reflect our views
about future events and financial performance, which statements constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Forward-looking statements include statements
regarding the intent, belief or current expectations of us or our officers,
including statements preceded by, followed by or including forward-looking
terminology such as "may," "might," "will," "should," "believe," "expect,"
"anticipate," "estimate," "continue," "predict," "forecast," "project" or
similar expressions, with respect to various matters.
Our actual results might differ materially from those projected in the
forward-looking statements depending on various important factors. These
important factors include the cost of obtaining FDA approval to market our new
iron supplemented dialysate product, the challenges associated with developing
new products, the uncertainty of acceptance of our products by the hemodialysis
community, competition in our market, general economic conditions, economic
conditions in the hemodialysis industry and factors discussed in the "Risk
Factors" section beginning on page 6, all of which constitute cautionary
statements identifying important factors with respect to the forward-looking
statements, including risks and uncertainties, that could cause actual results
to differ materially from those in the forward-looking statements. The
forward-looking statements should be considered in light of these risks and
uncertainties and you should not place undue reliance on them.
ii
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus.
It is not complete and does not contain all of the information that you should
consider before participating in the Exchange Offer or investing in the common
shares. You should read the entire prospectus carefully.
ROCKWELL MEDICAL TECHNOLOGIES, INC.
Rockwell Medical Technologies, Inc. (the "Company," "we," "us" and "our")
manufactures hemodialysis concentrates and dialysis kits, and we sell,
distribute and deliver these and other ancillary hemodialysis products to
hemodialysis providers in the United States, the Far East, eastern Europe and
Latin America. Hemodialysis duplicates kidney function in patients with failing
kidneys. Without properly functioning kidneys, a patient's body cannot get rid
of excess water and waste products and cannot regulate electrolytes in his or
her blood. Without frequent and ongoing hemodialysis treatments, these patients
would die.
We have also entered into two licensing agreements covering three U.S.
patents, two issued and one pending, as well as several foreign patents for iron
supplemented dialysate for treatment of iron deficiency in dialysis patients. We
are planning to conduct clinical trials of iron supplemented dialysate, which we
also refer to as dialysate iron. To realize a commercial benefit from this
therapy, and pursuant to the agreements, we must complete clinical trials and
obtain U.S. Food and Drug Administration ("FDA") approval to market iron
supplemented dialysate. We also plan to seek foreign market approval for this
product. We believe this product will substantially improve iron maintenance
therapy and, if approved, will compete for the global market for iron
maintenance therapy. Based upon competitor statements about market potential, we
estimate that global sales of for intravenous iron maintenance therapy may
exceed $500,000,000 per year, and the market size in the United States for such
therapy may be as much as $300,000,000 per year. We cannot, however, give any
assurance that this product will be approved by the FDA or, if approved, that it
will be successfully marketed.
HOW HEMODIALYSIS WORKS
Hemodialysis patients generally receive their treatments at independent
hemodialysis clinics or at hospitals. A hemodialysis provider such as a hospital
or a free standing clinic uses a dialysis station to treat patients. A dialysis
station contains a dialysis machine that takes concentrate solutions primarily
consisting of nutrients and minerals, such as our liquid concentrate solutions
or our concentrate powders mixed with purified water, and accurately dilutes
those solutions with purified water. The resulting solution, known as dialysate,
is then pumped through a device known as a dialyzer (artificial kidney), while
at the same time the patient's blood is pumped through a semi-permeable membrane
within the dialyzer. Excess water and chemicals from the patient's blood pass
through the membrane and are carried away in the dialysate while certain
nutrients and minerals in the dialysate penetrate the membrane and enter the
patient's blood to maintain proper blood chemistry. Dialysate generally contains
dextrose, sodium, calcium, potassium, magnesium, chloride and acetic acid. The
patient's physician chooses the formula required for each patient based on each
particular patient's needs, although most patients receive one of eight common
formulations.
In addition to using concentrate solutions and chemical powders (which must
be replaced for each use for each patient), a dialysis provider also requires
various other ancillary products such as dialysis on-off kits, sterile
subclavian dressing change trays, arterial and venous blood tubing lines,
fistula needles, intravenous administration sets, transducer protectors,
dialyzers, specialized kits and various other ancillary products, many of which
we sell.
INCREASING MARKET
Hemodialysis providers are generally either independent clinics or
hospitals. According to Centers for Medicare and Medicaid Services ("CMS"), the
total number of hemodialysis providers in the United States increased from 606
in 1973 to 4,433 in December 2002. CMS also reports that the number of patients
receiving hemodialysis has also grown substantially in the last decade, with
annual patient growth averaging
1
about 14,000 patients, or between 4-9%. According to the CMS, in 2002, more than
298,000 patients were treated in Medicare-approved renal facilities as compared
to 157,525 patients in 1993 and, from 1993 to 2002, the number of hemodialysis
stations, which are areas equipped to provide adequate and safe dialysis
therapy, grew from 35,240 stations to 72,115 stations, or by 104%. In addition,
according to CMS, the number of Medicare-approved dialysis machines increased by
approximately 4,000 stations, or 5.8%, between 2001 and 2002. According to
reports by major companies in our industry, there are believed to be 1.5 million
kidney dialysis patients globally.
OUR STRATEGY
Our long term objectives are to increase our market share, expand our
product line, expand our geographical selling territory and improve our
profitability by implementing the following strategies:
- increasing our revenues through new innovative products, such as our
Dri-Sate(R) Dry Acid Concentrate and SteriLyte(R) Liquid Bicarbonate,
- acting as a single source supplier to our customers for the concentrates,
chemicals and supplies necessary to support a hemodialysis provider's
operation,
- increasing our revenues by expanding our ancillary product line,
- offering our customers a higher level of delivery and customer service by
using our own delivery vehicles and drivers, and
- expanding our market share in target regions, including regions where our
proximity to customers will provide us with a competitive cost advantage
and allow us to provide superior customer service levels.
ABOUT THE COMPANY
We are a Michigan corporation, incorporated on October 25, 1996. From
October 25, 1996 through February 18, 1997, we had no operations and incurred
only legal and consulting expenses. On February 19, 1997, we acquired
substantially all of the assets of Rockwell Medical Supplies, L.L.C. and
Rockwell Transportation, L.L.C. (collectively, the "Predecessor Company") used
in connection with the business of manufacturing hemodialysis concentrates and
dialysis kits and distributing and delivering these and other products to
hemodialysis clinics. The Predecessor Company began operations in January 1996.
Our principal executive offices are located at 30142 Wixom Road, Wixom,
Michigan 48393. Our main telephone number is (248) 960-9009.
THE OFFERING
Exchange Offer................ We are offering to exchange Common Share
Purchase Warrants expiring January 26, 2006
with an exercise price of $[ ] ("New
Warrants") for each currently outstanding
Common Share Purchase Warrant expiring January
26, 2006 with an exercise price of $4.50 ("Old
Warrants") that is properly tendered and
accepted.
Offer of Sale of Common
Shares........................ We are offering to issue common shares upon
exercise of New Warrants. New Warrants will
entitle holders to purchase the same number of
common shares of our common stock as Old
Warrants entitled holders to purchase.
Price......................... There is no cost to holders of Old Warrants for
participating in the Exchange Offer. New
Warrants have an initial exercise price of
$[ ] per common share.
Expiration Period............. The Exchange Offer will expire at 5:00 p.m.,
Eastern Standard Time, on [ ], 2005,
unless extended by us at our sole discretion
(if and as extended, the "Expiration Date").
New Warrants may be exercised any time prior to
January 26, 2006.
2
Procedure for exchanging Old
Warrants...................... Each holder of Old Warrants wishing to
participate in the Exchange Offer must
complete, sign, and date a Letter of
Transmittal, in accordance with its
instructions, and mail or otherwise deliver the
Letter of Transmittal together with Old
Warrants and any other required documentation
to the Transfer Agent prior to the Expiration
Date.
Special Procedure for
beneficial
owners........................ Any beneficial owner whose interests in the Old
Warrants are registered in the name of a
broker, dealer, commercial bank, trust company,
nominee, or other securities intermediary and
who wishes to exchange Old Warrants in the
Exchange Offer should contact the securities
intermediary promptly and instruct the
securities intermediary to exchange on the
beneficial owner's behalf.
Withdrawal Rights............. Tenders of Old Warrants may be withdrawn prior
to the Expiration Date. See "The Exchange
Offer -- Withdrawal of Tenders."
Acceptance of Old Warrants and
Delivery of New Warrants...... We will accept for exchange any and all Old
Warrants that are properly tendered to American
Stock Transfer & Trust Company, as Transfer
Agent, in the Exchange Offer prior to the
Expiration Date. New Warrants issued pursuant
to the Exchange Offer will be delivered as soon
as practicable after the Expiration Date and
our acceptance of tendered Old Warrants. All
Old Warrants that are exchanged by holders and
accepted by us for exchange will be canceled
upon our acceptance for exchange. Tenders of
Old Warrants may be withdrawn prior to the
Expiration Date. See "The Exchange Offer."
Tax Consequences.............. While the matter is not free from doubt, we
believe that, if the Company does not
distribute money or property (including the
payment of interest on convertible debt) to
shareholders within 36 months of the Exchange
Offer, it is more likely than not that neither
the Exchange Offer nor the exchange of Old
Warrants for New Warrants would be treated as a
taxable distribution by us for United States
federal income tax purposes. There is no
definitive authority, and it is therefore
uncertain, whether the exchange of Old Warrants
for New Warrants pursuant to the Exchange Offer
would otherwise be taxable for United States
Federal Income Tax purposes. See "The Exchange
Offer -- Discussion of United States Federal
Income Tax Consequences."
Transfer Agent................ American Stock Transfer & Trust Company is the
Transfer Agent. Its telephone number is
718-921-8273. The address of the Transfer Agent
is set forth in "The Exchange Offer -- Transfer
Agent."
Terms of New Warrants:
Exercise price................ $[ ] per common share, subject to
adjustment in certain events. See "Description
of Securities -- Common Share Purchase
Warrants."
Exercise period............... Any time during the period following our
delivery of the New Warrants and ending on
January 26, 2006, which date may be extended by
the Company in its sole discretion. We
presently do not intend to extend the
expiration date of the New Warrants. Any
3
New Warrant that is not exercised prior its
expiration will be worthless.
Redemption.................... Redeemable by the Company at a price of $.10
per New Warrant upon not less than 30 days'
prior written notice to the holders of the New
Warrants at any time after our delivery of the
New Warrants, provided the closing bid price of
the common shares had been greater than $7.00
for 20 consecutive trading days ending on the
third business day prior to the date upon which
the Company gives notice of redemption
regardless of the illiquidity of the market for
the Company's common shares. See "Description
of Securities -- Common Share Purchase
Warrants."
New Warrant Agreement......... The New Warrants will be issued under and be
entitled to all of the rights and benefits of,
and subject to the limitations under, the
Warrant Agreement (the "New Warrant
Agreement"), to be dated as of [ ],
2005, between the Company and American Stock
Transfer & Trust Company as Warrant Agent (the
"Transfer Agent"). See "Description of
Securities -- Common Share Purchase Warrants."
Number of Common Shares
Outstanding:
Before this offering.......... 8,686,552 common shares. This number does not
include:
(a) 3,710,832 common shares that are reserved
for the exercise of outstanding warrants,
including 3,625,000 common shares that are
reserved for the exercise of the Old Warrants,
and
(b) 4,500,000 common shares that are reserved
for issuance under our stock option plan, under
which 3,717,904 options have been granted and
2,630,885 options are outstanding.
For more details, see "Capitalization" and
"Description of Securities."
After this offering........... 12,311,552 common shares. This number does not
include (i) 85,832 shares listed in item (a)
above, and (ii) the shares listed under item
(b) above, and assumes that all holders of Old
Warrants fully participate in the Exchange
Offer and the exercise of all of the New
Warrants.
Use of Proceeds............... We will not receive any proceeds as a result of
any participation by holders of Old Warrants in
the Exchange Offer. If all holders of Old
Warrants participate in the Exchange Offer and
exercise all of the New Warrants, we will
receive $[ ] in aggregate gross proceeds.
We cannot predict the number of Old Warrants
that will be exchanged for New Warrants in the
Exchange Offer or the number of New Warrants
that will be exercised. We intend to use the
net proceeds of this offering for general
working capital and may use the proceeds: to
add additional manufacturing facilities, for
research and product development and for
clinical trials related to our attempt to
obtain FDA approval of our iron dialysate
product and for the financing of marketing and
sales activities. See "Use of Proceeds."
Risk Factors.................. You should read the "Risk Factors" section
beginning on page 6 before deciding to invest
in New Warrants or the common shares.
4
SUMMARY COMBINED/CONSOLIDATED FINANCIAL INFORMATION
(IN WHOLE DOLLARS)
CONSOLIDATED STATEMENT OF INCOME (LOSS) DATA:
COMPANY
---------------------------------------------------------------
FOR THE YEAR FOR THE YEAR FOR THE SIX FOR THE SIX
ENDED ENDED MONTHS ENDED MONTHS ENDED
DECEMBER 31, DECEMBER 31, JUNE 30, JUNE 30,
2003 2004 2004 2005
------------ ------------ --------------- ---------------
Sales.......................... $14,970,144 $17,944,710 $8,690,768 $13,410,541
Cost of Sales.................. 12,414,462 15,139,215 7,313,570 11,930,680
----------- ----------- ---------- -----------
Gross Profit................... 2,555,682 2,805,495 1,377,198 1,479,861
Selling, General and
Administrative............... 2,367,773 2,396,315 1,153,388 1,336,126
----------- ----------- ---------- -----------
Operating Income............... 187,909 409,180 223,810 143,735
Other Income................... -0- -0- -0- 136,468
Interest Expense, Net.......... 183,056 197,658 88,968 86,531
----------- ----------- ---------- -----------
Net Income..................... 4,853 211,522 134,842 194,672
=========== =========== ========== ===========
Net Income Per Common Share.... -0- .02 .02 .02
Weighted Average Number of
Common Shares Outstanding.... 8,495,134 8,546,302 8,539,889 8,610,029
CONSOLIDATED BALANCE SHEET DATA:
COMPANY
----------------------------------------------------------------------
JUNE 30,
DECEMBER 31, DECEMBER 31, JUNE 30, 2005 JUNE 30, 2005
2003 2004 2004 ACTUAL AS ADJUSTED(1)
------------ ------------ ---------- ---------- --------------
Cash...................... 106,639 166,195 306,032 1,275,910 [ ]
Working Capital........... 792,679 781,482 875,217 1,015,930 [ ]
Total Assets.............. 7,044,786 7,700,552 7,484,395 9,756,074 [ ]
Long Term Debt and
Capitalized Lease
Obligations............. 926,230 818,678 913,980 643,654 [ ]
Accumulated Deficit....... (8,980,262) (8,768,740) (8,845,420) (8,574,068) [ ]
Total Shareholders'
Equity.................. 3,172,108 3,422,319 3,339,826 3,842,013 [ ]
---------------
(1) The "As Adjusted" column reflects the exchange of all Old Warrants for New
Warrants and the sale of the 3,625,000 common shares underlying such New
Warrants and our receipt and application of the estimated net proceeds from
the sale.
5
RISK FACTORS
The New Warrants and common shares are a risky investment. You should not
invest in the New Warrants or the common shares unless you can afford to lose
your entire investment. This section describes some, but not all, of the risks
of accepting the Exchange Offer or purchasing common shares underlying New
Warrants. The order in which these risks are listed does not necessarily
indicate their relative importance.
WE HAVE ONLY RECENTLY EXPERIENCED ANNUAL PROFITS AND HAVE AN ACCUMULATED
DEFICIT
Since we began, we experienced losses in each year of operations until
2003. From when we began through December 31, 2004, we have had a total net loss
of $8,768,740 (on sales of $76,163,599). Combined with the Predecessor Company,
we have had a total net loss of $10,518,244 (on sales of $77,527,010). While we
operated profitably in 2003 and 2004, we cannot be certain that this trend will
continue in the future.
DISTRIBUTION OF PRODUCTS IS EXPENSIVE
We operate our own fleet of trucks to deliver our products and perform
inside delivery into the customer's clinic. A significant portion of our
products have traditionally been sold in 55 gallon drums consisting primarily of
water. The cost to distribute these drums has been expensive relative to the
revenue generated by the product. These drums require special handling,
including drum pump-off and empty drum return. As a result, distribution costs
of our acid products sold in drums are high relative to their sales value. The
further a drum is shipped from our facility, the lower our gross profit margin
on the drum. In addition, because we deliver our own products, we are directly
exposed to fluctuations in fuel costs, which we are unable to recover from our
customers on a short term basis. Accordingly, high fuel costs may adversely
impact our profitability.
We introduced a powder form of acid concentrate product in 1999 that
eliminates the shipping of water in the product. The dialysis service provider,
which is our customer, mixes the powder product with water at its clinic site.
As a result, we are able to ship more acid concentrate product on a truck and
thereby increase the revenue per truckload. Dry acid concentrate sales
represented 50% of total acid concentrate sales in 2003, over 50% of total acid
concentrate sales in 2004 and approximately 40% of acid concentrate sales in
2005 following substantial growth in liquid acid volumes at our new facility in
South Carolina. While we anticipate that customers will prefer the powder form
of the acid concentrate product, we do not know if we will be successful in
attracting new customers or realizing cost efficiencies in our operations to the
extent that we will remain profitable. Most of the new business we added in 2004
consisted of sales of our liquid concentrate products outside of our traditional
distribution range. During the first six months of 2005, we added substantial
amounts of liquid acid business as well and, as a result, total Dri-Sate
revenue, while continuing to increase, represented a lower percentage of total
acid concentrate product sales, decreasing to 40% of total acid concentrate
product sales. Distribution of our liquid products is more expensive than
distribution of the powder form of our products. While we will attempt to
convert new customers to the powder form of our product, we do not know whether
we will be successful. In March, 2005 we entered into a short-term lease for a
manufacturing facility in South Carolina, which we expect to reduce our cost to
distribute our products to new customers located in the Southeastern United
States. The lease is terminable upon 90 days' notice by the Company or the
landlord. On September 10, 2005, the Company received notice of the lease
agreement's termination effective December 9, 2005. We are evaluating
manufacturing and distribution alternatives in the Southeastern United States.
WE FACE STRONG COMPETITION IN OUR MARKET
There is intense competition in the hemodialysis product market and most of
our competitors are large diversified companies which have substantially greater
financial, technical, manufacturing, marketing, research and development and
management resources than we do. We may not be able to continue to successfully
compete with these other companies.
A FEW SIGNIFICANT CUSTOMERS ACCOUNT FOR MUCH OF OUR SALES VOLUME, AND ATTEMPTS
TO EXPAND OUR CUSTOMER BASE MAY BE UNSUCCESSFUL OR UNPROFITABLE
Our revenue is highly concentrated in a few customers and the loss of any
of those customers would adversely affect our results. If we were to lose a
significant portion of our business with major national and
6
regional dialysis chains, it could have a substantial negative impact on our
cash flow and operating results. If we were to lose a substantial portion of our
business, it may have a detrimental impact on our ability to continue our
operations in their current form or to continue to execute our business
strategy. If we lost a substantial portion of our business, we would be required
to take actions to conserve our cash resources and to mitigate the impact of any
such losses on our business operations. However, we expect to continue to grow
our business while executing our strategic plan to expand our product lines, to
expand our geographic reach and to develop our proprietary technology which may
include adding facilities and personnel to support our growth. As we increase
our business in certain markets and regions, which are further from our
manufacturing facilities than we have historically served, we may incur
additional costs that are greater than the additional revenue generated from
these initiatives.
THE COMMON SHARES AND NEW WARRANTS ARE NOT REGISTERED IN ALL JURISDICTIONS
We have applied to qualify the common shares and the New Warrants for sale
or have determined that an exemption from qualification applies in the following
states (but we cannot assure you that we will succeed in qualifying the common
shares or New Warrants in these states): Alabama, Arizona, Arkansas, California,
Colorado, Connecticut, Delaware, Florida, Georgia, Illinois, Indiana, Iowa,
Kansas, Maine, Maryland, Massachusetts, Michigan, Minnesota, Nevada, New Jersey,
New Mexico, New York, North Carolina, Ohio, Oklahoma, Oregon, Pennsylvania,
Rhode Island, South Dakota, Texas, Utah, Vermont, Virginia, Washington, West
Virginia and Wisconsin. We also will not be able to issue New Warrants to
holders of Old Warrants unless and until we can qualify such New Warrants for
sale in jurisdictions in which such holders of Old Warrants reside, or an
exemption to such qualification exists in such jurisdiction. We will not be able
to issue common shares to those persons desiring to exercise their New Warrants
unless and until we can qualify such shares for sale in jurisdictions in which
such purchasers reside, or an exemption to such qualification exists in such
jurisdiction. In addition, investors will not be able to obtain New Warrants in
exchange for their Old Warrants or purchase common shares issuable upon exercise
of their New Warrants unless the registration statement of which this prospectus
is a part is current. We intend to keep the registration statement current and
to cause the common shares and the New Warrants to be qualified in all the
jurisdictions listed above, but we can not assure you that we will be
successful.
OUTSTANDING WARRANTS, OPTIONS AND THE EXERCISE PRICE OF THE NEW WARRANTS MAY
AFFECT THE MARKET PRICE OF THE COMMON SHARES
In addition to the New Warrants that may be exercised for the common shares
offered in this prospectus, we have reserved 4,500,000 common shares for
issuance upon exercise of options under our stock option plan, of which we have
granted options to acquire an aggregate of 3,717,904 common shares since
inception through August 31, 2005, and 85,832 common shares for issuance upon
exercise of privately placed warrants. As of August 31, 2005, options to
purchase 2,630,885 common shares remain outstanding. The market price of the
common shares may be depressed by the potential exercise of these warrants and
options and by the lower exercise price in the New Warrants as compared to the
exercise price of the Old Warrants. The holders of these warrants and options
are likely to exercise them when we would otherwise be able to obtain additional
capital on more favorable terms than those provided by the options and warrants.
Further, while the warrants and options are outstanding, we may be unable to
obtain additional financing on favorable terms.
THE NASDAQ SMALLCAP MARKET COULD DELIST THE COMMON SHARES AND NEW WARRANTS
It is a requirement for continued listing of our common shares and the
initial and continued listing of the New Warrants on The Nasdaq SmallCap Market
that we either maintain a minimum of $2,500,000 in shareholders' equity, have a
$35,000,000 market capitalization or have earned $500,000 in net income for two
of our three most recently completed fiscal years. We have relied on having
shareholders' equity in excess of $2,500,000 to meet this requirement. As of
June 30, 2005, Rockwell had shareholders' equity of $3,842,013. If the cost of
our clinical trials exceeds the income generated by our operations or if we
otherwise incur losses and if we are unable to raise sufficient equity to keep
shareholders' equity at or above $2,500,000, we may be subject to delisting from
The Nasdaq SmallCap Market. In addition, if holders of Old Warrants exercisable
7
for at least 100,000 common shares do not participate in the Exchange Offer, the
New Warrants will not qualify for listing on The Nasdaq SmallCap Market.
If The Nasdaq SmallCap Market delisted our common shares or New Warrants or
declined initially to list our New Warrants, any subsequent trading in the
applicable securities would be conducted in the over-the-counter market in the
so-called "pink sheets" or the "Electronic Bulletin Board" of the National
Association of Securities Dealers, Inc. It could be difficult to dispose of, or
to obtain accurate quotations as to the price of, our common shares or New
Warrants. Also, our securities would then be subject to Rules 15g-1 to 9 and
Schedule 15G that would impose additional sales practice requirements on
broker-dealers who sell such securities to persons other than established
customers and high net worth investors. These rules may restrict the ability of
broker-dealers to sell the common shares or New Warrants and may affect the
ability of holders of our common shares or New Warrants to sell them. The price
of our common shares or New Warrants may decline if they are delisted, and we
may have difficulty obtaining subsequent financing.
SHARES ELIGIBLE FOR FUTURE SALE MAY AFFECT THE MARKET PRICE OF THE COMPANY'S
COMMON SHARES
The Company is unable to predict the effect, if any, that future sales of
common shares, or the availability of our common shares for future sales, will
have on the market price of our common shares or warrants from time to time.
Sales of substantial amounts of our common shares (including shares issued upon
the exercise of warrants or stock options), or the possibility of such sales,
could adversely affect the market price of our common shares or New Warrants and
also impair the Company's ability to raise capital through an offering of its
equity securities in the future. Upon completion of the Offering, the Company
will have 12,311,552 common shares outstanding (assuming the exchange of all of
the Old Warrants and the exercise of the New Warrants, but assuming no exercise
of any other outstanding options and warrants). Of these shares, 12,311,552
common shares will be freely tradable without restriction under the Securities
Act, except for any shares purchased by any person who is or thereby becomes an
"affiliate" of the Company, which shares will be subject to the resale
limitations contained in Rule 144 promulgated under the Securities Act. Any
substantial sale of securities may have an adverse effect on the market price of
the common shares or Warrants. See "Description of Securities -- Common Share
Purchase Warrants."
THE TAX CONSEQUENCES OF THE EXCHANGE OFFER AND THE EXCHANGE OF OLD WARRANTS
FOR NEW WARRANTS ARE NOT FREE FROM DOUBT
While the matter is not free from doubt, we believe that, if the Company
does not distribute money or property (including the payment of interest on
convertible debt) to shareholders within 36 months of the Exchange Offer, it is
more likely than not that neither the Exchange Offer nor the exchange of Old
Warrants for New Warrants would be treated as a taxable distribution by us for
federal income tax purposes. There is no definitive authority addressing, and it
is therefore uncertain, whether the exchange of Old Warrants for New Warrants
pursuant to the Exchange Offer would otherwise be taxable for federal income tax
purposes. It is possible that the exchange would qualify as a tax-free
reorganization. In this event, you would not recognize taxable gain or loss on
the exchange for federal income tax purposes. Alternatively, the exchange of Old
Warrants for New Warrants may be treated as a nontaxable modification of the Old
Warrants or as a taxable exchange. If the exchange of Old Warrants for New
Warrants were treated as a taxable exchange, then you may have to recognize
taxable gain or loss on the exchange for federal income tax purposes. In this
event, you may have to pay federal income taxes on such gain and your ability to
deduct such losses may be restricted.
WE DEPEND ON GOVERNMENT FUNDING OF HEALTHCARE
Many of our customers receive the majority of their funding from the
government and are supplemented by payments from private health care insurers.
Our customers depend on Medicare funding to be viable businesses. If Medicare
funding were to be materially decreased, our customers would be severely
impacted and could be unable to pay us.
If we were to obtain FDA approval for our new products, there is no
guarantee that our customers would receive reimbursement for the new product,
even though the current treatment method is reimbursed by the
8
government. Without reimbursement from the government, it is unlikely that our
customers would adopt new treatment methods. There is a risk that the new
products may not receive reimbursement or may not receive the same level of
reimbursement that is currently in place.
WE DEPEND ON KEY PERSONNEL
Our success depends heavily on the efforts of Robert L. Chioini, our
President and Chief Executive Officer, and Thomas E. Klema, our Chief Financial
Officer, Secretary and Treasurer. Mr. Chioini is primarily responsible for
managing our sales and marketing efforts which has driven our growth. We
maintain key man life insurance on Mr. Chioini in the amount of $1 million.
Neither Mr. Chioini nor Mr. Klema are parties to a current employment agreement
with the Company. If we lose the services of Mr. Chioini or Mr. Klema, our
business, financial condition and results of operations could be adversely
affected. See "Management -- Directors and Executive Officers."
WE HAVE BROAD DISCRETION IN USING THE NET PROCEEDS
We intend to use the net proceeds from purchases of common shares hereunder
through exercise of New Warrants to execute our business strategy. We intend to
use the net proceeds of this offering for general working capital and may use
the proceeds: to add additional manufacturing facilities, for research and
product development and for clinical trials related to our attempt to obtain FDA
approval of our iron dialysate product and for the financing of marketing and
sales activities. Accordingly, we have broad discretion in using these funds in
our operations. Given that the issuance of shares hereunder is dependent upon
individual decisions of warrant holders to exercise their warrants, we do not
have control over the timing of our receipt of the proceeds. Accordingly, we
will use such proceeds as dictated by our business needs at the time we receive
such proceeds which may differ from our present business needs.
WE MAY NOT HAVE SUFFICIENT CASH TO OPERATE THE BUSINESS
While it is possible that we will raise up to [$ ] in equity capital
from exercise of the New Warrants, we believe that we will have to raise
additional capital through other equity sources or other debt instruments in
order to execute our business strategy. If we are unable to obtain other sources
of capital, we may have to alter our strategy and could fail and go out of
business. Whether we are able to raise any capital through the exercise of New
Warrants is, among other things, dependant upon the price performance of our
common stock. If the trading price of our common shares does not sufficiently
exceed the exercise price of the New Warrants and maintain such price for a
sufficient period of time, the holders of the New Warrants will not exercise the
New Warrants and the Company will not raise capital from sales of common shares
upon exercise of New Warrants.
OUR BUSINESS IS HIGHLY REGULATED
The testing, manufacture and sale of the products we manufacture and
distribute are subject to extensive regulation by the FDA and by other federal,
state and foreign authorities. Before medical devices can be commercially
marketed in the United States, the FDA must give either 510(k) clearance or
premarket approval for the devices. If we do not comply with these requirements
we may be subject to any of the following:
- fines,
- injunctions,
- civil penalties,
- recall or seizure of products,
- total or partial suspension of production,
- denial of premarket clearance or premarket approval for devices,
- withdrawal of marketing clearances or approvals, and
- criminal prosecution.
9
Our business could be adversely affected by any of these actions.
Our hemodialysis concentrates have been cleared by the FDA. However, the
FDA could rescind these clearances and any new products or modifications to our
current products that we develop could fail to receive FDA clearance. If the FDA
rescinds or denies any current or future clearances or approvals for our
products, we would be prohibited from selling those products in the United
States until we obtain such clearances or approvals. Our business would be
adversely affected by any such prohibition, any delay in obtaining necessary
regulatory approvals, or any limits placed by the FDA on our intended use. Our
products are also subject to federal regulations regarding manufacturing
quality, known as Good Manufacturing Practices, or GMP. In addition, our new
products will be subject to review as a pharmaceutical drug by the FDA. For
further discussion of these issues, see "Business -- Government Regulation."
OUR NEW PRODUCTS MAY NEVER BE APPROVED FOR MARKETING BY THE FDA
We have signed licensing agreements for water soluble iron supplements to
be included in our dialysate products as an iron maintenance therapy for
dialysis patients. We have been advised that these water soluble iron
supplements will be considered a drug/device combination by the FDA. Our iron
maintenance therapy product will require human clinical trials and approval by
the FDA. We do not yet know the scope and duration of clinical trials required
by the FDA for our new products. Clinical trials are expensive and time
consuming to complete, and we may not be able to raise sufficient funds to
complete the clinical trials to obtain marketing approval. The process of
obtaining FDA approval for a new product may take several years and is likely to
involve the expenditure of substantial resources. In addition, the FDA may order
the temporary or permanent discontinuation of a clinical trial at any time. Many
products that undergo clinical trials are never approved for patient use. Thus,
it is possible that our new proprietary products may never be approved to be
marketed. If we are unable to obtain marketing approval, our entire investment
in new products may be worthless or our licensing rights could be forfeited.
FOREIGN APPROVALS OF OUR NEW DRUG PRODUCTS FOR MARKETING MAY BE DIFFICULT TO
OBTAIN
The approval procedures for the marketing of our new drug products in
foreign countries vary from country to country, and the time required for
approval may be longer or shorter than that required for FDA approval. Even
after foreign approvals are obtained, further delays may be encountered before
products may be marketed. For example, many countries require additional
governmental approval for price reimbursement under national health insurance
systems.
MAINTENANCE AND UPKEEP ON OUR MANUFACTURING FACILITIES CAN BE COSTLY
Manufacturing facilities are subject to periodic inspections for compliance
with GMP, and each domestic device or drug manufacturing facility must be
registered with the FDA. Foreign regulatory authorities may also have similar
regulations. In complying with standards set forth in these regulations, we must
expend significant time, money and effort in the area of quality assurance to
insure full technical compliance. FDA approval to manufacture a device or drug
is site specific. In the event an approved manufacturing facility for a
particular drug becomes inoperable, obtaining the required FDA approval to
manufacture such drug at a different manufacturing site could result in
production delays, which could adversely affect our business and results of
operations.
CHANGES IN HEALTH CARE REFORM COULD ADVERSELY AFFECT OUR BUSINESS
The federal and state governments in the United States, as well as many
foreign governments, from time to time explore ways to reduce medical care costs
through health care reform. Due to uncertainties regarding the ultimate features
of reform initiatives and their enactment and implementation, we cannot predict
what impact any reform proposal ultimately adopted may have on the
pharmaceutical and medical device industry or on the business or operating
results of the Company. The Company's activities are subject to various federal,
state and local laws and regulations regarding occupational safety, laboratory
practices, and environmental protection and may be subject to other present and
possible future local, state, federal and foreign regulations.
10
WE MAY NOT HAVE SUFFICIENT PRODUCTS LIABILITY INSURANCE
As a supplier of medical products, we may face potential liability from a
person who claims that he or she suffered harm as a result of using our
products. We maintain products liability insurance in the amount of $3 million
per occurrence and $3 million in the aggregate. Since we have never experienced
a product liability claim, we believe that our current insurance will be
sufficient to cover any potential liabilities arising from our business and
operations. However, we cannot be sure that it will remain economical to retain
our current level of insurance, that our current insurance will remain available
or that such insurance would be sufficient to protect us against liabilities
associated with our business. We may be sued, and we may have significant legal
expenses that are not covered by insurance. In addition, our reputation could be
damaged by product liability litigation and that could harm our marketing
ability. Any litigation could also hurt our ability to retain products liability
insurance or make such insurance more expensive. Our business, financial
condition and results of operations could be adversely affected by an uninsured
or inadequately insured product liability claim in the future.
VOTING CONTROL AND ANTI-TAKEOVER PROVISIONS REDUCE THE LIKELIHOOD THAT YOU
WILL RECEIVE A TAKEOVER PREMIUM
Upon completion of this Offering, the officers and directors of the Company
will beneficially own approximately 18.3% of the Company's voting shares
(assuming the exercise of options granted to such officers and directors which
are exercisable within 60 days of the date of this Prospectus). Accordingly,
they may be able to effectively control the Company's affairs. The Company's
shareholders do not have the right to cumulative voting in the election of
directors. The Board of Directors has the authority, without further approval of
the Company's shareholders, to issue shares of preferred stock (the "Preferred
Stock") having such rights, preferences and privileges as the Board of Directors
may determine. Any such issuance of Preferred Stock could, under certain
circumstances, have the effect of delaying or preventing a change in control of
the Company and may adversely affect the rights of holders of common shares,
including by decreasing the amount of earnings and assets available for
distribution to holders of common shares and adversely affect the relative
voting power or other rights of the holders of the Company's common shares. In
addition, the Company is subject to Michigan statutes regulating business
combinations, takeovers and control share acquisitions which might also hinder
or delay a change in control of the Company. Anti-takeover provisions that could
be included in the Preferred Stock when issued and the Michigan statutes
regulating business combinations, takeovers and control share acquisitions can
have a depressive effect on the market price of the Company's securities and can
limit shareholders' ability to receive a premium on their shares by discouraging
takeover and tender offer bids. See "Security Ownership of Certain Beneficial
Owners and Management" and "Description of Securities -- Preferred Stock."
The Directors of the Company serve staggered three-year terms, and
directors may not be removed without cause. The Company's Articles of
Incorporation also set the minimum and maximum number of directors constituting
the entire Board at three and fifteen, respectively, and require approval of
holders of a majority of the Company's voting shares to amend these provisions.
These provisions could have an anti-takeover effect by making it more difficult
to acquire the Company by means of a tender offer, a proxy contest or otherwise
or the removal of incumbent officers and directors. These provisions could
delay, deter or prevent a tender offer or takeover attempt that a shareholder
might consider in his or her best interests, including those attempts that might
result in a premium over the market price for the common shares held by the
Company's shareholders. See "Description of Securities -- Common Shares."
OUR BOARD OF DIRECTORS IS SUBJECT TO POTENTIAL DEADLOCK
Our Board of Directors presently has four members, and under our bylaws,
approval by a majority of the Directors is required for many significant
corporate actions. It is possible that our Board of Directors may be unable to
obtain majority approval in certain circumstances, which would prevent us from
taking action.
11
WE DEPEND ON OUR SALES REPRESENTATIVES AND DISTRIBUTORS TO MARKET OUR PRODUCTS
We market our products through our own employees and through independent
sales representatives and distributors. We have only limited experience in
developing and marketing medical products, and our direct sales force consists
of three persons, including our Chief Executive Officer. We depend substantially
on several independent sales representatives and distributors to generate sales.
If these independent sales representatives and distributors fail to market,
promote and sell the Company's products, our business, financial condition and
results of operations could be adversely affected.
FUTURE ISSUANCES OF OUR COMMON SHARES MAY DILUTE CURRENT SHAREHOLDERS
Immediately after the Offering, the Company will have an aggregate of
approximately 3,902,567 common shares authorized but unissued and not reserved
for specific purposes. All of such shares may be issued without any action or
approval by the Company's shareholders. Although there are no present plans,
agreements, commitments or undertakings with respect to the issuance of
additional shares or securities convertible into any such shares by the Company
(other than those currently reserved for issuance), any common shares issued
would further dilute the percentage ownership of the Company held by the
Company's shareholders.
THE COMPANY DOES NOT ANTICIPATE PAYING DIVIDENDS IN THE FORESEEABLE FUTURE
Since inception, the Company has not paid any cash dividend on its common
shares and it does not anticipate paying such dividends in the foreseeable
future. The payment of dividends by the Company is within the discretion of its
Board of Directors and depends upon the Company's earnings, capital
requirements, financial condition and requirements, future prospects,
restrictions in future financing agreements, business conditions and other
factors deemed relevant by the Board. The Company intends to retain earnings, if
any, to finance its operations. See "Dividend Policy."
THE MARKET PRICE OF THE COMPANY'S SECURITIES MAY BE VOLATILE
The market price of the Company's securities may be highly volatile.
Quarterly operating results of the Company; changes in the general conditions in
the economy, the financial markets, or the medical products industry; changes in
financial estimates by securities analysts or failure by the Company to meet
such estimates; litigation involving the Company; actions by governmental
agencies; or other developments affecting the Company or its competitors, could
cause the market price of the Company's securities to fluctuate substantially.
The historically low trading volume of the Company's securities may also cause
the market price of the Company's securities to fluctuate significantly in
response to a relatively low number of trades or transactions involving the
Company's securities. In addition, the stock market may experience significant
price and volume fluctuations which may affect the market price of the Company's
securities for reasons that are unrelated to the Company's operating performance
and that are beyond the Company's control.
THE EXCHANGE OFFER
BACKGROUND OF AND REASONS FOR THE EXCHANGE OFFER
In May 2005, our Board of Directors decided not to further extend the term
of the Old Warrants, which are scheduled to expire on January 26, 2006. Old
Warrants have an exercise price of $4.50, and it is uncertain whether the
trading price of our common shares will exceed the exercise price of the Old
Warrants prior to their expiration. If the Old Warrants expire unexercised, they
will be worthless. Although our Board of Directors decided not to extend the
term of the Old Warrants, it determined that it was in the best interests of the
Company for the Old Warrants to be exchanged for New Warrants with an exercise
price that was lower than that of the Old Warrants in order to increase the
chance that such warrants will be exercised prior to their expiration.
12
TERMS OF THE EXCHANGE OFFER
As of the date of this prospectus, Old Warrants currently outstanding are
exercisable for an aggregate of 3,625,000 common shares. This prospectus,
together with the Letter of Transmittal, is being sent to all registered holders
of the Old Warrants located in states where the Exchange Offer has been
qualified (collectively the "Holders" and each, individually, a "Holder"). There
will be no fixed record date for determining Holders entitled to participate in
the Exchange Offer. We initially will mail this prospectus and the Letter of
Transmittal to Holders determined as of the latest practicable date prior to the
commencement of the Exchange Offer. Only a Holder of Old Warrants may exchange
such Old Warrants in the Exchange Offer.
Upon satisfaction or waiver of all the conditions set forth in this
prospectus and in the Letter of Transmittal, we will accept any and all Old
Warrants validly tendered to the Transfer Agent. We will issue New Warrants as
soon as practicable after the Expiration Date and our acceptance of tendered Old
Warrants exercisable to purchase common shares equal to the number of common
shares covered by the Old Warrants surrendered pursuant to the Exchange Offer.
Old Warrants that are exchanged will be cancelled following the issuance of New
Warrants.
In all cases, issuance of New Warrants for Old Warrants that are accepted
for exchange pursuant to the Exchange Offer will be made only after the
Expiration Date and timely receipt by the Transfer Agent of (i) the certificates
evidencing such Old Warrants or confirmation of a book-entry transfer of such
Old Warrants (a "Book-Entry Confirmation") into the account of American Stock
Transfer and Trust Company at The Depository Trust Company (the "Book-Entry
Transfer Facility"), (ii) the Letter of Transmittal (or a manually signed
facsimile thereof), properly completed and duly executed, with any required
signature guarantees or, in the case of a book-entry transfer, an Agent's
Message (as defined below) in lieu of the Letter of Transmittal, and (iii) any
other documents required by the Letter of Transmittal; provided, however, that
we reserve the absolute right to waive any defects or irregularities in the
exchange or conditions of the Exchange Offer.
The term "Agent's Message" means a message, transmitted by the Book-Entry
Transfer Facility to and received by the Transfer Agent and forming a part of a
Book-Entry Confirmation, that states that the Book-Entry Transfer Facility has
received an express acknowledgment from the participant in the Book-Entry
Transfer Facility tendering the Old Warrants that are the subject of such
Book-Entry Confirmation, that such participant has received and agrees to be
bound by the terms of the Letter of Transmittal and that we may enforce such
agreement against such participant.
If any tendered Old Warrants are not accepted for exchange for any reason
pursuant to the terms and conditions of the Exchange Offer, or if certificates
representing Old Warrants are submitted evidencing more Old Warrants than are
tendered, certificates evidencing untendered Old Warrants will be returned,
without expense to the tendering Holder (or, in the case of Old Warrants
tendered by book-entry transfer into the Transfer Agent's account at the
Book-Entry Transfer Facility, such Old Warrants will be credited to an account
maintained at the Book-Entry Transfer Facility), promptly following the
expiration or termination of the Exchange Offer. For purposes of the Exchange
Offer, we will be deemed to have accepted properly tendered Old Warrants for
exchange if, as and when we give oral or written notice thereof to the Transfer
Agent. If we extend the Exchange Offer, are delayed in our acceptance for
exchange of Old Warrants or are unable to accept Old Warrants for exchange
pursuant to the Exchange Offer for any reason, then, without prejudice to the
our rights under the Exchange Offer, the Transfer Agent may, nevertheless, on
our behalf, retain tendered Old Warrants, and such Old Warrants may not be
withdrawn except to the extent that tendering Holders are entitled to withdraw
their tender of Old Warrants prior to the Expiration Date. The Transfer Agent
will act as agent for the exchanging Holders for the purposes of receiving the
New Warrants from the Company.
We will pay all charges and expenses, other than any applicable taxes,
including taxes described below, in connection with the Exchange Offer. The
Company plans to use operating capital to fund the cash expenses and costs to be
incurred in connection with the Exchange Offer. See "Fees and Expenses."
13
We intend to conduct the Exchange Offer in accordance with the applicable
requirements of the Securities Act of 1933, as amended, and the Exchange Act and
the rules and regulations of the SEC thereunder. Old Warrants that are not
exchanged in the Exchange Offer will be worthless upon their expiration on
January 26, 2006.
EXPIRATION DATE
The term "Expiration Date" shall mean 5:00 p.m., Eastern Standard Time, on
[ ], 2005, unless the Company, at its sole discretion, extends the
Exchange Offer, in which case the term "Expiration Date" shall mean the latest
date and time to which the Exchange Offer is extended. In order to extend the
Exchange Offer, we will notify the Exchange Agent of any extension by oral or
written notice and will mail to the Holders an announcement thereof prior to
9:00 a.m., Eastern Standard Time, on the next business day after the
then-effective Expiration Date.
PROCEDURES FOR EXCHANGING
To exchange Old Warrants in the Exchange Offer, a Holder must complete,
sign and date the Letter of Transmittal, or facsimile thereof, have the
signatures thereon guaranteed if required by the Letter of Transmittal, and mail
or otherwise deliver such Letter of Transmittal or such facsimile along with the
certificates for such Old Warrants to the Transfer Agent prior to the Expiration
Date. To be tendered effectively, the Letter of Transmittal and other required
documents must be received by the Transfer Agent at the address set forth in the
Letter of Transmittal prior to the Expiration Date.
Any beneficial owner whose interests in the Old Warrants are registered in
the name of a broker, dealer, commercial bank, trust company, nominee or other
securities intermediary and who wishes to exchange such Old Warrants in the
Exchange Offer should contact such securities intermediary promptly and instruct
such securities intermediary to exchange on such beneficial owner's behalf.
The tender of Old Warrants by a Holder pursuant to any one of the
procedures described above will constitute such Holder's acceptance of the
Exchange Offer, as well as the tendering Holder's representation and warranty
that such Holder has the full power and authority to tender and surrender the
Old Warrants tendered, as specified in the Letter of Transmittal. Our acceptance
for exchange of Old Warrants tendered pursuant to the Exchange Offer will
constitute a binding agreement between the tendering Holder and us upon the
terms and subject to the conditions of the Exchange Offer.
THE METHOD OF DELIVERY OF OLD WARRANTS, THE LETTER OF TRANSMITTAL AND ALL
OTHER REQUIRED DOCUMENTS TO THE TRANSFER AGENT IS AT THE ELECTION, EXPENSE AND
RISK OF THE HOLDER. INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED THAT HOLDERS
USE AN OVERNIGHT OR HAND DELIVERY SERVICE AND THE DELIVERY WILL BE DEEMED MADE
ONLY WHEN ACTUALLY RECEIVED OR CONFIRMED BY THE TRANSFER AGENT. IN ALL CASES,
SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE DELIVERY TO THE TRANSFER AGENT
BEFORE THE EXPIRATION DATE. NO LETTER OF TRANSMITTAL OR OLD WARRANTS SHOULD BE
SENT TO THE COMPANY. HOLDERS MAY REQUEST THEIR RESPECTIVE BROKERS, DEALERS,
COMMERCIAL BANKS, TRUST COMPANIES OR NOMINEES TO EFFECT THE ABOVE TRANSACTIONS
FOR SUCH HOLDERS. DELIVERY OF DOCUMENTS TO THE BOOK-ENTRY TRANSFER FACILITY DOES
NOT CONSTITUTE DELIVERY TO THE TRANSFER AGENT.
Signatures on a Letter of Transmittal must be guaranteed by an Eligible
Institution (as defined below) unless the Old Warrants tendered pursuant thereto
are tendered (i) by a Holder who has not completed the box entitled "Special
Issuance Instructions" on the Letter of Transmittal or (ii) for the account of
an Eligible Institution (as defined below). In the event that signatures on a
Letter of Transmittal are required to be guaranteed, such guarantor must be a
participant in the Security Transfer Agents Medallion Program or any other
"eligible guarantor institution," as such term is defined in Rule 17Ad-15 of the
Exchange Act (an "Eligible Institution").
14
If the Letter of Transmittal or any Old Warrants are signed by trustees,
executors, administrators, guardians, attorneys-in-fact, officers of
corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing and, unless waived by the Company,
evidence satisfactory to the Company of their authority to so act must be
submitted with the Letter of Transmittal.
If a Holder desires to tender Old Warrants pursuant to the Exchange Offer
and the certificates evidencing such Old Warrants are not immediately available
or such Holder cannot deliver the certificates and all other required documents
to the Transfer Agent prior to the Expiration Date, or such Holder cannot
complete the procedure for delivery by book-entry transfer on a timely basis,
such Old Warrants may nevertheless be tendered, provided that all of the
following conditions are satisfied:
(i) such tender is made by or through an Eligible Institution;
(ii) a properly completed and duly executed Notice of Guaranteed Delivery,
substantially in the form made available by the Company, is received prior to
the Expiration Date by the Transfer Agent as provided below; and
(iii) the Old Warrant certificates (or a Book-Entry Confirmation)
evidencing all tendered Old Warrants, in proper form for transfer, in each case
together with the Letter of Transmittal (or a manually signed facsimile
thereof), properly completed and duly executed, with any required signature
guarantees (or, in the case of a book-entry transfer, an Agent's Message), and
any other documents required by the Letter of Transmittal are received by the
Transfer Agent within three Nasdaq Small-Cap Market trading days after the date
of execution of such Notice of Guaranteed Delivery. As used herein "trading
days" means any day on which the Nasdaq Small-Cap Market is open for business.
The Notice of Guaranteed Delivery may be delivered by hand or transmitted
by manually signed facsimile transmission or mailed to the Transfer Agent and
must include a guarantee by an Eligible Institution in the form set forth in the
form of Notice of Guaranteed Delivery made available by the Company.
All questions as to the validity, form and eligibility (including time of
receipt), for acceptance of tendered Old Warrants will be determined by the
Transfer Agent and the Company in their discretion, which determination will be
final and binding. The Company reserves the absolute right to reject any and all
Old Warrants not properly tendered or any Old Warrants our acceptance of which
would, in the opinion of our counsel, be unlawful. We also reserve the right to
waive any defects, irregularities or conditions of exchange as to particular Old
Warrants. Our interpretation of the terms and conditions of the Exchange Offer
(including the instructions in the Letter of Transmittal) will be final and
binding on all parties. Unless waived, any defects or irregularities in
connection with tenders of Old Warrants must be cured within such time as the
Transfer Agent or the Company shall determine. Although we intend to notify
Holders of defects or irregularities with respect to tenders of Old Warrants,
neither the Company nor the Transfer Agent or any other person shall be under
any duty to give notification of defects or irregularities with respect to
tenders of Old Warrants, nor shall any of them incur any liability for failure
to give such notification. Until such defects or irregularities have been cured
or waived, tenders of Old Warrants will not be deemed to have been made. Any Old
Warrants received by the Transfer Agent that are not properly tendered and as to
which the defects or irregularities have not been cured or waived will be
returned by the Transfer Agent to the exchanging Holders, unless otherwise
provided in the Letter of Transmittal, as soon as practicable following the
Expiration Date.
WITHDRAWAL OF TENDERS
Tenders of Old Warrants may be withdrawn prior to the Expiration Date. For
a withdrawal to be effective, a written, telegraphic or facsimile transmission
notice of withdrawal must be timely received by the Transfer Agent at the
address set forth in the Letter of Transmittal. Any such notice of withdrawal
must specify the name of the person who tendered the Old Warrants to be
withdrawn, the number of Old Warrants to be withdrawn and the name of the
registered holder of such Old Warrants, if different from that of the person who
tendered such Old Warrants. If certificates evidencing Old Warrants to be
withdrawn have been delivered or otherwise identified to the Transfer Agent,
then, prior to the physical release of such certificates, the serial numbers
shown on such certificates must be submitted to the Transfer Agent and, unless
such Old
15
Warrants have been tendered for the account of an Eligible Institution, the
signature(s) on the notice of withdrawal must be guaranteed by an Eligible
Institution. If Old Warrants have been tendered pursuant to the procedures for
book-entry transfer as set forth in above, any notice of withdrawal must also
specify the name and number of the account at the Book-Entry Transfer Facility
to be credited with the withdrawn Old Warrants.
If we extend the Offer, are delayed in our acceptance for tender of Old
Warrants or are unable to accept Old Warrants for exchange pursuant to the
Exchange Offer for any reason, then, without prejudice to our rights under the
Exchange Offer, the Transfer Agent may, nevertheless, on behalf of Holder,
retain tendered Old Warrants, and such Old Warrants may not be withdrawn, except
to the extent that tendering Holders are entitled to withdrawal rights as
described herein.
Withdrawals of Old Warrants may not be rescinded. Any Old Warrants
properly withdrawn will thereafter be deemed not to have been validly tendered
for purposes of the Exchange Offer. However, withdrawn Old Warrants may be
re-tendered by again following one of the procedures described in this
prospectus at any time prior to the Expiration Date.
ALL QUESTIONS AS TO THE FORM AND VALIDITY (INCLUDING TIME OF RECEIPT) OF
ANY NOTICE OF WITHDRAWAL WILL BE DETERMINED BY THE COMPANY, IN ITS SOLE
DISCRETION, WHOSE DETERMINATION WILL BE FINAL AND BINDING. NONE OF THE COMPANY,
THE TRANSFER AGENT OR ANY OTHER PERSON WILL BE UNDER ANY DUTY TO GIVE
NOTIFICATION OF ANY DEFECTS OR IRREGULARITIES IN ANY NOTICE OF WITHDRAWAL OR
INCUR ANY LIABILITY FOR FAILURE TO GIVE ANY SUCH NOTIFICATION.
TRANSFER AGENT
American Stock Transfer & Trust Company has been appointed as Transfer
Agent for the Exchange Offer and the sale of common shares underlying New
Warrants. Questions and requests for assistance, requests for additional copies
of this prospectus or of the Letter of Transmittal should be directed to the
Transfer Agent, addressed as follows:
American Stock Transfer & Trust Company
59 Maiden Lane
New York, NY 10038
ATTN: Reorganization Department (if for the Exchange Offer)/Legal Share
Department (if for common shares underlying New Warrants)
By Telephone: By Facsimile:
718-921-8273 718-921-8368
Originals of all documents submitted by facsimile should be sent promptly
by registered mail or overnight courier or delivered by hand. Delivery to an
address other than as set forth above will not constitute a valid delivery.
FEES AND EXPENSES
We will pay the expenses of soliciting tenders of the Old Warrants. The
principal solicitation is being made by mail; however, additional solicitation
may be made by telecopier, telephone or in person by officers and regular
employees of the Company and its affiliates.
We have not retained any dealer-manager in connection with the Exchange
Offer and will not make any payments to brokers-dealers or others soliciting
acceptances of the Exchange Offer. We will pay the Transfer Agent reasonable and
customary fees for its services and will reimburse the Transfer Agent for its
reasonable out-of-pocket expenses in connection therewith.
The cash expenses to be incurred in connection with the Exchange Offer will
be paid by the Company. Such expenses include fees and expenses of the Exchange
Agent, accounting and legal fees and printing costs, among others. The Company
plans to use operating capital to fund the cash expenses and costs to be
incurred in connection with the Exchange Offer.
16
Rockwell will not pay any transfer taxes that may be applicable to the
exchange of the Old Warrants pursuant to the Exchange Offer. If certificates
representing Old Warrants for warrants not tendered or accepted for exchange are
to be delivered to, or are to be issued in the name of, any person other than
the Holder of Old Warrants tendered, or if tendered Old Warrants are registered
in the name of any person other than the person signing the Letter of
Transmittal, or if a transfer tax is imposed for any reason other than the
exchange of the Old Warrants pursuant to the Exchange Offer, then the amount of
any such transfer taxes (whether imposed on the registered Holder or any other
persons) will be payable by the exchanging Holder. If satisfactory evidence of
payment of such taxes or exemption therefrom is not submitted with the Letter of
Transmittal, the amount of such transfer taxes will be billed directly to such
exchanging Holder.
RECOMMENDATION OF THE BOARD OF DIRECTORS
Our Board of Directors believes that the Exchange Offer is in the best
interests of the Company and Holders of Old Warrants, and recommends that
Holders of Old Warrants participate in the Exchange Offer. Old Warrants that are
not exchanged in the Exchange Offer will be worthless after their expiration on
January 26, 2006.
CONSEQUENCES OF FAILURE TO EXCHANGE
After the expiration of the Exchange Offer you will no longer have a right
to exchange your Old Warrants for New Warrants and any Old Warrants not
exchanged in the Exchange Offer will become worthless after their expiration.
ACCOUNTING TREATMENT
The exchange of Old Warrants for New Warrants will be accounted for as a
capital transaction. New Warrants will be recognized at issuance based on the
fair value of the respective New Warrants as of the date of exchange. The
difference between the fair value of any New Warrants and the carrying amount of
Old Warrants in any exchange will be charged to retained earnings.
DISCUSSION OF UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
The following discussion describes the material United States federal
income tax consequences to (1) Holders that accept the Exchange Offer and (2)
Holders that do not accept the Exchange Offer. This discussion is not a complete
analysis or listing of all potential tax effects relevant to a particular
Holder's decision of whether to accept the Exchange Offer. This discussion is
based on provisions of the Internal Revenue Code of 1986, as amended (the
"Code"), federal income tax regulations and administrative and judicial
interpretations of the Code and those regulations, all as in effect as of the
date of this prospectus and all of which are subject to change, possibly with
retroactive effect. This discussion does not address all aspects of United
States federal income taxation that may be applicable to Holders in light of
their particular circumstances or to Holders subject to special treatment under
United States federal income tax law, including, without limitation:
- partnerships and other pass-through entities,
- foreign persons,
- certain financial institutions,
- insurance companies,
- tax-exempt entities,
- dealers in securities or foreign currencies,
- traders in securities that elect to apply a mark-to-market method of
accounting,
- certain United States expatriates,
- persons that hold their Old Warrants as part of a straddle, hedge,
conversion transaction, or other integrated investment,
- persons whose functional currency is not the United States dollar, and
- persons that acquired their Old Warrants as compensation.
17
Furthermore, this discussion does not address any aspect of state, local,
or foreign taxation, or any aspect of United States federal tax laws other than
the United States federal income tax. Accordingly, we strongly urge you to
consult your own tax advisor as to the specific United States federal, state,
local, or foreign income or other tax consequences of your acceptance or
nonacceptance of the Exchange Offer.
This discussion is limited to Holders that hold their Old Warrants as
capital assets. A Holder holds warrants as capital assets unless that Holder
holds the warrants as stock in trade or other property of a kind which would
properly be included in the Holder's inventory if on hand at the close of the
taxable year, or is held primarily for sale to customers in the ordinary course
of the Holder's trade or business.
POSSIBLE TAX TREATMENT OF EXCHANGE OFFER AND EXCHANGE OF OLD WARRANTS FOR NEW
WARRANTS AS A TAXABLE DISTRIBUTION
Section 305(a) of the Code provides the general rule that gross income does
not include the amount of any distribution of the "stock" of a corporation made
by such corporation to its "shareholders" with respect to its stock. For
purposes of Section 305, the term "stock" includes rights to acquire stock and
the term "shareholder" generally includes a holder of such rights. Several
exceptions to this general rule of nonrecognition are set forth in Section
305(b) of the Code, pursuant to which a distribution of "stock" -- including a
"right to acquire stock" -- will be taxable. These exceptions include, without
limitation, distributions that have the result of the receipt of cash or other
property by some shareholders and an increase in the proportionate interests of
other shareholders in the assets or earnings and profits of the corporation. For
purposes of Section 305, payments of interest on convertible debt are treated as
distributions of property to shareholders. Where the distribution of cash or
other property to some shareholders and distribution of stock (or rights to
acquire stock) to other shareholders are separated by more than 36 months, the
distributions are presumed not to result in the receipt of cash or other
property by some shareholders and increase in the proportionate interest of
other shareholders, unless the distributions are pursuant to a plan. The Company
has not distributed any cash or other property to shareholders, and has no
present plan to do so. Even if the Company were, within 36 months of the
expiration of the Exchange Offer, to distribute cash or other property to other
shareholders (not pursuant to a plan), the Exchange Offer could be viewed either
as an integrated part of the exchange and not treated as a separate distribution
of a stock right, or as analogous to an isolated redemption with a bona fide
business purpose, which would not be regarded as a taxable distribution under
Section 305(b).
Section 305(c) of the Code provides that certain transactions (including,
without limitation, a recapitalization) may be treated as a distribution with
respect to any shareholder whose proportionate interest in the earnings and
profits or assets of the corporation is increased by such transactions. Such
distributions may be deemed to be distributions of stock by the corporation to
such shareholders. As discussed below, the exchange of Old Warrants for New
Warrants could be treated (and will be reported by the Company) as a
recapitalization for federal income tax purposes. A recapitalization, however,
should not be treated as a taxable distribution under Section 305 of the Code if
the recapitalization (i) has a bona fide business purpose, (ii) is an isolated
transaction, and (iii) is not part of a plan to increase periodically the
proportionate interest of any shareholder in the assets or earnings and profits
of a corporation.
Based on the foregoing, we believe that, while the matter is not free from
doubt, if the Company does not distribute money or property (including the
payment of interest on convertible debt) to shareholders within 36 months of the
Exchange Offer, then it is more likely than not that neither the Exchange Offer
nor the exchange of Old Warrants for New Warrants would be treated as resulting
in a taxable distribution under Section 305.
Generally, a nontaxable distribution of stock or rights to acquire stock
requires an allocation of tax basis among such distributed stock or stock rights
and the stock or stock rights with respect to which such distribution was made.
The following discussion assumes that the Exchange Offer is not treated as a
distribution of stock or stock rights, and, therefore, no such allocation is
required.
18
HOLDERS THAT ACCEPT THE EXCHANGE OFFER
The United States federal income tax consequences of the exchange of one
class of warrants (here, the New Warrants) for another class of warrants (here,
the Old Warrants) with substantially identical terms except for the exercise
price (the "Exchange") are uncertain. One possible characterization is that the
Exchange qualifies as a tax-free reorganization within the meaning of section
368(a) of the Code. If the Exchange does qualify as a tax-free reorganization,
then:
- You would not recognize any gain or loss upon receipt of New Warrants in
the Exchange;
- Your aggregate tax basis in the New Warrants you receive in the Exchange
would equal your aggregate tax basis in the Old Warrants you surrender;
and
- Your holding period in the New Warrants you receive in the Exchange would
include the period during which you held the Old Warrants that you
exchanged.
There is no definitive authority regarding whether the Exchange would be
respected as a tax-free reorganization, and we have not requested a private
letter ruling from the Internal Revenue Service (the "IRS"). While it is
possible that the Exchange could qualify as a tax-free reorganization, the IRS
could disagree. In the event of such disagreement, there is no assurance that
the IRS would not prevail in a judicial or administrative proceeding.
There is no definitive authority addressing how the Exchange would be
characterized for United States federal income tax purposes if the Exchange were
not to qualify as a tax-free reorganization. Two other possible
characterizations of the Exchange are as a nontaxable modification of the Old
Warrants or as a taxable exchange of the Old Warrants for the New Warrants.
If the Exchange were treated as a single exchange of Old Warrants for New
Warrants in a transaction not qualifying as a tax-free reorganization and not
treated as a nontaxable modification of the Old Warrants, then the Exchange
could be treated as a taxable exchange of the Old Warrants for the New Warrants.
If the Exchange were treated as a taxable exchange, then you would recognize
gain or loss equal to the difference between the amount realized in the exchange
and your adjusted tax basis in the Old Warrants surrendered. The amount realized
in the Exchange would equal the fair market value of the New Warrants you
receive. Your adjusted tax basis in the Old Warrants would be, in general, your
cost of acquiring the Old Warrants. Any such gain or loss would be capital gain
or loss. The maximum tax rate applicable to capital gains for capital assets
held for more than one year is 15 percent. The maximum tax rate applicable to
capital gains is greater for holding periods of one year or less. The
deductibility of capital losses is subject to limitations, including the
possible application of the "wash sale" rules of Section 1091 of the Code. The
aggregate tax basis in the New Warrants you receive would equal the fair market
value of the New Warrants you receive (subject to adjustment if the wash sale
rules apply). The holding period of the New Warrants you receive would not
include the period during which you held the Old Warrants.
HOLDERS THAT DO NOT ACCEPT THE EXCHANGE OFFER
If you do not accept the Exchange Offer and do not exercise your Old
Warrants prior to their expiration date, you will recognize a loss upon the
lapse of your right to exercise the Old Warrants. A loss from the lapse of the
right to exercise Old Warrants would be recognized in 2006. The amount of loss
recognized would equal your adjusted tax basis in the Old Warrants. Your
adjusted tax basis in the Old Warrants would be, in general, your cost of
acquiring the Old Warrants. Any loss from the lapse of the right to exercise
your Old Warrants would be a capital loss. The deductibility of capital losses
is subject to limitations.
REPORTING OF THE EXCHANGE
There are reporting requirements that apply to tax-free reorganizations
under Section 368 of the Code. These reporting requirements apply to both
corporations that are a party to the reorganization and to taxpayers who receive
stock, securities or money or other property in the reorganization. The Company
intends to take the position that the exchange is, and therefore intends to
report the Exchange as, a tax-free reorganization, although such reporting does
not bind the IRS to treat the Exchange as a tax-free reorganization. You should
19
consult your tax advisor regarding the federal income tax consequences of the
exchange of Old Warrants for New Warrants and the applicable reporting
requirements if the Transactions qualify as a tax-free reorganization.
The foregoing is a summary of the material federal income tax
considerations of the Exchange Offer and the Exchange that may be relevant to a
Holder. This summary is based upon the Code and rules, regulations and existing
interpretations relating thereto, any of which could be changed at any time
(possibly with retroactive effect). Because the tax consequences of the Exchange
Offer and the Exchange may vary from investor to investor, investors should not
consider this summary to constitute formal tax advice and should consult their
own tax advisers concerning the tax consequences to such investors of the
Exchange Offer and the Transactions and any applicable tax reporting
requirements.
DIFFERENCES BETWEEN THE OLD WARRANTS AND THE NEW WARRANTS
The form and terms of the New Warrants are substantially the same as the
form and terms of the Old Warrants except that the exercise price of the New
Warrants is $[ ] per common share issuable under the New Warrants, while the
exercise price of the Old Warrants is $4.50 per common share issuable under the
Old Warrants.
American Stock Transfer & Trust Company will act as Transfer Agent under
the New Warrant Agreement. American Stock Transfer & Trust Company is the
transfer agent under the warrant agreement relating to the Old Warrants (the
"Old Warrant Agreement").
The statements contained herein concerning the Old Warrants, the New
Warrants, the Old Warrant Agreement and the New Warrant Agreement do not purport
to be complete and are qualified in their entirety by reference to the Old
Warrant Agreement and the New Warrant Agreement.
USE OF PROCEEDS
We will not receive any proceeds from the completion of the Exchange Offer.
The net proceeds to us from the sale of the 3,625,000 common shares underlying
the New Warrants offered by this Prospectus (after deducting estimated offering
expenses) are estimated to be approximately [$ ]. We intend to use the net
proceeds of this offering for general working capital and may use the proceeds:
to add additional manufacturing facilities, for research and product
development, for clinical trials related to our attempt to obtain FDA approval
of our iron dialysate product and for the financing of marketing and sales
activities, as described in the table below. However, we have broad discretion
in using these funds in our operations.
USE OF PROCEEDS AMOUNT
--------------- -------
Iron Dialysate Product(1)................................... $
Additional Manufacturing Facilities......................... $
Research and Product Development............................ $
Working Capital(2).......................................... $
-------
Total Net Proceeds.......................................... $
=======
---------------
(1) Includes expenses for clinical trials related to our attempt to obtain FDA
approval of our iron dialysate product.
(2) Includes working capital and other ongoing selling, general and
administrative expenses. See "Management's Discussions and Analysis of
Financial Condition and Results of Operations" and the Financial Statements
included elsewhere in this Prospectus about our current working capital
needs and ongoing selling, general and administrative expenses.
The foregoing represents our best estimate of the allocation of the net
proceeds of the common share offering, based upon the current state of our
business development and management's estimates of current industry conditions.
The net proceeds may be utilized differently in response to, among other things,
changes in our business plans, future revenues and expenses and industry,
regulatory or competitive conditions. The amount and timing of expenditures will
vary depending on a number of factors, including changes in our contemplated
operations or business plans and changes in economic and industry conditions.
Any such shifts
20
will be at the discretion of our Board of Directors. Given that the issuance of
shares hereunder is dependent upon individual decisions of warrant holders to
exercise their warrants, we do not have control over the timing of our receipt
of the proceeds, which may differ from our present business needs. Accordingly,
we will use such proceeds as dictated by our business needs at the time we
receive such proceeds.
Pending such uses, the net proceeds of the common share offering are
expected to be invested in U.S. Government Securities or deposited in federally
insured accounts of banks or money market accounts of other financial
institutions, or invested in short-term, investment-grade, interest-bearing
investments or other similar short-term investments.
DETERMINATION OF OFFERING PRICE
In order to provide an incentive for the holders of the Old Warrants to
participate in the Exchange Offer, and subsequently to exercise the New
Warrants, we determined that an exercise price of $[ ] for the New Warrants
would be appropriate. The exercise price for the New Warrants does not reflect
any determination of the value of the underlying common shares and was
determined based upon the judgment of our Board of Directors as the price
necessary to appropriately increase the likelihood of the exercise of the New
Warrants prior to expiration.
21
CAPITALIZATION
The following table sets forth the capitalization of the Company (i) as of
June 30, 2005, and (ii) on an as adjusted basis after giving effect to the
issuance and sale of the 3,625,000 common shares in the Offering upon exercise
of the New Warrants (assuming all old Warrants are exchanged), at the assumed
offering price of $[ ] per common share, and the application of the
estimated net proceeds of [$ ] thereof. The information set forth below
should be read in conjunction with the consolidated financial statements and
notes thereto appearing elsewhere herein and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
AT JUNE 30, 2005
-------------------------
ACTUAL AS ADJUSTED
----------- -----------
Shareholders' equity:
Preferred Stock, 2,000,000 shares authorized, no shares
issued and outstanding at June 30, 2005 and as adjusted... 0 0
Common Shares, 20,000,000 shares authorized; 8,674,619
shares issued and outstanding at June 30, 2005 and
12,233,464 shares issued and outstanding, as
adjusted(1)............................................... $12,095,931 $ [ ]
Common Share Purchase Warrants, 3,710,832 issued and
outstanding as of March 31, 2005 and 85,832 issued and
outstanding, as adjusted.................................. $ 320,150 [ ]
Accumulated Deficit......................................... (8,574,068) [ ]
Total Shareholders' Equity.................................. $ 3,842,013 [ ]
Total Capitalization........................................ $12,416,081 $ [ ]
---------------
(1) Includes (i) 3,625,000 common shares to be issued upon exercise of the New
Warrants. Excludes (i) 4,500,000 common shares reserved for issuance upon
exercise of options granted under the Company's 1997 Stock Option Plan, of
which options to acquire an aggregate of 3,717,904 options have been granted
and 2,643,484 remain outstanding; and (ii) 85,832 common shares reserved for
issuance upon the exercise of the Private Warrants.
22
DIVIDEND POLICY
Our Board of Directors has discretion whether or not to pay dividends;
however, we are restricted from making any distributions or paying dividends
(other than stock dividends) under the terms of its loan agreement with Standard
Federal Bank. Among the factors our Board of Directors considers when
determining whether or not to pay dividends are our earnings, capital
requirements, financial condition, future business prospects and business
conditions. We have never paid any cash dividends on our common shares and do
not anticipate paying dividends in the foreseeable future. In addition, in
connection with the opinions rendered by Honigman Miller Schwartz and Cohn LLP
with respect to the Exchange Offer, we represented that we have no plan to pay
any dividends before the third anniversary of the Expiration Date and that we
will not make any distribution of money or property to our shareholders in their
capacity as shareholders before such date. We intend to retain earnings, if any,
to finance the development and expansion of our operations.
23
MANAGEMENT'S DISCUSSIONS AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
We operate in a single business segment: the manufacture and distribution
of hemodialysis concentrates, dialysis kits and ancillary products used in the
dialysis process. We have increased sales each year since our inception in 1996.
We increased sales of our concentrate product lines by over 30% in 2004,
allowing us to more fully utilize our facilities, equipment and staff, and
increasing our profitability. Our sales also increased by over 54% for the first
six months of 2005 compared to the first six months of 2004.
The dialysis industry is highly concentrated with several large clinic
chains representing the majority of the industry. We expect that the
consolidation of large and regional dialysis service providers will continue in
the future. Our largest customer, DaVita, Inc., the second largest dialysis
treatment provider in the United States has announced its pending acquisition of
the dialysis clinic business of Gambro, the third largest dialysis treatment
provider in the United States. How this acquisition by DaVita may impact our
market or our results is not clear at this time; however, we believe these
events may prove beneficial in our business development efforts.
We believe that our core concentrate and supply business can continue to be
profitable; however, the dialysis supply market is very competitive and we
compete against companies that have substantially greater resources than we
have. We expect to continue growing our business while executing our strategic
plan to expand our product lines, expand our geographic reach and to develop our
proprietary technology. We expanded our operations in the Southeastern United
States by adding a third manufacturing facility in March of 2005. We have
increased our plant capacity in order to position ourselves to take advantage of
accelerated growth potential in our market. In the short run, we expect that
these additional costs will reduce our gross profit margins until we
successfully increase facility production volumes.
We are seeking to gain FDA approval for our iron supplemented dialysate
product (which we also refer to as dialysate iron). We believe our iron
supplemented dialysate product has the potential to compete in the iron
maintenance therapy market. If we are successful in introducing our dialysate
iron product, we believe it is possible that we may also increase our market
share for the other products we sell. The cost to obtain regulatory approval for
a drug in the United States is substantial and we expect that the development
costs of our iron supplemented dialysate product will require us to raise
additional funds or collaborate with a strategic partner. These substantial
costs include those expected to be incurred in order to conduct required
clinical trials and to obtain marketing approval which costs may offset some or
all of any profits generated from sales of our existing products during the
approval process, and we may incur losses. We expect the approval process to
take between two and three years and there is no assurance we will be
successful.
RESULTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 20, 2005 COMPARED TO THE SIX MONTHS ENDED JUNE
20, 2004
Sales
Our sales for the first six months of 2005 were $13,410,541 and were
$4,719,773, or 54.3%, higher than the first six months of 2004. In the first
half of 2005, 76.5% of our sales consisted of dialysis concentrate sales, and
sales of our concentrates increased by over 43% in the first six months of 2005
compared to the first six months of 2004. We have been successful at developing
new business over the last year with our growth attributable to unit volume
increases across the breadth of our product lines. Our growth has been
attributable to both new dialysis centers purchasing products from our core
concentrate product lines and to a substantial purchase order from a single
distributor for which we recorded revenue of $3.1 million in the first half of
2005. Sales of our ancillary products grew by $1.5 million, primarily as a
result of increases in sales of specialty kits from this distributor's purchase
order.
Gross Profit
Our overall gross profit for the first half of 2005 increased by $102,663,
or 7.5%, while our gross profit margins decreased by 4.8 percentage points to
sales. There were both recurring and non-recurring factors that
24
impacted gross profit margins, including the expansion of our production
operations, transition costs as we moved order fulfillment operations between
regions, higher product delivery costs due to fuel increases and higher costs
for equipment maintenance caused by increased production volumes.
We made an investment in the geographic expansion of our business in order
to position the Company to take advantage of new business opportunities in our
market. In March of 2005, we added a third manufacturing facility in the
Southeastern United States that increased our costs of operation. We moved
certain production related to business in that region to the new plant from our
other facilities, which added flexibility to our other facilities to absorb
additional volume growth. As a result, we added additional operating costs which
have not been completely offset by higher production volumes. We anticipate that
having a facility in the Southeastern United States will enable us to realize
improvements in distribution efficiencies and will mitigate the negative impact
from supplying the Southeastern United States from our other facilities.
We anticipate that our business volumes will grow in the future and that
the additional manufacturing capacity and personnel that have been added will be
more effectively utilized resulting in restoring gross profit margins to levels
experienced prior to the addition of the new facility.
Our strategy was to expeditiously penetrate the Southeastern region of the
U.S. and install a self-sustaining operation in the region in a short period of
time. We successfully added over $5,000,000 in new annualized revenue over the
last nine months in that market. We have added a facility but have incurred
start-up costs for transition, above normal distribution expense to ensure
continuity in product supply and additional operating costs for the new
operation. We estimate that the transition costs including above normal
operating costs were equivalent to approximately two gross profit margin
percentage points in the first half of 2005. The remainder of the cost increases
are the result of additional production personnel and resources. We anticipate
improvement in our overall gross profit margins as we increase our respective
plant volumes in the future.
Selling, General and Administrative Expense
Selling, general and administrative expense decreased as a percentage of
sales by 3.3% in the first half of 2005 as compared to the first half of 2004,
with the first half cost to sales of 10.0% as compared to 13.3% in the first
half of 2004. Overall, selling, general and administrative expense increased by
$182,738, or 15.8%. Approximately $120,000 of the increase was for sales and
administrative personnel to handle increased transaction activity. We also
incurred higher operating expenses for computer infrastructure costs and other
operating expenses related to our substantial sales growth. In addition, we
increased spending on development of our dialysate iron product by over $22,000
from the first six months of last year. We have recognized $85,000 of expenses
related to the dialysate iron project in the first half of 2005.
Interest Expense
Interest expense decreased by $2,437 in the first six months of 2005
compared to the prior period, primarily due to a lower effective interest rate
under our new line of credit.
We were the plaintiff in certain litigation that was settled in the first
quarter of 2005. We have recognized $137,468 of other income from this
settlement in the first half of 2005. A portion of the cash received was from
the exercise of stock options by the defendant during the first quarter of 2005
which totaled $103,750.
Net Income
Net income in the first half of 2005 was $194,671, an improvement of
$59,830 over the first half results in 2004. Net income to sales was 1.5% in the
first half of 2005 as compared to net income to sales of 1.6% in the first half
of 2004. Basic earnings per share for the first half of 2005 aggregated $.02
which was equivalent to basic earnings per share for the first half of 2004.
Diluted earnings per share in the first half of 2005 were $.02 as compared to
$.01 for the first half of 2004.
25
FOR THE YEAR ENDED DECEMBER 31, 2004 COMPARED TO THE YEAR ENDED DECEMBER 31,
2003
Sales
For the year ended December 31, 2004, our sales were $17.94 million as
compared to sales of $14.97 million for 2003, representing an increase of 19.9%.
We increased our sales to our key national and regional chain customers. Sales
of our concentrate product lines increased by over 30% while sales of our
ancillary product lines decreased by $600,000. The decrease in our ancillary
product sales was due to a reduction in blood tubing sales to a single customer
of $860,000 in 2004 as compared to 2003.
Our core concentrate product lines, which represent approximately 85% of
our total sales, increased by over 30% in 2004 over 2003. Sales of our
concentrate product lines were up $3.6 million in 2004 over 2003. Demand
increased for all of our concentrate product lines with substantial growth in
both powder and liquid product lines. Many clinic chains and independent
providers are attracted to our Dri-Sate product line and its patented
Dri-Sate(R) Dry Acid Concentrate Mixing System. Our Dri-Sate Dry Acid
Concentrate unit volumes increased 38% over 2003. Similarly, our gallon volume
of liquid acid concentrate grew by 40%. Our SteriLyte(R) Liquid Bicarbonate unit
volume increased 52% in 2004 as compared to 2003. Powder bicarbonate unit
volumes increased by 32%.
While our overall ancillary sales declined in 2004 as compared to 2003 due
to the reduction in blood tubing purchases by a single customer of $860,000, the
remainder of our ancillary products realized increases in sales volumes. We
realized additional blood tubing sales aggregating $150,000 and we experienced
an increase of $110,000 in specialty kit sales.
We also experienced a reduction in backhaul revenue from our transportation
fleet. Our backhaul revenue declined $67,000 in 2004 as compared to 2003 as a
result of a combination of factors including new driver regulations that reduced
the amount of driving time available and significant business growth that
resulted in greater utilization of our fleet to deliver our own products. We do
not expect backhaul revenue to be a material source of revenue in the future.
Gross Profit
Gross profit was $2,805,000 and increased by $250,000 in 2004 as compared
to 2003. In 2004, we made a change to the relative allocation of certain costs
for facility, depreciation and other costs that increased the portion of those
costs included in cost of goods sold. As a result, we increased cost of sales by
$136,800 in 2004 as compared to 2003 or .8% of sales for this change in
allocations. Overall, our comparable gross profit margins between 2004 and 2003
decreased by .5 percentage points after adjusting for this change in
allocations. Despite higher sales volumes, our gross profit margins of 15.6%
decreased largely due to increased delivery costs for our products which more
than offset productivity improvements from higher production volumes.
We experienced substantially higher delivery costs throughout 2004 due to
several contributing factors including additional fleet resources added to
support new business growth, higher fuel costs to operate our fleet, increased
frequency of deliveries for certain customers and, in the second half of 2004, a
higher growth rate in customers in territories beyond our traditional
distribution footprint. As a result of these factors, our distribution costs
were up approximately 3 percentage points as compared to 2003. We anticipate
that the negative impact from some of these factors may be mitigated in the
future as we gain efficiencies from our fleet additions, reduce delivery
frequency for certain customers which convert from our liquid products to our
dry products and optimize our distribution efforts in certain markets. We have
leased on a short-term basis a new facility in the Southeast and leased
manufacturing equipment on a short-term basis to address, on an interim basis,
distribution of our products in that region. The leases are terminable upon 90
days' written notice by either party. On September 10, 2005, the Company
received notice of the lease agreements' termination effective December 9, 2005.
We would expect that if the cost of fuel increases, it may offset any future
distribution improvements and other productivity improvements from higher sales
volumes.
26
Selling, General and Administrative Expenses
Selling, General and Administrative expenses were $2,396,000 and were 13.4%
of sales, an improvement of 2.4 percentage points compared to 2003. However, we
reduced the allocation of facility, depreciation and other costs charged to
selling, general and administrative expense by $136,800. Without this allocation
change, selling, general and administrative costs increased by $165,000, or 7%
compared to the 2003. The majority of the cost increase was due to additional
resources and expenses, including additional personnel costs, to handle
increased transaction activity associated with our over 30% increase in
concentrate sales.
We made a considerable investment for research and product development of
dialysate iron in 2004 with aggregate spending of $200,000. We spent over
$250,000 for development of our iron supplemented dialysate product in 2003. We
expense these investments in the year they are incurred.
Operating Income
Our Operating Income in 2004 increased over our operating income in 2003 by
$221,000, or 118%, to $409,000, or 2.3%, of sales. This improvement resulted
primarily from our increased sales volumes.
Interest Expense
Interest expense increased by $14,600 in 2004 over 2003 due to higher
interest expense on new capitalized leases obligations. This increase was
partially offset by lower average borrowings under our line of credit.
Net Income
Net income in 2004 was $211,522, an improvement of $206,700 over 2003. Net
income as a percentage of sales improved by 1.2 percentage points compared to
2003. We have substantial tax loss carryforwards from our earlier losses and the
impact of those carryforward losses offset our statutory tax liability for 2004.
We have not recorded a federal income tax benefit from our prior losses because
we might not realize the carryforward benefit of the remaining losses.
Basic earnings per share was $.02 which was a $.02 improvement in net
income per share in 2004 over 2003. Similarly, fully diluted earnings per share
of $.02 improved $.02 as compared to 2003.
FOR THE YEAR ENDED DECEMBER 31, 2003 COMPARED TO THE YEAR ENDED DECEMBER 31,
2002
Sales
For the year ended December 31, 2003, sales were $15 million as compared to
sales of $11.5 million for 2002 representing an increase of 30.2%. Our sales
increased largely because of unit volume growth across our key product lines
with the addition of new customers and increase in sales to existing customers.
Sales of our concentrate product lines, which represented 79% of our sales in
2003, increased 24%. In addition, in 2002 we added blood tubing to the line of
ancillary products we sell, resulting in ancillary product line sales increasing
89% in 2003.
Sales of our concentrate product lines increased by $2.2 million, or 24%,
over 2002. We experienced increased demand across all of our concentrate product
lines. We added several significant regional dialysis providers as customers in
2003 and signed a large supply contract with a major provider during 2003. As a
result of the new business, we achieved significant growth in all of our product
lines. Our Dri-Sate Dry Acid Concentrate unit volumes increased 35% over 2002.
Similarly, our liquid acid concentrate unit volume grew by 15%. Our SteriLyte(R)
Liquid Bicarbonate unit volume increased 50% in 2003 as compared to 2002. Our
addition of a manufacturing facility in Texas in 2000 has also allowed us to
increase our sales in the southern United States.
We also increased our sales of ancillary products significantly during
2003. Our total ancillary product sales increased by $1.3 million, or 89%, in
2003 driven by a 180% increase in sales of blood tubing as compared
27
to 2002. Sales in our kit products grew by over $200,000, however our sales of
fistula needles declined by $275,000 due to one of our suppliers withdrawing its
fistula needles from the market during 2002.
Gross Profit
Our gross profit margins continued to improve in 2003 resulting from
substantially higher production volumes and greater capacity utilization in both
of our manufacturing facilities. Our gross profit margins improved each quarter
in 2003 with fourth quarter gross profit margins of 19.2%. Overall, 2003 gross
profit margins were 17.1% and were 4.4 percentage points higher than in 2002.
Our gross profit in 2003 was $2,555,700 which represents an increase of
$1,102,000, or 76%, over 2002 with the improvement largely driven by higher
sales volume.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $2,368,000 and were 15.8%
of sales, an improvement of 4.4 percentage points compared to 2002. Overall,
selling, general and administrative expenses increased $49,000, or 2.1%, over
2002. We were able to add additional sales volume with limited increases in
expenses. In addition, we spent substantially more on research and product
development in 2003 with spending up $130,000 from the level in 2002. Overall,
we spent over $250,000 for development of our iron supplemented dialysate
product in 2003. We expense these investments in the year they are incurred.
Interest Expense
Interest expense increased by $67,500 in 2003 over 2002 due to increased
borrowings under our line of credit, interest expense under a note payable
related to equipment we added to our new facilities in 2001 and 2002 and
interest expense on capital lease obligations.
Net Income and Earnings Per Share
Net Income for 2003 was $4,853 as compared to a net loss of ($980,711) in
2002 representing over a 100% reduction in the 2002 net loss; a $985,000 net
profit improvement in 2003 over 2002. During the second half of 2003, we earned
a net profit of $185,000. We have substantial tax loss carryforwards from our
earlier losses and the impact of those carryforward losses offset the statutory
tax liability for 2003. The Company has not recorded a federal income tax
benefit from its prior losses because it might not realize the carryforward
benefit of those losses.
Net Income per share was negligible in 2003 as compared to a net loss of
($.12) per share in 2002. The $.12 improvement in earnings per share in 2003 was
the result of higher sales, improved gross profit margins and tight expense
control.
CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS
Our consolidated audited financial statements and accompanying notes are
prepared in accordance with accounting principles generally accepted in the
United States of America.
These accounting principles require us to make estimates, judgments and
assumptions that affect the reported amounts of revenues, expenses, assets,
liabilities, and contingencies.
All significant estimates, judgments and assumptions are developed based on
the best information available to us at the time made and are regularly reviewed
and updated when necessary. Actual results will generally differ from these
estimates. Changes in estimates are reflected in our financial statements in the
period of change based upon on-going actual experience, trends, or subsequent
realization depending on the nature and predictability of the estimates and
contingencies.
Interim changes in estimates are generally applied prospectively within
annual periods. Certain accounting estimates, including those concerning revenue
recognition and allowance for doubtful accounts, impairments and valuation
adjustments, and accounting for income taxes, are considered to be critical in
evaluating
28
and understanding our financial results because they involve inherently
uncertain matters and their application requires the most difficult and complex
judgments and estimates.
REVENUE RECOGNITION AND ALLOWANCE FOR DOUBTFUL ACCOUNTS
We recognize revenue at the time we transfer title to our products to our
customers consistent with generally accepted accounting principles. Our products
are generally sold domestically on a delivered basis, and as a result, we do not
recognize revenue until delivered to the customer with title transferring upon
completion of the delivery. For our international sales, we generally transfer
title to the buyer when the container leaves our facility, and therefore, we
recognize revenue upon shipment to foreign customers. We also recognize revenue
for delivery of freight for third parties upon completion of the delivery
service.
Accounts receivable are stated at invoice amounts. The carrying amount of
trade accounts receivable is reduced by an allowance for doubtful accounts that
reflects our best estimate of accounts that may not be collected. We review
outstanding trade account receivable balances and based on our assessment of
expected collections, we estimate the portion, if any, of the balance that may
not be collected as well as a general valuation allowance for other accounts
receivable based primarily based on historical experience. All accounts or
portions thereof deemed to be uncollectible are written off to the allowance for
doubtful accounts.
IMPAIRMENTS OF LONG-LIVED ASSETS
We account for impairment of long-lived assets, which include property and
equipment, amortizable intangible assets and goodwill, in accordance with the
provisions of SFAS No. 144 Accounting for the Impairment or Disposal of
Long-Lived Assets or SFAS No. 142 Goodwill and Other Intangible Assets, as
applicable. An impairment review is performed annually or whenever a change in
condition occurs which indicates that the carrying amounts of assets may not be
recoverable. Such changes may include changes in our business strategies and
plans, changes to our customer contracts, changes to our product lines and
changes in our operating practices. We use a variety of factors to assess the
realizable value of long-lived assets depending on their nature and use.
We adopted Statement of Financial Accounting Standards (SFAS) No. 142,
"Goodwill and Other Intangible Assets." Under SFAS No. 142, goodwill is no
longer amortized; however, it must be tested for impairment at least annually.
Goodwill impairment is based on the fair market value of our common shares.
Amortization continues to be recorded for other intangible assets with definite
lives over the estimated useful lives. Intangible assets subject to amortization
are reviewed for potential impairment whenever events or circumstances indicate
that carrying amounts may not be recoverable based on future cash flows.
ACCOUNTING FOR INCOME TAXES
We estimate our income tax provision to recognize our tax expense for the
current year and our deferred tax liabilities and assets for future tax
consequences of events that have been recognized in our financial statements
using current enacted tax laws. Deferred tax assets must be assessed based upon
the likelihood of recoverability from future taxable income and to the extent
that recovery is not likely, a valuation allowance is established. The allowance
is regularly reviewed and updated for changes in circumstances that would cause
a change in judgment about whether the related deferred tax asset may be
realized. These calculations and assessments involve complex estimates and
judgments because the ultimate tax outcome can be uncertain or future events
unpredictable.
LIQUIDITY AND CAPITAL RESOURCES
Our strategy is to expand our operations to serve dialysis providers
throughout the United States. We anticipate that, as a result of our existing
supply agreements, our customer relationships and changing market dynamics, we
have the opportunity to capture substantial market share. We expect that we will
continue to realize substantial revenue growth during the second half of 2005
and that we will require additional working capital and capital expenditures to
fund this growth. In addition, over the next several years, we expect to make
substantial investments in our dialysate iron product in order to gain FDA
approval to market dialysate iron.
29
In 2004, we generated cash from our business operations and reinvested
those funds into the development and expansion of our business. Cash flow
generated from our business operations aggregated $840,000 in 2004 after
adjusting our earnings for non-cash charges against earnings for depreciation
and amortization. We realized substantial revenue growth of over 54% in the
first half of 2005. Based on current and prospective developments that we
anticipate in our business in the second half of 2005 and into 2006, we will
require additional working capital and capital expenditures to support our
development plans. Our current credit line coupled with positive cash flow from
operations is expected to provide the majority of the funding that we anticipate
we may need to support future growth of our core concentrate and dialysis supply
business.
In addition to funding provided by operations, we intend to raise
additional capital. We continue to engage in discussions with various potential
financing sources including potential lenders, strategic partners and investors.
In addressing our need for additional working capital, we obtained a new
line of credit with a financial institution which expands our borrowing
capacity. This credit line has a $2.75 million credit limit. We are permitted to
borrow up to 80% of our eligible accounts receivable and 40% of eligible
inventory up to $600,000. As of June 30, 2005 we had borrowed $991,884 under
this credit line.
We are seeking FDA approval for our dialysate iron drug product. The
development and approval of drugs can be expensive and take a long time. The
development and approval costs may offset some or all of our earnings during the
approval process. We estimate the cash required to fund approval of our new iron
supplemented dialysate product will be between $5,000,000 -- $7,000,000 over the
next several years. We may raise these funds ourselves or if we do not raise the
capital to fund this project ourselves, we may decide to seek a partner with
greater technical and financial resources to facilitate FDA approval of this
product.
We plan to raise the capital required to expand our operations and fund our
new product development strategy through a combination of cash flow from
operations, debt or equity financing arrangements and/or licensing arrangements;
however, we may not be successful.
If we are not successful in raising additional funds, we may be required to
alter our growth strategy, defer spending on business development, curtail
production expansion plans or take other measures to conserve our cash
resources.
In addition, the dialysis provider market that we serve is becoming
increasingly concentrated. As a result, our business is predominantly with
national and regional dialysis chains. If we were to lose a significant portion
of our business with major national and regional dialysis chains, it could have
a substantial negative impact on our cash flow and operating results. If we were
to lose a substantial portion of our business, it may have a detrimental impact
on our ability to continue our operations in their current form or to continue
to execute our business strategy. If we lost a substantial portion of our
business, we would be required to take actions to conserve our cash resources
and to mitigate the impact of any such losses on our business operations.
30
BUSINESS
GENERAL
We are a Michigan corporation, incorporated on October 25, 1996. We
manufacture hemodialysis concentrates and dialysis kits, and we sell, distribute
and deliver these and other ancillary hemodialysis products to hemodialysis
providers in the United States, the Far East, eastern Europe and Latin America.
Hemodialysis duplicates kidney function in patients with failing kidneys.
Without properly functioning kidneys, a patient's body cannot get rid of excess
water and waste products and cannot regulate electrolytes in their blood.
Without frequent and ongoing hemodialysis treatments these patients would die.
We have also entered into two licensing agreements covering three U.S.
patents, two issued and one pending, as well as several foreign patents for iron
supplemented dialysate for treatment of iron deficiency in dialysis patients. We
are planning to conduct clinical trials of iron supplemented dialysate also
known as dialysate iron. To realize a commercial benefit from this therapy, and
pursuant to the agreements, we must complete clinical trials and obtain U.S.
Food and Drug Administration ("FDA") approval to market iron supplemented
dialysate. We will also seek foreign market approval for this product. We
believe this product will substantially improve iron maintenance therapy and, if
approved, will compete for the global market for iron maintenance therapy. We
estimate that the global market size for intravenous iron maintenance therapy to
exceed $500,000,000 per year, with the market size in the United States for such
therapy being approximately $300,000,000 per year. We cannot, however, give any
assurance that this product will be approved by the FDA or, if approved, that it
will be successfully marketed.
INDUSTRY BACKGROUND
We provide products used in the treatment of patients with end stage renal
disease ("ESRD"). We estimate there are over 360,000 ESRD patients in the United
States and 1.5 million ESRD patients globally, who as a result of permanent
kidney failure require long-term dialysis for survival. The incidence of kidney
failure in the United States is increasing as a result of an aging population,
an increasing occurrence of diabetes and hypertension and increased use of
prescription drugs. ESRD patients are treated with recurring dialysis treatments
replacing the functions of their nonfunctioning kidneys. The most common form of
dialysis treatment is hemodialysis; representing approximately 90% of dialysis
patients in the United States. Most ESRD patients undergoing hemodialysis
treatments generally receive three treatments per week, or 156 treatments per
year, although the number of weekly treatments varies.
Hemodialysis patients generally receive their treatments at independent
hemodialysis clinics or at hospitals. A hemodialysis provider such as a hospital
or a free standing clinic uses a dialysis station to treat patients. A dialysis
station contains a dialysis machine that takes concentrate solutions primarily
consisting of nutrients and minerals, such as our liquid concentrate solutions
or our concentrate powders mixed with purified water, and accurately dilutes
those solutions with purified water. The resulting solution, known as dialysate,
is then pumped through a device known as a dialyzer (artificial kidney), while
at the same time the patient's blood is pumped through a semi-permeable membrane
within the dialyzer. Excess water and chemicals from the patient's blood pass
through the membrane and are carried away in the dialysate while certain
nutrients and minerals in the dialysate penetrate the membrane and enter the
patient's blood to maintain proper blood chemistry. Dialysate generally contains
dextrose, sodium, calcium, potassium, magnesium, chloride and acetic acid. The
patient's physician chooses the formula required for each patient based on each
particular patient's needs, although most patients receive one of eight common
formulations.
In addition to using concentrate solutions and chemical powders (which must
be replaced for each use for each patient), a dialysis provider also requires
various other ancillary products such as dialysis on-off kits, sterile
subclavian dressing change trays, arterial and venous blood tubing lines,
fistula needles, intravenous administration sets, transducer protectors,
dialyzers, specialized kits and various other ancillary products, many of which
we sell.
31
DIALYSIS INDUSTRY TRENDS
According to statistics compiled by CMS, the dialysis industry has
experienced steady patient population growth with the patient population
increasing between 4-9% each year over the last ten years. ESRD is an
irreversible deterioration of kidney function. Population segments with the
highest incidence of ESRD are also the fastest growing within the U.S.
population including the elderly, Hispanic and African-American population
segments. More than 73% of new ESRD cases are attributed to either diabetes
(45%), or hypertension (28%), while glomerulonephritis is the primary factor
behind nearly (8%) of treated cases.
Hemodialysis providers are generally either independent clinics or
hospitals. According to the CMS, since 1973 the total number of hemodialysis
providers in the United States increased from 606 in 1973 to 4,433 in December
2002. The number of patients receiving hemodialysis has also grown substantially
in the last decade with annual patient growth averaging about 14,000 patients or
between 4-9%. According to the CMS, in 2002, more than 298,000 patients were
treated in Medicare-approved renal facilities as compared to 157,525 patients in
1993 and, from 1993 to 2002, the number of hemodialysis stations, which are
areas equipped to provide adequate and safe dialysis therapy, grew from 35,240
stations to 72,115 stations or 104%. In addition, according to CMS, the number
of Medicare-approved dialysis machines increased by approximately 4,000
stations, or 5.8%, between 2001 and 2002. According to reports by major
companies in our industry, there are believed to be 1.5 million kidney dialysis
patients globally.
STRATEGY
Our long term objectives are to increase our market share, expand our
product offerings, expand our geographical selling territory and improve our
profitability by implementing the following strategies:
- Increasing Sales Through Sales of New Innovative Products. We have
signed global licensing agreements for delivery of iron supplemented
dialysate. The FDA considers this product to be a combination
pharmaceutical drug (iron) and device (dialysate). We believe iron
supplemented dialysate will substantially improve iron maintenance
therapy. See "Products -- Iron Supplemented Dialysate" and "Risk
Factors -- Our new products may never be approved for marketing by the
FDA." We introduced two new product lines in 1999; Dri-Sate(R) Dry Acid
Concentrate and SteriLyte(R) Liquid Bicarbonate which we believe are
superior to competitors' product offerings and have acted as a catalyst to
attract new customers and to expand our existing business relationships
with dialysis providers. See "Products -Dri-Sate Dry Acid Concentrate" and
"SteriLyte Liquid Bicarbonate."
- Acting as a Single Source Supplier. We have positioned Rockwell as an
independent "one-stop-shop" to our customers for the concentrates,
chemicals and supplies necessary to support a hemodialysis provider's
operation. Some of our competitors do not offer a full line of
hemodialysis products requiring customers to do business with a number of
suppliers in order to purchase necessary supplies.
- Increasing Sales Through Ancillary Product Line Expansion. We believe
the market potential for ancillary products and supplies used by
hemodialysis providers is equivalent to or greater than the market for
dialysis concentrates. Our strategy is to offer cost effective ancillary
products that include specialized kits, fistula needles, chemicals,
sterile dressings and blood tubing. Customers purchase many of these
ancillary items based on price from various suppliers. We believe that as
we continue to gain market share, we will increasingly be able to procure
these ancillary items on a cost-effective basis and will provide our
customers with the convenience of a single supply source and a highly
competitive price level.
- Offering a Higher Level of Delivery/Customer Service. By using our own
delivery vehicles and drivers, we believe we can offer a higher level of
customer service to hemodialysis providers than we could if we relied
primarily on the use of common carriers to distribute our products. Our
drivers perform services for customers that are generally not available
from common carriers, such as stock rotation, non-loading-dock delivery
and drum pump-offs. A drum pump-off requires the driver to pump
hemodialysis concentrates from a 55 gallon drum into larger holding tanks
within the hemodialysis clinic. Certain of our competitors generally use
common carriers for delivery of their products. We
32
believe we offer a higher distribution service level to our customers
through the use of our own delivery vehicles and drivers.
- Expanding Market Share in Target Regions. Because of the costs
associated with transporting and delivering hemodialysis concentrates, we
believe we have a cost advantage with respect to certain customers located
near our manufacturing facilities. Our long range strategy is to add
additional manufacturing facilities or distribution centers in locations
which will provide us with a competitive cost advantage and allow us to
provide customers with superior customer service levels due to our
proximity to them. We would expect to execute this strategy by leveraging
off of our existing customer relationships by serving those customers in
areas where we currently only have a minor or negligible presence.
PRODUCTS
We manufacture, sell, distribute and deliver hemodialysis concentrates as
well as a full line of ancillary hemodialysis products to hemodialysis providers
and distributors located in more than 33 states as well as several foreign
countries, primarily in the Far East, eastern Europe and Latin America.
Hemodialysis concentrates are comprised of two primary product types, which are
generally described as acidified dialysate concentrate, also known as, acid
concentrate and bicarbonate.
ACID CONCENTRATE
Acid concentrate generally contains sodium chloride, dextrose and
electrolyte additives such as magnesium, potassium, and calcium. Acid
concentrate products are manufactured in three basic series to reflect the
dilution ratios used in various types of dialysis machines. We supply all three
series and currently manufacture approximately 60 different liquid acid
concentrate formulations. We supply liquid acid concentrate in both 55 gallon
drums and in cases containing four one gallon containers.
DRI-SATE(R) DRY ACID CONCENTRATE
In June of 1998, we obtained 510(k) clearance from the FDA to manufacture
and market Dri-Sate Dry Acid Concentrate. This product line enhanced our
previous liquid acid concentrate product offerings. Since its introduction in
1999, our dry acid concentrate product line has grown to represent over 50% of
our acid concentrate sales.
Our Dri-Sate Dry Acid Concentrate allows a clinic to mix its acid
concentrate on-site. The clinical technician, using a specially designed mixer,
adds pre-measured packets of the necessary ingredients to 50 or 100 gallons of
purified water (AMII standard). Once mixed, the product is equivalent to the
acid concentrate provided to the clinic in liquid form. By using Dri-Sate Dry
Acid Concentrate numerous advantages are realized by the clinics including lower
cost per treatment, reduced storage space requirements, reduced number of
deliveries and more flexibility in scheduling deliveries. In addition to the
advantages to our customers, the freight costs to us are lower for Dri-Sate Dry
Acid Concentrate than for acid concentrate in the liquid form. We can also
generate back-haul revenue because our trucks are available to haul freight on
the return trip rather than being used to return empty 55 gallon drums to our
facilities.
BICARBONATE
Bicarbonate is generally sold in powder form and each clinic generally
mixes bicarbonate on site as required. We offer approximately 20 bicarbonate
products covering all three series of generally used bicarbonate dilution
ratios.
STERILYTE(R) LIQUID BICARBONATE
In June of 1997, we obtained 510(k) clearance from the FDA to manufacture
and market SteriLyte Liquid Bicarbonate. Our SteriLyte Liquid Bicarbonate is
mostly used in acute care settings. Our SteriLyte
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Liquid Bicarbonate offers the dialysis community a high-quality product and
provides the clinic a safe supply of bicarbonate.
ANCILLARY PRODUCTS
We offer a wide range of ancillary products including blood tubing, fistula
needles, specialized custom kits, dressings, cleaning agents, filtration salts
and other supplies used by hemodialysis providers.
IRON SUPPLEMENTED DIALYSATE
We have licensed the exclusive right to manufacture and sell a product that
we believe will substantially improve the treatment of dialysis patients with
iron deficiency, which is pervasive in the dialysis patient population. Iron
deficiency in dialysis patients typically results from the demands placed upon
the body by current dialysis drug therapies. Most dialysis patients receive
replacement therapy of recombinant human erythropoetin (Epoetin alfa). Epoetin
alfa is a hormone that acts in the bone marrow to increase the production of red
blood cells, which carry oxygen throughout the body to nourish tissues and
sustain life. Hemoglobin, an important constituent of red blood cells, is
composed largely of iron and protein.
Treatment with Epoetin alfa therapy requires adequate amounts of iron, as
well as the rapid mobilization of iron reserves, for new hemoglobin synthesis
and new red blood cell formation. The demands of this therapy can outstrip the
body's ability to mobilize iron stores. Epoetin alfa is commonly administered as
a large intravenous injection on an intermittent basis, which creates an
unnatural strain on the iron release process when the need for iron outstrips
its rate of delivery, called functional iron deficiency. In addition, the
majority of dialysis patients also suffer from iron deficiency resulting from
blood loss from dialysis treatments and reduced dietary intake of iron.
Accordingly, iron supplementation is required to maintain proper iron balance
and ensure good therapeutic response. The liver is the site of most stored iron.
Iron stores typically will be depleted before the production of iron-containing
proteins, including hemoglobin, is impaired. Most dialysis patients receiving
Epoetin alfa therapy also receive iron supplement therapy in order to maintain
sufficient iron stores and to achieve the full benefit of Epoetin alfa
treatments.
Current iron supplement therapy involves intravenous parenteral iron
compounds, which deposit their iron load onto the liver rather than directly to
blood plasma to be carried to the bone marrow. The liver slowly processes these
iron deposits into a useable form. As a result of the time it takes for the
liver to process a dosage of intravenous iron into useable form, there can be
volatility in iron stores, which can reduce the effectiveness of Epoetin alfa
treatments.
Our iron supplemented dialysate is distinctly different from intravenous
iron compounds because our product transfers iron in a useable form directly
from dialysate into the blood plasma, from which it is carried directly to the
bone marrow for the formation of new red blood cells. The kinetic properties of
our iron compound allows for the rapid uptake of iron in blood plasma by
molecules that transport iron called transferrin. The frequency and dosage of
our iron supplemented dialysate is designed and intended to maintain iron
balance in a steady state. We believe that this more direct method of iron
delivery will be more effective at maintaining iron balance in a steady state
and to achieve superior therapeutic response from Epoetin alfa treatments.
Iron supplemented dialysate has other benefits that we believe are
important. Iron administered by our product bypasses the liver altogether and
thereby avoids causing liver damage, which is a significant risk of current iron
supplement therapies. In addition, we believe that clinics may realize
significant drug administration savings due to decreased nursing time for
administration and elimination of supplies necessary to administer intravenous
iron compounds.
We are currently in the process of preparing to seek FDA approval of iron
supplemented dialysate. A Phase II clinical trial on one of our licensed iron
supplemented dialysate products under an Investigational New Drug (IND)
exemption was completed by one of our licensors. We plan to conduct further
product testing and clinical trials in order to obtain FDA approval for iron
supplemented dialysate. We currently expect that the scope, duration and cost of
this testing is likely to be greater than we initially anticipated. We
34
now estimate the cost to obtain FDA approval to be between $5-7 million.
However, this estimate may be modified as the approval process progresses. We
plan to conduct safety pharmacology testing and to conduct clinical trials. We
will be required to pay the cost of obtaining marketing approval of the product
in order to realize any benefit from commercialization of the product. In
addition to funding, safety pharmacology testing, clinical trials and patent
maintenance expenses, we are obligated to make certain milestone payments and to
pay ongoing royalties upon successful introduction of the product. The milestone
payments include a payment of $50,000 which will become due upon completion of
Phase III clinical trials, a payment of $100,000 which will become due upon FDA
approval of the product and a payment of $175,000 which will become due upon
issuance of a reimbursement code covering the product.
DISTRIBUTION AND DELIVERY OPERATIONS
The majority of our products are delivered by our subsidiary, Rockwell
Transportation, Inc. Rockwell Transportation, Inc. operates a fleet of 22 trucks
which are used to deliver products to our customers. A portion of our
deliveries, primarily to medical products distributors, is provided by common
carriers chosen by us based on rates.
Rockwell Transportation, Inc. currently employs 22 drivers to operate its
truck fleet and a fleet operations manager to manage its distribution
operations. We perform services for customers that are generally not available
from common carriers, such as stock rotation, non-loading-dock delivery and drum
pump-offs. Certain of our competitors use common carriers and/or do not perform
the same services upon delivery of their products. We believe we offer a higher
level of service to our customers because of the use of our own delivery
vehicles and drivers.
If we are able to continue to grow our Dri-Sate Dry Acid Concentrate sales
and migrate our product mix from liquid acid dialysate in drums to Dri-Sate Dry
Acid Concentrate, we anticipate we will achieve improved distribution
efficiencies from our truck fleet as a result of reduced frequency of deliveries
and increased sales volume per truckload. As an example, a pallet containing
four drums of liquid acid concentrate contains 220 gallons of liquid acid
concentrate. On a pallet containing our Dri-Sate Dry Acid Concentrate, we can
ship the equivalent of 1,200 gallons of acid concentrate in powder form.
Our trucking operations are and will continue to be subject to various
state and federal regulations, which if changed or modified, could adversely
affect our business, financial condition and results of operations.
SALES AND MARKETING
We primarily sell our products directly to domestic hemodialysis providers
through three independent sales representation companies and three direct
salespeople employed by us. Our President and Chief Executive Officer leads and
directs our sales efforts to our major accounts. We also utilize several
independent distributors in the United States. Our products are sold to certain
international customers through independent sales agents.
Our sales and marketing initiatives are directed at purchasing decision
makers at large for-profit national and regional hemodialysis chains and toward
independent hemodialysis service providers. Our marketing efforts include
advertising in trade publications, distribution of product literature and
attendance at industry trade shows and conferences. We target our sales and
marketing efforts to clinic administrators, purchasing professionals, nurses,
medical directors of clinics, hospital administrators and nephrologists.
COMPETITION
DIALYSIS CONCENTRATE AND SUPPLIES COMPETITION
We compete against larger more established competitors with substantially
greater financial, technical, manufacturing, marketing, research and development
and management resources. We compete against three major competitors, of which
our two largest competitors are primarily in the business of operating
hemodialysis clinics. The two largest manufacturers of hemodialysis concentrates
are Fresenius Medical Care, Inc. ("Fresenius") and Gambro Healthcare, Inc.
("Gambro") who we believe also have, respectively, the
35
first and third largest ESRD patient base in the United States. Gambro recently
announced its intention to sell its clinic business to DaVita, Inc. These
companies produce and sell a more comprehensive line of dialysis equipment,
supplies and services than we sell.
Fresenius treats over 80,000 dialysis patients in North America and
operates in over 1,100 clinics. It also has a renal products business that
manufactures a broad array of equipment and supplies including dialysis
machines, dialyzers (artificial kidneys), concentrates and other supplies used
in hemodialysis. In addition to its captive customer base in its own clinics,
Fresenius also serves other clinic chains and independent clinics with its broad
array of products. We believe Fresenius manufactures its concentrate in its own
regional manufacturing facilities. Fresenius operates an extensive warehouse
network in the United States serving its captive customer base and other
independent clinics.
In May 2005, Fresenius announced its intention to acquire the clinic
business of Renal Care Group, Inc., the fourth largest provider of hemodialysis
services in the United States. Fresenius has indicated that it anticipates that
FTC approval may be received prior to the end of 2005. The timing of such a
transaction is not known at this time. The impact of such a transaction on our
results of operations, if and when completed, is not clear at this time. We
currently provide products to approximately 60-70 Renal Care Group clinics.
Gambro treats an estimated 42,500 dialysis patients in the United States
and operates approximately 580 clinics. Gambro manufactures and sells
hemodialysis machines, dialyzers and other ancillary supplies. Gambro sells its
concentrate solutions both to its own captive clinic base and to other clinic
chains and independent clinics. We believe Gambro operates one manufacturing
facility in Florida and additionally uses other manufacturers, including
Fresenius and a private label manufacturer in the eastern United States to
manufacture concentrate. Gambro also imports products from its European
manufacturing facilities. Gambro engages a third party trucking company to
deliver its products throughout the United States directly from the point of
manufacture and regional public and private warehouse locations. Gambro serves
the independent clinic market with liquid acid and powder bicarbonate
concentrate products used by its brand of dialysis machines as well as those
machines manufactured by its competitors in that segment. Gambro does not
manufacture a liquid bicarbonate product line nor does it manufacture a powder
acidified concentrate product line in the United States.
In December 2004, Gambro announced that it was going to sell its U.S.
clinic business to DaVita, Inc., our largest customer. Once completed it is not
clear whether Gambro will remain in the concentrate business or seek to alter
its strategy in some way. How this sale may impact our market or our results is
not clear at this time. We believe these events may prove beneficial in our
business development efforts.
We also compete against Cantel Medical Corp.'s subsidiary, Minntech
Corporation ("Minntech"). Minntech's Renal Systems division primarily sells
dialysis concentrates and Renalin, a specialty reuse agent for sanitizing
dialyzers. We believe Minntech has one domestic manufacturing facility located
in Minnesota, a distribution center in Camp Hill, Pennsylvania and a
distribution center in Mississippi. We believe Minntech uses a private label
manufacturer to supply certain products in the northeastern United States to its
warehouse locations. We believe Minntech largely uses its own vehicles to
deliver its products to its customers.
IRON MAINTENANCE THERAPY MARKET COMPETITION
We intend to enter the iron maintenance therapy market for the treatment of
dialysis patients with anemia. We must obtain FDA approval for our iron
supplemented dialysate to enter this market. The iron therapy market for
intravenous iron is serviced by two manufacturers and three products. We believe
the market leader is Watson Pharmaceutical, Inc. ("Watson"). Watson markets a
product called Ferrlecit(R) which is an injectable iron supplement made of
sodium ferric gluconate complex in sucrose, and also markets a product called
IN-FeD(R) which is an injectable iron supplement made of dextran and ferric
hydroxide. Watson is a large manufacturer of both generic and branded drugs. A
second competitor in the intravenous iron market is American Regent
Laboratories, Inc which markets Venofer(R), an injectable iron sucrose product.
Both Watson and American Regent Laboratories, Inc. have substantially greater
resources than us.
36
The markets for our products are highly competitive. New products we are
developing will face competition from both conventional forms of iron delivery
(i.e., oral and parenteral).
Competition in drug delivery systems is generally based on marketing
strength, product performance characteristics (i.e., reliability, safety,
patient convenience) and product price. Acceptance by dialysis providers and
nephrologists is also critical to the success of a product. The first product on
the market in a particular therapeutic area typically is able to obtain and
maintain a significant market share. Evolving technology, additional product
introductions or developments by others might render our products or
technologies noncompetitive or obsolete. In addition, pharmaceutical and medical
device companies are largely dependent upon health care providers being
reimbursed by private insurers and government agencies. Drugs approved by the
FDA might not receive reimbursement from private insurers or government
agencies. Even if approved by the FDA, providers of dialysate iron maintenance
therapy might not obtain reimbursement from insurers or government agencies. If
providers do not receive reimbursement for dialysate iron maintenance therapy,
the commercial prospects and marketability of the product would be severely
diminished.
QUALITY ASSURANCE AND CONTROL
We place significant emphasis on providing quality products and services to
our customers. Quality management plays an essential role in determining and
meeting customer requirements, identifying, preventing and correcting variance
from specifications and improving our products. We have implemented quality
systems that involve control procedures that result in rigid conformance to
specifications. Our quality systems also include assessments of suppliers of raw
materials, packaging components and finished goods, and quality management
reviews designed to inform management of key issues that may affect the quality
of products, assess the effectiveness of our quality systems and identify areas
for improvement.
Technically trained professionals at our production facilities develop and
implement our quality systems which include specific product testing procedures
and training of employees reinforcing our commitment to quality and promoting
continuous process improvements. To assure quality and consistency of our
concentrates, we conduct specific analytical tests during the manufacturing
process for each type of product that we manufacture. Our quality control
laboratory at each facility conducts analytical tests to verify that the
chemical properties of the concentrates comply with the specifications required
by industry standards. Upon verification that a batch meets those
specifications, we then package those concentrates. We also test packaged
concentrates at the beginning and end of each production run to assure product
consistency during the filling process. Each batch is assigned a lot number for
tracking purposes and becomes available for shipment after verification that all
product specifications have been met.
We use automated testing equipment in order to assure quality and
consistency in the manufacture of our concentrates. The equipment allows us to
analyze the materials used in the hemodialysis concentrate manufacturing
process, to assay and adjust the in-process hemodialysis concentrate, and to
assay and certify that the finished products are within the chemical and
biological specifications required by industry regulations. Our testing
equipment provides us with a high degree of accuracy and efficiency in
performing the necessary testing.
GOVERNMENT REGULATION
The testing, manufacture and sale of our hemodialysis concentrates and the
ancillary products we distribute are subject to regulation by numerous
governmental authorities, principally the FDA and corresponding state and
foreign agencies. Under the Federal Food, Drug and Cosmetic Act (the "FDA Act"),
and FDA regulations, the FDA regulates the pre-clinical and clinical testing,
manufacture, labeling, distribution and promotion of medical devices.
Noncompliance with applicable requirements can result in, among other things,
fines, injunctions, civil penalties, recall or seizure of products, total or
partial suspension of production, failure of the government to grant pre-market
clearance or pre-market approval for devices, withdrawal of marketing clearances
or approvals and criminal prosecution.
37
We plan to develop and commercialize selected drug candidates by ourselves
such as our iron supplemented dialysate product. The regulatory review and
approval process, which includes preclinical testing and clinical trials of each
product candidate, is lengthy and uncertain. Before marketing in the United
States, any pharmaceutical or therapeutic product must undergo rigorous
preclinical testing and clinical trials and an extensive regulatory approval
process implemented by the FDA under the Federal Food, Drug and Cosmetic Act.
Moreover, the FDA imposes substantial requirements on new product research
and the clinical development, manufacture and marketing of pharmaceutical
products, including testing and clinical trials to establish the safety and
effectiveness of these products.
MEDICAL DEVICE APPROVAL AND REGULATION
A medical device may be marketed in the United States only with prior
authorization from the FDA unless it is subject to a specific exemption. Devices
classified by the FDA as posing less risk than class III devices are categorized
as class I devices (general controls) or class II devices (general and specific
controls) and are eligible to seek "510(k) clearance." Such clearance generally
is granted when submitted information establishes that a proposed device is
"substantially equivalent" in intended use to a class I or II device already
legally on the market or to a "pre-amendment" class III device (i.e., one that
has been in commercial distribution since before May 28, 1976) for which the FDA
has not called for pre-market approval ("PMA") applications. The FDA in recent
years has been requiring a more rigorous demonstration of substantial
equivalence than in the past, including requiring clinical trial data in some
cases. For any devices that are cleared through the 510(k) process,
modifications or enhancements that could significantly affect safety or
effectiveness, or constitute a major change in the intended use of the device,
will require new 510(k) submissions. We have been advised that it now usually
takes from three to six months from the date of submission to obtain 510(k)
clearance, but it can take substantially longer. Our hemodialysis concentrates,
liquid bicarbonate and other ancillary products are categorized as class II
devices.
A device requiring prior marketing authorization that does not qualify for
510(k) clearance is categorized as class III, which is reserved for devices
classified by the FDA as posing the greatest risk (e.g., life-sustaining,
life-supporting or implantable devices), or devices that are not substantially
equivalent to a legally marketed class I or class II device. A class III device
generally must receive approval of a PMA application, which requires proving the
safety and effectiveness of the device to the FDA. The process of obtaining PMA
approval is expensive and uncertain. We have been advised that it usually takes
from one to three years after filing the request, but it can take longer.
If human clinical trials of a device are required, whether for a 510(k)
submission or a PMA application, and the device presents a "significant risk,"
the sponsor of the trial (usually the manufacturer or the distributor of the
device) will have to file an investigational device exemption ("IDE")
application prior to commencing human clinical trials. The IDE application must
be supported by data, typically including the results of animal and laboratory
testing. If the IDE application is approved by the FDA and one or more
appropriate Institutional Review Boards ("IRBs"), human clinical trials may
begin at a specific number of investigational sites with a specific number of
patients, as approved by the FDA. If the device presents a "non-significant
risk" to the patient, a sponsor may begin the clinical trial after obtaining
approval for the study by one or more appropriate IRBs without the need for FDA
approval.
Any devices manufactured or distributed by us pursuant to FDA clearances or
approvals are subject to pervasive and continuing regulation by the FDA and
certain state agencies. As a manufacturer of medical devices for marketing in
the United States we are required to adhere to regulations setting forth
detailed Good Manufacturing Practice ("GMP") requirements, which include
testing, control and documentation requirements. We must also comply with
Medical Device Reporting ("MDR") regulations which require that report to the
FDA any incident in which our products may have caused or contributed to a death
or serious injury, or in which our products malfunctioned and, if the
malfunction were to recur, it would be likely to cause or contribute to a death
or serious injury. Labeling and promotional activities are subject to scrutiny
by the FDA
38
and, in certain circumstances, by the Federal Trade Commission. Current FDA
enforcement policy prohibits the marketing of approved medical devices for
unapproved uses.
We are subject to routine inspection by the FDA and certain state agencies
for compliance with GMP requirements and other applicable Quality System
regulations. We are also subject to numerous federal, state and local laws
relating to such matters as safe working conditions, manufacturing practices,
environmental protection, fire hazard control, transportation and disposal of
hazardous or potentially hazardous substances.
We have 510(k) clearance from the FDA to market hemodialysis concentrates
in both liquid and powder form. In addition, we have received 510(k) clearance
for our Dri-Sate Dry Acid Concentrate Mixer.
We must comply with the FDA Act and related laws and regulations, including
GMP, to retain 510(k) clearances. We cannot assure you that we will be able to
maintain our 510(k) clearances from the FDA to manufacture and distribute our
products. If we fail to maintain our 510(k) clearances, we may be required to
cease manufacturing and/or distributing our products, which would have a
material adverse effect on our business, financial condition and results of
operations. If any of our FDA clearances are denied or rescinded, sales of our
products in the United States would be prohibited during the period we do not
have such clearances.
In addition to the regulations for medical devices covering our current
dialysate products, our new product development efforts will be subject to the
regulations pertaining to pharmaceutical products. We have signed licensing
agreements for water soluble iron supplements to be included in our dialysate
products. Water soluble iron supplements when coupled with our dialysate will be
used as an iron maintenance therapy for dialysis patients, and we have been
advised that these water soluble iron supplements will be considered a
drug/device combination by the FDA. As a result, our iron maintenance therapy
product will be subject to the FDA regulations for pharmaceutical products, as
well.
DRUG APPROVAL AND REGULATION
The marketing of pharmaceutical products, such as our new iron maintenance
therapy product, in the United States requires the approval of the FDA. The FDA
has established regulations, guidelines and safety standards which apply to the
pre-clinical evaluation, clinical testing, manufacturing and marketing of our
new iron maintenance therapy product and other pharmaceutical products. The
process of obtaining FDA approval for our new product may take several years and
is likely to involve the expenditure of substantial resources. The steps
required before a product can be produced and marketed for human use include:
(i) pre-clinical studies; (ii) submission to the FDA of an Investigational New
Drug Exemption ("IND"), which must become effective before human clinical trials
may commence in the United States; (iii) adequate and well controlled human
clinical trials; (iv) submission to the FDA of a New Drug Application ("NDA")
or, in some cases, an Abbreviated New Drug Application ("ANDA"); and (v) review
and approval of the NDA or ANDA by the FDA. An NDA generally is required for
products with new active ingredients, new indications, new routes of
administration, new dosage forms or new strengths. An NDA requires that complete
clinical studies of a product's safety and efficacy be submitted to the FDA, the
cost of which is substantial. These costs can be reduced, however, for delivery
systems which utilize approved drugs.
An ANDA involves an abbreviated approval process that may be available for
products that have the same active ingredient(s), indication, route of
administration, dosage form and dosage strength as an existing FDA-approved
product, if clinical studies have demonstrated bio-equivalence of the new
product to the FDA-approved product. Under FDA ANDA regulations, companies that
seek to introduce an ANDA product must also certify that the product does not
infringe on the approved product's patent or that such patent has expired. If
the applicant certifies that its product does not infringe on the approved
product's patent, the patent holder may institute legal action to determine the
relative rights of the parties and the application of the patent, and the FDA
may not finally approve the ANDA until a court finally determines that the
applicable patent is invalid or would not be infringed by the applicant's
product.
Pre-clinical studies are conducted to obtain preliminary information on a
product's efficacy and safety. The results of these studies are submitted to the
FDA as part of the IND and are reviewed by the FDA before
39
human clinical trials begin. Human clinical trials may begin 30 days after
receipt of the IND by the FDA unless the FDA objects to the commencement of
clinical trials.
Human clinical trials are typically conducted in three sequential phases,
but the phases may overlap. Phase I trials consist of testing the product
primarily for safety in a small number of patients at one or more doses. In
Phase II trials, the safety and efficacy of the product are evaluated in a
patient population somewhat larger than the Phase I trials. Phase III trials
typically involve additional testing for safety and clinical efficacy in an
expanded population at different test sites. A clinical plan, or protocol,
accompanied by the approval of the institution participating in the trials, must
be reviewed by the FDA prior to commencement of each phase of the clinical
trials. The FDA may order the temporary or permanent discontinuation of a
clinical trial at any time.
The results of product development and pre-clinical and clinical studies
are submitted to the FDA as an NDA or an ANDA for approval. If an application is
submitted, there can be no assurance that the FDA will review and approve the
NDA or an ANDA in a timely manner. The FDA may deny an NDA or an ANDA if
applicable regulatory criteria are not satisfied or it may require additional
clinical testing. Even if such data are submitted, the FDA may ultimately deny
approval of the product. Further, if there are any modifications to the drug,
including changes in indication, manufacturing process, labeling, or a change in
a manufacturing facility, an NDA or an ANDA supplement may be required to be
submitted to the FDA. Product approvals may be withdrawn after the product
reaches the market if compliance with regulatory standards is not maintained or
if problems occur regarding the safety or efficacy of the product. The FDA may
require testing and surveillance programs to monitor the effect of products
which have been commercialized, and has the power to prevent or limit further
marketing of these products based on the results of these post-marketing
programs.
The approval procedures for the marketing of our products in foreign
countries vary from country to country, and the time required for approval may
be longer or shorter than that required for FDA approval. Even after foreign
approvals are obtained, further delays may be encountered before products may be
marketed. For example, many countries require additional governmental approval
for price reimbursement under national health insurance systems.
Manufacturing facilities are subject to periodic inspections for compliance
with regulations and each domestic drug manufacturing facility must be
registered with the FDA. Foreign regulatory authorities may also have similar
regulations. We expend significant time, money and effort in the area of quality
assurance to insure full technical compliance. FDA approval to manufacture a
drug is site specific. In the event an approved manufacturing facility for a
particular drug becomes inoperable, obtaining the required FDA approval to
manufacture such drug at a different manufacturing site could result in
production delays, which could adversely affect our business and results of
operations.
OTHER GOVERNMENT REGULATIONS
The federal and state governments in the United States, as well as many
foreign governments, from time to time explore ways to reduce medical care costs
through health care reform. Due to uncertainties regarding the ultimate features
of reform initiatives and their enactment and implementation, we cannot predict
what impact any reform proposal ultimately adopted may have on the
pharmaceutical and medical device industry or on our business or operating
results. Our activities are subject to various federal, state and local laws and
regulations regarding occupational safety, laboratory practices, and
environmental protection and may be subject to other present and possible future
local, state, federal and foreign regulations.
PRODUCT LICENSE AGREEMENTS
We entered into two license agreements for iron supplemented dialysate
during 2001 and 2002, respectively. These license agreements cover both issued
and pending patents in the United States. These agreements also cover issued and
pending patents in a number of foreign jurisdictions. The license agreements
continue for the duration of the underlying patents in each country, or
approximately 13 years in the United States, and may be extended thereafter.
Patents were issued in the United States in 1999 and 2004.
40
The product license agreements require us to obtain FDA approval of iron
supplemented dialysate. A Phase II clinical trial on one such iron supplemented
dialysate under an Investigational New Drug (IND) exemption was completed by one
of our licensors. We plan to conduct product testing and clinical trials in
order to obtain FDA approval to market this product. We are currently evaluating
the cost, duration and scope of this product testing and clinical trials are
under evaluation. We will be required to pay the cost of obtaining approval from
the FDA to market the product in order to realize any benefit from
commercialization of the product which we estimate will take several years and
cost between $5 million and $7 million. In addition to funding clinical trials
and patent maintenance expenses, we are obligated to make certain milestone
payments and to pay ongoing royalties upon successful introduction of the
product as previously described.
TRADEMARKS & PATENTS
We have several trademarks and servicemarks used on our products and in our
advertising and promotion of our products, and we have applied for U.S.
registration of such marks. Most such registrations have now been issued.
We were issued a U.S. patent for our Dri-Sate Dry Acid Concentrate method
and apparatus for preparing liquid dialysate on May 28, 2002 which expires on
September 18, 2018. We received notice in August 2005 from the European Patent
and Trademark Office that it will be issuing a patent for our iron delivery
product. The patent is expected to cover Austria, Belgium, Denmark, Finland,
France, Germany, Greece, Ireland, Italy, the Netherlands, Portugal, Spain,
Sweden, Switzerland and the United Kingdom. We have no other patents.
SUPPLIERS
We believe the raw materials for our hemodialysis concentrates, the
components for our hemodialysis kits and the ancillary hemodialysis products
distributed by us are generally available from several potential suppliers. Our
principal suppliers include Cargill, Inc., Roquette, Inc., Church & Dwight Co.
Inc., Morton Salt Company and Nipro Medical Corporation.
CUSTOMERS
We operate in one market segment which involves the manufacture and
distribution of hemodialysis concentrates, dialysis kits and ancillary products
used in the dialysis process to hemodialysis clinics. For the year ended
December 31, 2004, two customers each accounted for more than 10% of our total
sales, representing 52% of total sales. For the year ended December 31, 2003,
three customers each accounted for more than 10% of our total sales,
representing 42% of total sales. Our accounts receivable from these customers
were $1,362,000 and $1,032,000 as of December 31, 2004 and 2003, respectively.
We are dependent on these customers and the loss of any of them would have a
material adverse effect on our business, financial condition and results of
operations. Our international sales aggregated slightly over 4% and 3% of
overall sales in 2004 and 2003, respectively. We received a substantial purchase
order from a single customer during the second quarter of 2005 for $6,500,000.
We fulfilled approximately $3,100,000 of this order in the first half of 2005.
We anticipate fulfilling approximately $2,900,000 in the third quarter of 2005
and the remainder in the fourth quarter of 2005. We think it is likely that such
purchase order may recur in the future; however, there is no guarantee that it
will.
EMPLOYEES
As of December 31, 2004, we had approximately 120 employees, all but one of
whom are full-time employees.
If our sales volumes continue to increase, we expect to add additional
production, distribution, sales and administrative personnel. Our arrangements
with our employees are not governed by any collective bargaining agreement. Our
employees are employed on an "at-will" basis.
41
Our employment agreements with Mr. Robert L. Chioini, our Chairman,
President and Chief Executive Officer, and Mr. Thomas E. Klema, our Vice
President, Chief Financial Officer and Secretary, have expired. Mr. Chioini and
Mr. Klema are continuing their employment without employment agreements under
the same compensation terms.
RESEARCH & DEVELOPMENT
We have licensed an iron maintenance therapy product for the treatment of
iron deficiency in anemic dialysis patients which we refer to as iron
supplemented dialysate. We incurred expenses during 2004 and 2003 for product
development, to obtain regulatory approval and for regulatory maintenance of the
intellectual property underlying our licensing agreements. We engaged outside
consultants and legal counsel to assist us with product development and
obtaining regulatory approval. In addition, we incurred ongoing expenses related
to obtaining additional protection of the intellectual property underlying our
licensing agreements. In 2004 and 2003, we incurred expenses related to the
commercial development of our iron supplemented dialysate product aggregating
approximately $200,000 and $250,000, respectively.
We must undertake substantial testing to obtain FDA approval for our new
iron supplemented dialysate product. The cost of this testing including clinical
trials (which we estimate to be between $5 million and $7 million) will have a
material impact on us, and we will be required to seek additional sources of
financing to fund these costs. Should we be unable to fund these new product
development efforts, we may have to abandon or postpone our efforts to obtain
FDA approval of our new iron maintenance therapy product. If we are unable to
obtain FDA approval of our new iron maintenance therapy product or to make
certain milestone payments we may forfeit our rights under our license
agreements. See "See Risk Factors -- Our new products may never be approved for
marketing by the FDA."
OTHER
We do not expect any significant cost or impact from compliance with
environmental laws.
DESCRIPTION OF PROPERTIES
We entered into a lease agreement in October 2000 to lease a new 51,000
square foot facility in Wixom, Michigan. We occupied the new facility in July
2001 under a seven year lease. Base rent for the facility is $31,786 per month.
In addition, we are responsible for all property taxes, insurance premiums and
maintenance costs.
On March 12, 2000, we entered into an agreement to lease a 51,000 square
foot facility in Grapevine, Texas through August 2005. On August 17, 2005, we
entered into an amendment to the lease agreement to extend the term of the lease
through August 31, 2010. The amendment to the lease also provides an option for
us to extend the term of the lease for one additional period of five years. Base
monthly rent for the facility currently is $17,521, and we are responsible for
all property taxes, insurance premiums and maintenance costs. Between August 28,
2005 and August 31, 2007, base monthly rent for the facility is $12,991.22, and
from September 1, 2007 through August 31, 2010, base monthly rent is $13,630.13.
On February 23, 2005, we entered into short term lease agreement for a
61,000 square foot facility in Hodges, South Carolina. Monthly rent for the
facility is $17,500. On September 10, 2005, the Company received notice of the
lease agreement's termination effective December 9, 2005.
We intend to use all of our facilities to manufacture and warehouse our
products. We also use the office space in Wixom, Michigan as our principal
administrative office. We believe these facilities are suitable and adequate to
meet our current production and distribution requirements. However, should our
business continue to expand, we may require additional office space,
manufacturing capacity and distribution facilities to meet our requirements.
42
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The Directors and Executive Officers of the Company and the positions held
by them are as follows:
NAME AGE POSITION
---- --- --------
Robert L. Chioini......................... 40 President, Chief Executive Officer and
Chairman of the Board
Kenneth L. Holt........................... 52 Director
Ronald D. Boyd............................ 42 Director
Patrick J. Bagley......................... 40 Director
Thomas E. Klema........................... 51 Vice President of Finance, Chief Financial
Officer, Treasurer and Secretary
Robert L. Chioini is a founder of the Company, has served as our Chairman
of the Board since March 2000, has served as our President and Chief Executive
Officer since February 1997 and has been one of our Directors since our
formation in October 1996. From January 1996 to February 1997, Mr. Chioini
served as Director of Operations of Rockwell Medical Supplies, L.L.C., a company
which manufactured hemodialysis concentrates and distributed such concentrates
and other hemodialysis products. From January 1995 to January 1996, Mr. Chioini
served as President of Rockwell Medical, Inc., a company which manufactured
hemodialysis kits and distributed such kits and other hemodialysis products.
From 1993 to 1995, Mr. Chioini served as a Regional Sales Manager at Dial
Medical of Florida, Inc., currently Gambro Healthcare, Inc. (Gambro Healthcare,
Inc. is currently the second largest integrated dialysis provider, manufacturer
and distributor of renal care products in the United States).
Kenneth L. Holt was elected as one of our Directors on March 14, 2000. He
is a founder and co-owner of Charleston Renal Care, LLC, a kidney disease
management company specializing in the treatment of end-stage renal disease. He
was a founder and co-owner of Savannah Dialysis Specialists, LLC, a disease
management company specializing in the treatment of end-stage renal disease, and
served as the Managing Partner from October 1999 until its sale to DaVita, Inc.
in 2004. From 1996 to October 1999, Mr. Holt served as Vice President for Gambro
Healthcare, Inc., in its Carolinas Region, and held the same position at Vivra
Renal Care, Inc., its predecessor company, which was acquired in 1997 by Gambro
Healthcare, Inc. From 1986 to 1996, Mr. Holt was also the co-owner and Managing
Partner in five dialysis clinics that he founded, which serviced approximately
350 dialysis patients.
Ronald D. Boyd was elected as one of our Directors on March 14, 2000. He is
a founder and co-owner of Classic Medical, Inc., a dialysis and medical products
company, and has served as the Executive Vice President of Classic Medical, Inc.
since its inception in November 1993. From May 1993 to November 1993, Mr. Boyd
served as a consultant for Dial Medical of Florida, Inc., a manufacturer and
distributor of dialysis products. From 1990 to 1993, Mr. Boyd served as a
Regional Sales Manager for Future Tech, Inc., a dialysis products distributor.
Patrick J. Bagley was elected as one of our Directors on July 31, 2005 by
our Board of Directors. Mr. Bagley is Senior Partner of the law firm Bagley and
Langan, P.L.L.C. and has been a practicing attorney during the past ten years.
Thomas E. Klema has served as the Vice President of Finance, Chief
Financial Officer, Treasurer and Secretary of the Company since January 1999.
Mr. Klema's background is in business and financial management where he has held
senior management positions in finance, administration, business planning and
development and operations management. Mr. Klema was Vice President of Finance
and Administration for the Whistler Corporation's Stanley Brand Garage Products
Group from 1997 to 1998. From 1980 to 1996, Mr. Klema was employed by the Molson
Companies, Ltd.'s Diversey Corporation specialty chemical subsidiary where he
held several senior management positions including Vice President of Finance and
Human Resources from 1995-1996, Vice President of Administration and Customer
Service from 1994-1995
43
and Vice President of Planning and Business Development from 1990-1993. Mr.
Klema is a certified public accountant.
None of our executive officers or Directors listed above was convicted in a
criminal proceeding during the past five years (excluding traffic violations or
similar misdemeanors) or was a party to any judicial or administrative
proceeding during the past five years (except for matters that were dismissed
without sanction or settlement) that resulted in a judgment, decree or final
order enjoining such executive officer or Director from future violations of, or
prohibiting activities subject to, federal or state securities laws, or a
finding of any violation of federal or state securities laws. Each of our
executive officers and Directors is a citizen of the United States.
The Company's Articles of Incorporation, as amended (the "Articles of
Incorporation"), provide for a staggered Board of Directors, whereby the
Directors are divided into three classes (as nearly equal in number as
feasible). The term of each of the classes of Directors expires at the annual
meetings of the shareholders to be held in 2006, 2007 and 2008 for the Class
III, Class I and Class II Directors, respectively. The term of each class is for
three years or until their successors are elected and qualified or, if earlier,
until their death, resignation or removal. Pursuant to the Company's Articles of
Incorporation, Directors may be removed only for cause. The following Directors
have been elected to fill the following classes: Class I (term until the 2007
annual meeting) -- Mr. Boyd; Class II (term until the 2008 annual
meeting) -- Mr. Holt; and Class III (term until the 2006 annual meeting) -- Mr.
Chioini and Mr. Bagley.
COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth, for the years ended December 31, 2002, 2003
and 2004, the compensation earned by Mr. Robert L. Chioini, the Company's Chief
Executive Officer, and the other executive officer of the Company whose total
annual salary and bonus exceeded $100,000 for the year ended December 31, 2004.
During the years ended December 31, 2002, 2003 and 2004, no other officers
earned in excess of $100,000 in total annual salary and bonus.
SUMMARY COMPENSATION TABLE
LONG TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION ------------
--------------------------------------- SECURITIES
OTHER ANNUAL UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS COMPENSATION ($) OPTIONS (#)
--------------------------- ---- ---------- ----- ---------------- ------------
Robert L. Chioini,............ 2004 $275,000(1) -0- $19,416(2) 500,000
President and Chief
Executive 2003 $275,000(1) -0- $18,988(2) 325,000
Officer 2002 $275,000(1) -0- $16,194(2) 173,000
Thomas E. Klema,.............. 2004 $156,600 -0- $10,788(2) 200,000
Vice President and Chief 2003 $156,600 -0- $11,388(2) 175,000
Financial Officer 2002 $156,600 -0- $ 9,416(2) 113,000
---------------
(1) On March 20, 2000, the Company entered into a three year employment
agreement with Mr. Chioini pursuant to which Mr. Chioini was paid an annual
salary of $275,000. The employment agreement expired on March 20, 2003. The
employment agreement called for salary increases of $25,000 in each
succeeding year of the contract. However, these increases were not put into
effect.
(2) Other annual compensation includes executive perquisites for health, life
and dental insurance and the Company's car allowance program.
44
OPTION GRANTS AND RELATED INFORMATION
The following table provides information with respect to options granted
during fiscal year ended December 31, 2004 to the executive officers named in
the Summary Compensation Table above.
OPTION GRANTS IN LAST FISCAL YEAR
% OF TOTAL OPTIONS
NUMBER OF SECURITIES GRANTED TO EXERCISE OR
UNDERLYING OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION
NAME GRANTED (#) FISCAL YEAR ($/SHARE) DATE
---- -------------------- ------------------ ----------- ----------
Robert L. Chioini.......... 165,000(1) 20.9% 4.05 1/13/2014
335,000(2) 42.5% 2.79 12/22/2014
Thomas E. Klema............ 85,000(1) 10.8% 4.05 1/13/2014
115,000(2) 14.6% 2.79 12/22/2014
---------------
(1) These options were granted on January 13, 2004. 25% of the options granted
were immediately exercisable and the balance of the options become
exercisable at the rate of 25% of the total grant per year on each of the
next three anniversaries of the date of grant.
(2) These options were granted on December 22, 2004. 25% of the options granted
were immediately exercisable and the balance of the options become
exercisable at the rate of 25% of the total grant per year on each of the
next three anniversaries of the date of grant.
The following table sets forth information concerning exercises of stock
options during the fiscal year ended December 31, 2004 by the executive officers
named in the Summary Compensation Table above and the value of unexercised
options held by such persons as of December 31, 2004.
AGGREGATED OPTION EXERCISES AND
FISCAL YEAR END OPTION VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
SHARES ACQUIRED VALUE OPTIONS AT FISCAL YEAR END FISCAL YEAR END
NAME ON EXERCISE (#) REALIZED ($) (EXERCISABLE/UNEXERCISABLE) (EXERCISABLE/UNEXERCISABLE) ($)
---- --------------- ------------ --------------------------- -------------------------------
Robert L. Chioini.... -0- -0- 919,750/573,250 1,272,295/385,525
Thomas E. Klema...... -0- -0- 384,750/258,250 609,995/186,625
COMPENSATION OF DIRECTORS
In July 1997, our Board of Directors and shareholders adopted the Rockwell
Medical Technologies, Inc. 1997 Stock Option Plan (the "1997 Stock Option
Plan"). The 1997 Stock Option Plan permits the Board of Directors, among other
things, to grant options to purchase common shares to our Directors, including
our Directors who are not our officers or employees (collectively, "Outside
Directors"). Upon the election of any new member to the Board of Directors who
is an Outside Director or at any other time that the Board deems reasonable, in
the Board's discretion, may grant to such member an option to purchase 5,000
common shares or such other amounts as are reasonable, in the Board's
discretion, at a per share exercise price equal to the fair market value of a
common share at the date of grant. On each date on which an annual meeting of
our shareholders is held, provided that a sufficient number of common shares
remain available under the 1997 Stock Option Plan, the Board of Directors, in
its discretion, may grant to each Outside Director who is then serving on the
Board of Directors an option to purchase common shares. The exercise price of
such options will be the fair market value of the common shares on the date of
grant. The options granted to the Outside Directors will generally become fully
exercisable on the first anniversary of the date of grant. Such options will
expire ten years after the date of grant. If an Outside Director becomes our
officer or employee and continues to serve as a member of the Board of
Directors, options granted under the 1997 Stock Option Plan will remain
exercisable in full. On January 13, 2004, options to purchase 10,000 common
shares were granted to each
45
Outside Director at an exercise price of $4.05. On December 22, 2004, options to
purchase 25,000 common shares were granted to each Outside Director at an
exercise price of $2.79.
INDEMNIFICATION OF DIRECTORS AND OFFICERS AND LIMITATION ON DIRECTORS' LIABILITY
The Michigan Business Corporation Act, as amended, authorizes a corporation
under specified circumstances to indemnify its directors and officers (including
reimbursement for expenses incurred). The provisions of the Company's Bylaws
relating to indemnification of Directors and Executive Officers generally
provide that Directors and Executive Officers will be indemnified to the fullest
extent permissible under Michigan law. The provision also provides for the
advancement of litigation expenses at the request of a Director or Executive
Officer. These obligations are broad enough to permit indemnification with
respect to liabilities arising under the Securities Act or the Michigan Uniform
Securities Act, as amended. The Company believes that such indemnification will
assist the Company in continuing to attract and retain talented Directors and
Officers in light of the risk of litigation directed against directors and
officers of publicly-held corporations.
The Michigan Business Corporation Act, as amended, also permits Michigan
corporations to limit the personal liability of Directors for a breach of their
fiduciary duty. The provisions of the Company's Articles of Incorporation limit
Director liability to the maximum extent currently permitted by Michigan law.
Michigan law allows a corporation to provide in its articles of incorporation
that a Director of the corporation will not be personally liable to the
corporation or its shareholders for monetary damages for breach of fiduciary
duty as a Director, except for liability for specified acts. As a result of the
inclusion of such a provision, shareholders of the Company may be unable to
recover monetary damages against Directors for actions taken by them which
constitute negligence or gross negligence or which are in violation of their
fiduciary duties, although it may be possible to obtain injunctive or other
equitable relief with respect to such actions. If equitable remedies are found
not to be available to shareholders in any particular case, shareholders may not
have any effective remedy against the challenged conduct. These provisions,
however, do not affect liability under the Securities Act.
In addition, the Company has obtained Directors' and Officers' liability
insurance. The policy provides for $4,000,000 in coverage including prior acts
dating to the Company's inception and liabilities under the Securities Act in
connection with this Offering.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to Directors, Officers and controlling persons of the Company
pursuant to the foregoing provisions or otherwise, the Company has been advised
that, in the opinion of the Securities and Exchange Commission, such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable.
46
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of September 21, 2005, certain
information concerning the common shares beneficially owned by each Director,
the Chief Executive Officer and the Chief Financial Officer of the Company, by
all Executive Officers and Directors of the Company as a group, and by each
shareholder that is a beneficial owner of more than 5% of the outstanding common
shares:
PERCENTAGE
BENEFICIALLY OWNED
AMOUNT AND NATURE -------------------------
OF BENEFICIAL BEFORE THE AFTER THE
NAME OWNERSHIP(1) OFFERING(2) OFFERING(3)
---- -------------------- ----------- -----------
Robert L. Chioini(4).......................... 1,640,516(8) 16.9%(8) 12.3%(8)
Kenneth L. Holt(5)............................ 122,500(9) 1.4%(9) 1.0%(9)
Ronald D. Boyd(6)............................. 122,500(10) 1.4%(10) 1.0%(10)
Patrick J. Bagley(7).......................... 177,950(11) 2.0%(11) 1.4%(11)
Thomas E. Klema(4)............................ 524,259(12) 5.7%(12) 4.1%(12)
All directors and executive Officers as a
group (5 Persons)........................... 2,587,725(13) 24.7%(13) 18.3%(13)
Revocable Trust of Robert S. Brown............ 713,254(14) 8.2%(14) 5.8%(14)
4565 Chamberlain Drive
East China, MI 48054
Patricia Xirinachs............................ 630,000(15) 7.2%(15) 5.1%(15)
1325 Franklin Ave,
Suite 250
Garden City, NY 11530
Perkins Capital Management.................... 445,500(16) 5.1%(16) 3.6%(16)
730 East Lake Drive
Wayzata, Minnesota 55391
---------------
(1) Unless otherwise indicated, each person has sole investment and voting
power with respect to the shares indicated, subject to community property
laws, where applicable. For purposes of computing the percentage of
outstanding shares held by each person or group of persons named above as
of the date of the table, any security which such person or group of
persons has the right to acquire within 60 days after such date is deemed
to be outstanding for the purpose of computing the percentage ownership for
such person or persons, but is not deemed to be outstanding for the purpose
of computing the percentage ownership of any other person.
(2) Based on 8,686,552 common shares outstanding as of September 21, 2005.
(3) Based on 12,311,552 common shares outstanding, assuming all 3,625,000
common shares offered hereby are sold to third parties.
(4) Address is c/o the Company, 30142 Wixom Road, Wixom, Michigan 48393.
(5) Address is c/o Charleston Renal Care, LLC, 109 Greenland Drive, South
Carolina 29445.
(6) Address is 1912 West Hampton Point Drive, Statesboro, Georgia 30458.
(7) Address is c/o Bagley and Langan, P.L.L.C., 4540 Highland Road Waterford,
Michigan 48328.
(8) Includes 1,036,000 common shares that Mr. Chioini has the right to acquire
within 60 days of the date of this Prospectus pursuant to the Company's
1997 Stock Option Plan.
(9) Includes 122,500 common shares that Mr. Holt has the right to acquire
within 60 days of the date of this Prospectus pursuant to the Company's
1997 Stock Option Plan.
(10) Includes 122,500 common shares that Mr. Boyd has the right to acquire
within 60 days of the date of this Prospectus pursuant to the Company's
1997 Stock Option Plan.
47
(11) Includes 34,700 common shares owned by Mr. Bagley's wife and 8,000 shares
owned by Bagley and Langan, P.L.L.C., of which Mr. Bagley is the Senior
Partner and sole owner. Also includes 62,500 shares and 7,000 shares that
Mr. Bagley's wife and Bagley and Langan, P.L.L.C., respectively, have the
right to acquire within 60 days of the date of this Prospectus pursuant to
common share purchase warrants.
(12) Includes 449,750 common shares that Mr. Klema has the right to acquire
within 60 days of the date of this Prospectus pursuant to the Company's
1997 Stock Option Plan.
(13) Includes the common shares described in notes (8) through (12) above.
(14) This information is based upon conversations with the trustee of the
Revocable Trust of Robert S. Brown and includes 713,254 common shares
beneficially owned by Robert S. Brown.
(15) Includes 20,000 common shares that Mrs. Xirinachs' husband, Michael J.
Xirinachs, has the right to acquire within 60 days of the date of this
Prospectus, pursuant to the Company's 1997 Stock Option Plan and 5,000
common shares which he owns. This information is based on conversations
between the Company and Michael J. Xirinachs and information provided by
the Company's transfer agent.
(16) Based on Schedule 13F filing as of December 31, 2004.
DESCRIPTION OF SECURITIES
GENERAL
The authorized capital stock of the Company consists of an aggregate of
20,000,000 common shares ("common shares"), and 2,000,000 preferred shares
("preferred shares"). 8,686,552 common shares and no preferred shares were
issued and outstanding as of September 21, 2005.
COMMON SHARES
Holders of our common shares are entitled to one vote per common share on
each matter submitted to a vote of shareholders of the Company and to
participate ratably in dividends and other distributions when and if declared by
the Board of Directors from funds legally available for such distributions. See
"Dividend Policy." Upon the liquidation, dissolution or winding up of the
Company, holders of common shares are entitled to share pro rata in any assets
available for distribution to shareholders after payment of all obligations of
the Company and after provision has been made with respect to each class of
stock, if any, having preference over the common shares. Holders of common
shares do not have cumulative voting rights or preemptive, subscription or
conversion rights and the common shares are not redeemable. The common shares
presently outstanding are, and the common shares to be issued upon exercise of
the New Warrants will be, duly authorized, validly issued, fully paid and
non-assessable.
The Board of Directors is authorized to issue additional common shares
within the limits authorized by the Company's Articles of Incorporation without
further shareholder action.
COMMON SHARE PURCHASE WARRANTS
The Company is offering to exchange New Warrants for Old Warrants. We also
have Common Share Purchase Warrants (the "Private Warrants") issued in a private
placement in 2002.
Holders of each Old Warrant are entitled to purchase one common share at
the exercise price of $4.50 per share for a period expiring January 26, 2006,
unless the Company extends the expiration date of the Old Warrants. The Company
does not intend to extend the expiration date at this time. The exercise price
and the number of common shares to be issued upon exercise of each Old Warrant
is subject to adjustment in the event of share split, share dividend,
recapitalization, merger, consolidation or certain other events. There were
3,625,000 Old Warrants issued and outstanding at June 30, 2005.
Under certain conditions, the Old Warrants may be redeemed by the Company
at a redemption price of $.10 per Old Warrant upon not less than 30 days' prior
written notice to the holders of such Old Warrants,
48
provided the closing bid price of the common shares has been at least $7.00 for
20 consecutive trading days ending on the third business day prior to the date
the notice of redemption is given.
Holders of the New Warrants will be entitled to purchase one common share
at the exercise price of $[ ] per share until January 26, 2006, unless the
Company extends the expiration date of the New Warrants. The Company presently
does not intend to extend the expiration date of the New Warrants. The exercise
price and the number of common shares to be issued upon exercise of each New
Warrant is subject to adjustment in the event of share split, share dividend,
recapitalization, merger, consolidation or certain other events.
Under certain conditions, the New Warrants may be redeemed by the Company
at a redemption price of $.10 per New Warrant upon not less than 30 days' prior
written notice to the holders of such New Warrants, provided the closing bid
price of the common shares has been at least $7.00 for 20 consecutive trading
days ending on the third business day prior to the date the notice of redemption
is given.
Holders of Private Warrants are entitled to purchase one common share at a
stated price. The Private Warrants have a three year term expiring between May
2005 and October 2005. The shares underlying these warrants have not been
registered. Investors exercising these warrants receive unregistered common
shares which may not be resold for a period of one year following the date they
are acquired. In 2002, the Company issued 128,460 Private Warrants to investors
and investment bankers with exercise prices ranging from $.50 to $2.70. In 2003,
the Company issued 25,000 Private Warrants to investment bankers with an
exercise price of $2.50. There were 85,832 Private Warrants issued and
outstanding at August 31, 2005.
PREFERRED SHARES
The Company is authorized to issue up to 2,000,000 preferred shares in one
or more series, each with such designations, rights, preferences, privileges and
restrictions as may be determined from time to time by the Board of Directors.
Accordingly, the Board of Directors is empowered, without further shareholder
approval, to issue preferred shares with dividend, liquidation, conversion,
voting or other rights that could decrease the amount of earnings and assets
available for distribution to holders of common shares or adversely affect the
voting power or other rights of the holders of common shares. The issuance of
preferred shares could be used, under certain circumstances, as a method of
discouraging, delaying or preventing a change in control of the Company.
Anti-takeover provisions that could be included in the preferred shares when
issued may have a depressive effect on the market price of the Company's
securities and may limit shareholders' ability to receive a premium on their
shares by discouraging takeover and tender offer bids. The Company has no
present intention to issue any preferred shares.
MARKET FOR COMMON EQUITY AND OLD WARRANTS
The Company's common shares and the Old Warrants are traded on the Nasdaq
SmallCap Market under the symbols RMTI and RMTIW, respectively. The prices below
are the high and low bid prices for the common shares and the Old Warrants as
reported by Nasdaq in each quarter during 2003 and 2004 and the quarters ended
March 31, 2005 and June 30, 2005, and the portion of the third quarter of 2005
through
49
August 31, 2005. The below prices reflect inter-dealer prices, without retail
mark-up, mark down or commission and may not represent actual transactions.
BID PRICE INFORMATION
---------------------------
COMMON
SHARES OLD WARRANTS
----------- -------------
QUARTER ENDED HIGH LOW HIGH LOW
------------- ---- ---- ----- -----
March 31, 2003.............................................. 1.56 .41 .50 .04
June 30, 2003............................................... 2.05 1.00 .40 .05
September 30, 2003.......................................... 3.49 1.95 .67 .15
December 31, 2003........................................... 3.99 2.70 .98 .45
March 31, 2004.............................................. 4.50 3.45 1.25 .69
June 30, 2004............................................... 4.25 2.52 .96 .31
September 30, 2004.......................................... 3.41 2.28 .65 .30
December 31, 2004........................................... 3.75 2.67 .71 .41
March 31, 2005.............................................. 3.28 2.95 .92 .43
June 30, 2005............................................... 3.15 2.85 .76 .45
Through August 31, 2005..................................... 3.37 3.05 .50 .48
As of August 31, 2005, there were approximately 56 record holders of the
common shares. On August 31, 2005, the average of the high and low sales prices
of the common shares was $3.29, as quoted on The Nasdaq SmallCap Market.
ANTI-TAKEOVER LEGISLATION
Chapters 7A and 7B of the Michigan Business Corporation Act, as amended,
may affect attempts to acquire control of the Company. In general, under Chapter
7A, "business combinations" (defined to include, among other transactions,
certain mergers, dispositions of assets or shares and recapitalizations) between
covered Michigan business corporations or their subsidiaries and an "interested
shareholder" (defined as the direct or indirect beneficial owner of at least 10
percent of the voting power of a covered corporation's outstanding shares) can
only be consummated if approved by at least 90 percent of the votes of each
class of the corporation's shares entitled to vote and by at least two-thirds of
such voting shares not held by the "interested shareholder" or affiliates,
unless five years have elapsed after the person involved became an "interested
shareholder" and unless certain price and other conditions are satisfied.
Pursuant to its Articles of Incorporation, the Company has elected not to be
subject to the provisions of Chapter 7A; however, the Board of Directors has the
power, at any time, to elect for the Company to be subject to Chapter 7A as to
specifically identified or unidentified interested shareholders.
In general, under Chapter 7B, an entity that acquires "Control Shares" of
the Company may vote the Control Shares on any matter only if a majority of all
shares, and of all non-"Interested Shares", of each class of stock entitled to
vote as a class, approve such voting rights. Interested Shares are shares owned
by officers of the Company, employee-directors of the Company and the entity
making the Control Share Acquisition (as defined). Control Shares are shares
that, when added to shares already owned by an entity, would give the entity
voting power in the election of directors or any of three thresholds: one-fifth,
one-third and a majority. The effect of the statute is to condition the
acquisition of voting control of a corporation on the approval of a majority of
the pre-existing disinterested shareholders. The Board of Directors may amend
the bylaws before a Control Share Acquisition occurs to provide that Chapter 7B
does not apply to the Company.
TRANSFER AGENT
The Company has engaged American Stock Transfer & Trust Company to act as
Transfer Agent for the Company's common shares, the Old Warrants, the New
Warrants and the Exchange Offer.
50
PLAN OF DISTRIBUTION
If a warrantholder desires to exercise its New Warrants, such warrantholder
must deliver to the Company notice of his, her or its intent to exercise. Such
notice must be accompanied by the purchase price for the common shares to be
purchased in such exercise and such warrantholder must surrender such Warrants.
Upon the Company's receipt of the notice, the common share purchase price and
the surrendered New Warrants, the Company will instruct the Transfer Agent to
issue to the warrantholder the common shares as specified in such notice.
The following table sets forth the expenses (other than underwriting
discounts and commissions) which will be paid by the Company in connection with
the issuance and distribution of the securities being registered hereby. All
amounts indicated are estimates.
SEC Registration Fee........................................ 1,495
Nasdaq Listing Fees......................................... 30,000
Printing expenses (other than stock certificates)........... 4,000
Printing and engraving of stock certificates................ 30,000
Legal fees and expenses (other than blue sky)............... 120,000
Accounting fees and expenses................................ 30,000
Blue sky fees and expenses (including legal and filing
fees)..................................................... 80,000
Transfer Agent fees and expenses............................ 5,000
Miscellaneous............................................... 6,000
--------
Total..................................................... $306,495
========
LEGAL MATTERS
The validity of the securities offered hereby have been passed upon for the
Company by Honigman Miller Schwartz and Cohn LLP, 2290 First National Building,
Detroit, Michigan 48226-3506.
EXPERTS
The consolidated balance sheet of the Company as of December 31, 2004 and
2003 and the consolidated statements of income, shareholders' equity and cash
flows for the years then ending, included in this Prospectus, have been audited
by Plante & Moran, PLLC, independent accountants, as stated in their reports
appearing in this Prospectus and elsewhere in the registration statement (which
reports on the financial statements express an unqualified opinion), and have
been included herein in reliance on the reports of Plante & Moran, PLLC,
independent accountants, given on the authority of said firm as experts in
accounting and auditing.
51
INDEX TO FINANCIAL STATEMENTS
PAGE
--------
Consolidated Financial Statements for Rockwell Medical
Technologies, Inc. and Subsidiary Report of Independent
Accountants for the years ended December 31, 2004 and
2003...................................................... F-2
Consolidated Balance Sheets at December 31, 2004 and
December 31, 2003......................................... F-3
Consolidated Income Statement for the years ended December
31, 2004 and 2003......................................... F-4
Consolidated Statement of Changes in Shareholders' Equity
for the years ended December 31, 2004 and 2003............ F-5
Consolidated Statements of Cash Flow for the years ended
December 31, 2004 and 2003................................ F-6
Notes to the Consolidated Financial Statements.............. F-7-F-17
Consolidated Balance Sheets as of June 30, 2005 and December
31, 2004.................................................. F-18
Consolidated Income Statements for the six months ended June
30, 2005 and June 30, 2004................................ F-19
Consolidated Statements of Cash Flows for the six months
ended June 30, 2005 and June 30, 2004..................... F-20
Notes to the Consolidated Financial Statements.............. F-21
F-1
PLANTE & MORAN, PLLC LETTERHEAD
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Shareholders
Rockwell Medical Technologies, Inc. and Subsidiary
We have audited the consolidated balance sheet of Rockwell Medical
Technologies, Inc. and Subsidiary as of December 31, 2004 and 2003 and the
related consolidated statements of income, shareholders' equity, and cash flows
for the years then ended. 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 the standards of the Public
Company Oversight Board (United States). Those standards require that we plan
and perform the audits 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 Rockwell
Medical Technologies, Inc. and Subsidiary as of December 31, 2004 and 2003, and
the results of their operations and their cash flows for the years then ended,
in conformity with accounting principles generally accepted in the United States
of America.
Plante & Moran, PLLC
Auburn Hills, Michigan
March 21, 2005
F-2
ROCKWELL MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2004 AND 2003
DECEMBER 31, DECEMBER 31,
2004 2003
--------------- ---------------
(WHOLE DOLLARS)
ASSETS
Cash and Cash Equivalents................................... $ 166,195 $ 106,639
Restricted Cash Equivalents................................. 8,662 8,662
Accounts Receivable, net of a reserve of $44,500 in 2004 and
$34,500 in 2003........................................... 2,302,093 2,169,564
Inventory................................................... 1,652,457 1,350,291
Other Current Assets........................................ 111,630 103,971
----------- -----------
Total Current Assets...................................... 4,241,037 3,739,127
Property and Equipment, net................................. 2,048,665 1,943,376
Intangible Assets........................................... 369,508 314,071
Goodwill.................................................... 920,745 920,745
Other Non-current Assets.................................... 120,597 127,467
----------- -----------
Total Assets.............................................. $ 7,700,552 $ 7,044,786
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Short Term Borrowings....................................... $ 452,682 $ 642,018
Notes Payable & Capitalized Lease Obligations............... 389,602 307,959
Accounts Payable............................................ 2,124,679 1,666,952
Accrued Liabilities......................................... 492,592 329,519
----------- -----------
Total Current Liabilities................................. 3,459,555 2,946,448
Long Term Notes Payable & Capitalized Lease Obligations..... 818,678 926,230
Shareholders' Equity:
Common Share, no par value, 8,556,531 and 8,519,405 shares
issued and outstanding.................................... 11,870,909 11,832,220
Common Share Purchase Warrants, 3,761,071 and 3,766,071
shares issued and outstanding............................. 320,150 320,150
Accumulated Deficit......................................... (8,768,740) (8,980,262)
----------- -----------
Total Shareholders' Equity................................ 3,422,319 3,172,108
----------- -----------
Total Liabilities And Shareholders' Equity................ $ 7,700,552 $ 7,044,786
=========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
ROCKWELL MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED INCOME STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
2004 2003
----------- -----------
(WHOLE DOLLARS)
Sales....................................................... $17,944,710 $14,970,144
Cost of Sales............................................... 15,139,215 12,414,462
----------- -----------
Gross Profit.............................................. 2,805,495 2,555,682
Selling, General and Administrative......................... 2,396,315 2,367,773
----------- -----------
Operating Income.......................................... 409,180 187,909
Interest Expense, net....................................... 197,658 183,056
----------- -----------
Income Before Income Taxes................................ 211,522 4,853
Income Tax Expense.......................................... -- --
----------- -----------
Net Income................................................ $ 211,522 $ 4,853
=========== ===========
Basic And Diluted Earnings Per Share........................ $ .02 $ -0-
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
ROCKWELL MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
COMMON SHARES PURCHASE WARRANTS TOTAL
----------------------- -------------------- ACCUMULATED SHAREHOLDERS'
SHARES AMOUNT WARRANTS AMOUNT DEFICIT EQUITY
--------- ----------- --------- -------- ----------- -------------
(WHOLE DOLLARS)
Balance as of December 31,
2002..................... 8,488,283 $11,724,507 3,753,460 $306,108 $(8,985,115) $3,045,500
Issuance of Common
Shares................... 18,733 24,914 -- -- -- 24,914
Exercise of Purchase
Warrants................. 12,389 12,799 (12,389) -- -- 12,799
Compensation Expense
related to Stock Options
and Purchase Warrants.... -- 70,000 25,000 14,042 -- 84,042
Net Income................. 4,853 4,853
--------- ----------- --------- -------- ----------- ----------
Balance as of December 31,
2003..................... 8,519,405 $11,832,220 3,766,071 $320,150 $(8,980,262) $3,172,108
Issuance of Common
Shares................... 32,126 34,989 -- -- -- 34,989
Exercise of Purchase
Warrants................. 5,000 3,700 (5,000) -- -- 3,700
Net Income................. 211,522 211,522
--------- ----------- --------- -------- ----------- ----------
Balance as of December 31,
2004..................... 8,556,531 $11,870,909 3,761,071 $320,150 $(8,768,740) $3,422,319
========= =========== ========= ======== =========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
ROCKWELL MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
2004 2003
------------ ------------
(WHOLE DOLLARS)
Cash Flows From Operating Activities:
Net Income................................................ $ 211,522 $ 4,853
Adjustments To Reconcile Net Income To Net Cash Used In
Operating Activities:
Depreciation and Amortization.......................... 629,697 453,926
Compensation Recognized For Stock Options & Purchase
Warrants............................................. 84,042
Changes in Assets and Liabilities:
(Increase) Decrease in Accounts Receivable........... (132,529) (447,109)
(Increase) Decrease in Inventory..................... (302,166) 126,215
(Increase) Decrease in Other Assets.................. (789) 21,654
Increase (Decrease) in Accounts Payable.............. 457,727 (13,890)
Increase (Decrease) in Other Liabilities............. 163,073 (4,273)
Changes in Assets and Liabilities................. 185,316 (317,403)
Cash Provided By Operating Activities............. 1,026,535 225,418
Cash Flows From Investing Activities:
Purchase of Equipment..................................... (392,046) (164,626)
(Increase) Decrease in Restricted Cash Equivalents........ 5,303
Purchase of Intangible Assets............................. (83,095) (2,419)
Cash Provided By (Used In) Investing Activities... (475,141) (161,742)
Cash Flows From Financing Activities:
Proceeds From Borrowings on Line of Credit................ 16,794,439 14,122,113
Payments on Line of Credit................................ (16,983,775) (13,897,349)
Issuance of Common Shares and Purchase Warrants........... 38,689 37,713
Payments on Notes Payable................................. (341,191) (219,647)
Cash Provided (Used) By Financing Activities...... (491,838) 42,830
Increase In Cash............................................ 59,556 106,506
Cash At Beginning Of Period................................. 106,639 133
------------ ------------
Cash At End Of Period....................................... $ 166,195 $ 106,639
============ ============
Supplemental Cash Flow disclosure:
2004 2003
-------- --------
Interest Paid............................................... $197,818 $183,616
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
ROCKWELL MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS
We manufacture, sell and distribute hemodialysis concentrates and other
ancillary medical products and supplies used in the treatment of patients with
End Stage Renal Disease "ESRD." We supply our products to medical service
providers who treat patients with kidney disease. Our products are used to
cleanse patient's blood and replace nutrients lost during the kidney dialysis
process. We primarily sell our products in the United States.
We are regulated by the Federal Food and Drug Administration under the
Federal Drug and Cosmetics Act, as well as by other federal, state and local
agencies. We have received 510(k) approval from the FDA to market hemodialysis
solutions and powders. We also have 510(k) approval to sell our Dri-Sate Dry
Acid Concentrate product line and our Dri-Sate Mixer.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
Our consolidated financial statements include our accounts and the accounts
for our wholly owned subsidiary, Rockwell Transportation, Inc.
All intercompany balances and transactions have been eliminated.
REVENUE RECOGNITION
We recognize revenue at the time we transfer title to our products to our
customers consistent with generally accepted accounting principles. Generally,
we recognize revenue when our products are delivered to our customer's location
consistent with our terms of sale. In most instances title for goods shipped
internationally transfers to the buyer once it leaves our facility and
therefore, we recognize revenue upon shipment to foreign customers.
SHIPPING AND HANDLING REVENUE AND COSTS
Our products are generally priced on a delivered basis with the price of
delivery included in the overall price of our products which is reported as
sales. Separately identified freight and handling charges are also included in
sales. Our trucks which deliver our products to our customers sometimes generate
backhaul revenue from hauling freight for other third parties. Revenue from
backhaul activity is recognized upon completion of the delivery service.
We include shipping and handling costs including expenses of Rockwell
Transportation, Inc. in cost of sales.
CASH AND CASH EQUIVALENTS AND RESTRICTED CASH
We consider cash on hand, unrestricted certificates of deposit and short
term marketable securities as cash and cash equivalents.
At December 31, 2004 and 2003, restricted cash equivalents consisted of a
certificate of deposit of $8,662 and $8,662, respectively, securing a letter of
credit.
ACCOUNTS RECEIVABLE
Accounts receivable are stated at invoice amounts. The carrying amount of
trade accounts receivable is reduced by an allowance for doubtful accounts that
reflects our best estimate of accounts that may not be collected. We review
outstanding trade account receivable balances and based on our assessment of
expected collections, we estimate the portion, if any, of the balance that may
not be collected as well as a general
F-7
ROCKWELL MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
valuation allowance for other accounts receivable based primarily based on
historical experience. All accounts or portions thereof deemed to be
uncollectible are written off to the allowance for doubtful accounts.
INVENTORY
Inventory is stated at the lower of cost or net realizable value. Cost is
determined on the first-in first-out (FIFO) method.
PROPERTY AND EQUIPMENT
Property and Equipment are recorded at cost. Expenditures for normal
maintenance and repairs are charged to expense as incurred. Property and
equipment are depreciated using the straight-line method over their useful
lives, which range from three to ten years. Leasehold improvements are amortized
using the straight-line method over the shorter of their useful lives or the
related lease term.
LICENSING FEES
License Fees related to the technology, intellectual property and marketing
rights for dialysate iron covered under certain issued patents have been
capitalized and are being amortized over the life of the related patents which
is generally 17 years.
GOODWILL, INTANGIBLE ASSETS AND LONG LIVED ASSETS
We adopted Statement of Financial Accounting Standards (SFAS) No. 142,
"Goodwill and Other Intangible Assets." Under SFAS No. 142, goodwill is not
amortized; however, it must be tested for impairment at least annually.
Amortization continues to be recorded for other intangible assets with definite
lives over their estimated useful lives. Intangible assets subject to
amortization are reviewed for potential impairment whenever events or
circumstances indicate that carrying amounts may not be recoverable.
An impairment review of goodwill, intangible assets, and property and
equipment is performed annually or whenever a change in condition occurs which
indicates that the carrying amounts of assets may not be recoverable. Such
changes may include changes in our business strategies and plans, changes to our
customer contracts, changes to our product lines and changes in our operating
practices. We use a variety of factors to assess the realizable value of
long-lived assets depending on their nature and use.
The recorded amounts of goodwill and other intangibles from prior business
combinations are based on management's best estimates of the fair values of
assets acquired and liabilities assumed at the date of acquisition. We assess
goodwill for impairment annually. The useful lives of other intangible assets
are based on management's best estimates of the period over which the assets are
expected to contribute directly or indirectly to our future cash flows.
Management annually evaluates the remaining useful lives of intangible assets
with finite useful lives to determine whether events and circumstances warrant a
revision to the remaining amortization periods. It is reasonably possible that
management's estimates of the carrying amount of goodwill and the remaining
useful lives of other intangible assets may change in the near term.
INCOME TAXES
A current tax liability or asset is recognized for the estimated taxes
payable or refundable on tax returns for the year. Deferred tax liabilities or
assets are recognized for the estimated future tax effects of temporary
differences between book and tax accounting and operating loss and tax credit
carryforwards.
F-8
ROCKWELL MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
PRODUCT DEVELOPMENT AND RESEARCH
We incurred product development and research costs related to the
commercial development, patent approval and regulatory approval of new products,
including iron supplemented dialysate, aggregating approximately $200,000 and
$250,000 in 2004 and 2003, respectively.
STOCK OPTIONS
Stock options granted to employees are accounted for using the intrinsic
value method in accordance with Accounting Principles Board Opinion No. 25
Accounting for Stock Issued to Employees, as allowed under SFAS No. 123
Accounting for Stock-Based Compensation. Stock option grants to employees do not
result in an expense if the exercise price is at least equal to the market price
at the date of grant. Exercise prices on all options granted equal or exceed the
fair market value of the underlying stock at the applicable grant dates and,
accordingly, no compensation cost is recorded in the accompanying financial
statements as a result of stock options awarded under the plan to employees.
Stock options granted to non-employees are recorded at the fair value of the
awards at the date of the grant using the Black-Scholes model.
Our reported and pro forma information for the years ended December 31:
2004 2003
--------- ---------
As reported net income (loss) available to common
shareholders.............................................. $ 211,522 $ 4,853
Less: Stock based compensation expense determined under the
fair market value method, net of tax...................... 879,457 481,292
--------- ---------
Pro forma net income (loss)................................. $(667,935) $(476,439)
========= =========
As reported basic earnings per share and diluted earnings
per share................................................. $ .02 $ (0.00)
Pro forma earnings (loss) per share and diluted earnings
(loss) per share.......................................... $ (0.08) $ (0.00)
NET EARNINGS PER SHARE
We computed our basic earnings (loss) per share using weighted average
shares outstanding for each respective period. Diluted earnings per share also
reflect the weighted average impact from the date of issuance of all potentially
dilutive securities, consisting of stock options and common share purchase
warrants, unless inclusion would have had an antidilutive effect. Actual
weighted average shares outstanding used in calculating basic and diluted
earnings per share were:
2004 2003
--------- ---------
Basic Weighted Average Shares Outstanding................... 8,546,302 8,495,134
Effect of Dilutive Securities............................... 758,821 734,620
--------- ---------
Diluted Weighted Average Shares Outstanding................. 9,305,123 9,229,754
========= =========
At December 31, 2004 potentially dilutive securities comprised 2,707,717
stock options exercisable at prices from $.55 to $4.05 per share, 3,625,000
common share purchase warrants exercisable at $4.50 per common share and 136,071
common share purchase warrants exercisable at various prices ranging from $.50
to $4.05.
At December 31, 2003 potentially dilutive securities comprised 1,918,927
stock options exercisable at prices from $.55 to $3.06 per share, 3,625,000
common share purchase warrants exercisable at $4.50 per common share and 141,071
common share purchase warrants exercisable at various prices ranging from $.50
to $2.70.
F-9
ROCKWELL MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ACCOUNTING CHANGE
In 2004, we made a change to the relative allocation of certain costs for
facility, depreciation and other costs that increased the portion of those costs
included in cost of sales. As a result, we increased cost of sales and decreased
selling, general and administrative expenses by $136,800 in 2004 as compared to
2003 for this change in allocations.
ESTIMATES IN PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the period.
Actual results could differ from those estimates.
3. MANAGEMENT'S PLAN OF OPERATION
We have followed a strategy of developing market share through a
differentiated value proposition to our customers including new products,
superior delivery and customer service, and tailoring product line offerings to
match customer requirements, including offering a full range of formulations and
supplies. In 2004, our revenue increased by $2,974,566 or 19.9% over 2003. In
2003, our revenue increased by $3,474,000 or 30.2% over 2002.
Our strategy is to expand our operations to serve dialysis providers
throughout the United States and internationally on an export basis. We
anticipate that, as a result of our existing supply agreements, our customer
relationships and our changing market dynamics, we have the opportunity to
capture substantial market share that will lead to sustaining and increasing our
profitable operations. We expect that we will continue to realize substantial
growth during 2005 and that we will require additional working capital and
capital expenditures to fund this growth. In addition, over the next several
years, we expect to make substantial investments in our dialysate iron product
in order to gain FDA approval to market dialysate iron.
In 2004, we generated cash from our business operations and reinvested
those funds into the development and expansion of our business. Cash flow
generated from our business operations aggregated $840,000 in 2004 after
adjusting our earnings for non-cash charges against earnings for depreciation
and amortization. We realized substantial growth of over 30% in our core
concentrate business in 2004 and as a result we increased our accounts
receivable and inventory by over $430,000 to support this growth. Based on
current and prospective developments that we anticipate in our business in 2005,
we will require additional working capital and capital expenditures to support
our development plans. Positive cash flow from operations is anticipated to
provide a portion of the funding that we anticipate that we may need to support
future growth.
In addressing our need for expanded working capital requirements, we have
received a commitment letter for a new line of credit with a financial
institution which expands our borrowing capacity. This credit line has a $2.75
million credit limit. We are permitted to borrow up to 80% of our eligible
accounts receivable and 40% of eligible inventory up to $600,000. This line of
credit is dependent upon certain conditions including satisfactory completion of
due diligence by the lender and completion of legal documentation.
We are seeking FDA approval for our dialysate iron drug product. The
development and approval of drugs can be expensive and take a long time. The
development and approval costs may offset some or all of our earnings during the
approval process. We estimate the cash required to fund approval of our new iron
supplemented dialysate product will be between $5,000,000 -- $7,000,000 over the
next several years. We may raise these funds ourselves or if we do not raise the
capital to fund this project ourselves, we may decide to seek a partner with
greater technical and financial resources to facilitate approval of this
product.
F-10
ROCKWELL MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
We believe that we will be able to raise the capital required to expand our
operations and fund our new product development strategy through a combination
of cash flow from operations and licensing, debt or equity financing
arrangements; however we may not be successful.
If we are not successful in raising additional funds, we may be required to
alter our growth strategy, defer spending on business development, curtail
production expansion plans or take other measures to conserve our cash
resources.
4. SIGNIFICANT MARKET SEGMENTS
We operate in one market segment which involves the manufacture and
distribution of hemodialysis concentrates, dialysis kits and ancillary products
used in the dialysis process to hemodialysis clinics. For the year ended
December 31, 2004, two customers each accounted for more than 10% of our total
sales, representing 52% of total sales. For the year ended December 31, 2003,
three customers each accounted for more than 10% of our total sales,
representing 42% of total sales. Our accounts receivable from these customers
were $1,362,000 and $1,032,000 as of December 31, 2004 and 2003, respectively.
We are dependent on these customers and the loss of any of them would have a
material adverse effect on our business, financial condition and results of
operations. Our international sales aggregated slightly over 4% and 3% of
overall sales in 2004 and 2003, respectively.
5. INVENTORY
Components of inventory as of December 31, 2004 and 2003 are as follows:
2004 2003
---------- ----------
Raw Materials............................................... $ 319,746 $ 241,317
Finished Goods.............................................. 1,332,711 1,108,974
---------- ----------
Total..................................................... $1,652,457 $1,350,291
========== ==========
6. PROPERTY AND EQUIPMENT
Major classes of Property and Equipment, stated at cost, as of December 31,
2004 and 2003 are as follows:
2004 2003
----------- -----------
Leasehold Improvements..................................... $ 380,319 $ 379,244
Machinery and Equipment.................................... 2,652,899 2,337,726
Office Equipment and Furniture............................. 247,582 208,692
Laboratory Equipment....................................... 236,747 236,747
Transportation Equipment................................... 705,320 533,717
----------- -----------
4,222.867 3,696,126
Accumulated Depreciation................................. (2,174,202) (1,752,750)
----------- -----------
Net Property and Equipment................................. $ 2,048,665 $ 1,943,376
=========== ===========
Included in the table above are assets under capital lease obligations with
a cost of $873,628 and $523,345 and a net book value of $669,514 and $477,612,
as of December 31, 2004 and 2003, respectively.
Depreciation expense was $602,039 for 2004 and $429,377 for 2003.
F-11
ROCKWELL MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. GOODWILL AND INTANGIBLE ASSETS
Total goodwill was $920,745 at December 31, 2004 and 2003. We completed our
annual impairment tests as of November 30, 2004 and 2003 and determined that no
adjustment for impairment of goodwill was required.
We entered into a global licensing agreement in 2001 covering patents for a
method for iron delivery to a patient by transfer from dialysate. The invention
relates to methods and compositions for delivering iron to an iron-deficient
patient using an iron complex in an aqueous solution. We entered into a second
licensing agreement in 2002 covering patents for a more specific form of iron
which may be delivered via dialysate. We intend to obtain FDA approval for this
product as a drug additive to our dialysate product line which upon approval
will be marketed as an iron maintenance therapy for dialysis patients.
We have capitalized the licensing fees paid for the rights to use this
patented technology as an intangible asset. As of December 31, 2004, we have
capitalized licensing fees of $450,214, net of accumulated amortization of
$80,705. As of December 31, 2003, we have capitalized licensing fees of
$314,071, net of accumulated amortization of $53,047. Our policy is to amortize
licensing fees over the life of the patents pertaining to the licensing
agreements. We recognized amortization expense of $27,658 in 2004 and $24,549 in
2003. Estimated amortization expense for licensing fees for 2005 through 2009 is
approximately $31,000 per year. One of the licensing agreements requires the
additional payments upon achievement of certain milestones.
8. LINE OF CREDIT
As of March 28, 2003, we renewed and expanded our credit facility under a
$2,500,000 revolving line of credit facility with a financial institution. The
two year loan facility is secured by our accounts receivable and other assets.
Borrowings under the facility are limited to 80% of eligible accounts
receivable. We are required to maintain a net worth of $750,000. We are
obligated to pay interest at the rate of two percentage points over the prime
rate, plus other fees aggregating .25% of the loan balance. Our outstanding
borrowings under this loan facility were $452,700 and $642,018 as of December
31, 2004 and 2003, respectively.
Subsequent to the end of the year, we received a commitment letter for a
new line of credit with a financial institution which expands our borrowing
capacity. This credit line has a $2.75 million credit limit with interest at
.75% over the prime rate. We are permitted to borrow up to 80% of our eligible
accounts receivable and 40% of eligible inventory up to $600,000. This line of
credit is dependent upon certain conditions including satisfactory completion of
due diligence by the lender and completion of legal documentation.
9. NOTES PAYABLE & CAPITAL LEASE OBLIGATIONS
NOTES PAYABLE
In August 2001, we entered into a financing agreement with a financial
institution to fund $1,000,000 of equipment capital expenditures for our
manufacturing facilities. The note payable requires monthly payments of
principal and interest aggregating $20,884 through June 2007. The note had a
balance of $561,637 and
F-12
ROCKWELL MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
$754,541 at December 31, 2004 and 2003, respectively. The note bears interest at
a fixed rate of 8.65% and is collateralized by the equipment acquired by the
Company.
Future principal payments on notes payable are:
Year ending December 31, 2005............................... $210,258
Year ending December 31, 2006............................... 229,173
Year ending December 31, 2007............................... 122,206
--------
Total Notes Payable....................................... $561,637
========
CAPITAL LEASE OBLIGATIONS
During 2004, we entered into capital lease obligations primarily related to
equipment with an initial fair market value aggregating $315,282. In addition,
we have other capital lease obligations related to financing other equipment.
These capital lease obligations require even monthly installments over periods
ranging from 2005-2010 and interest rates on the leases range from 5%-17.0%.
These obligations under capital leases had outstanding balances of $646,643 and
$479,648 at December 31, 2004 and 2003, respectively.
Future minimum lease payments under capital lease obligations are:
Year ending December 31, 2005............................... $ 237,231
Year ending December 31, 2006............................... 214,304
Year ending December 31, 2007............................... 163,400
Year ending December 31, 2008............................... 95,992
Year ending December 31, 2009............................... 67,755
Thereafter.................................................. 5,159
---------
Total minimum payments on capital lease obligations....... 784,441
Interest.................................................... (137,798)
---------
Present value of minimum lease payments................... 646,643
Current portion of capital lease obligations................ (179,344)
---------
Long-term capital lease obligations....................... $ 467,299
=========
11. OPERATING LEASES
We lease our production facilities and administrative offices as well as
certain equipment used in our operations. The lease terms are three to seven
years. Lease payments under all operating leases were $651,642 and $810,105 for
the years ended December 31, 2004 and 2003, respectively.
We have leases on two buildings that approximate 51,000 square feet each
and that expire in August 2005 and July 2008, respectively.
Future minimum rental payments under these lease agreements are as follows:
Year ending December 31, 2005............................... $ 597,681
Year ending December 31, 2006............................... 444,139
Year ending December 31, 2007............................... 417,596
Year ending December 31, 2008............................... 216,294
Year ending December 31, 2009............................... 11,501
----------
Total..................................................... $1,687,211
==========
F-13
ROCKWELL MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. INCOME TAXES
We recognized no income tax expense or benefit for the years ended December
31, 2004 and 2003. We earned a profit in both years and retained a valuation
allowance against our net deferred tax assets due to our limited history of
taxable income.
A reconciliation of income tax expense at the statutory rate to income tax
expense at our effective tax rate is as follows:
2004 2003
-------- -------
Tax Expense Computed at 34% of Pretax Income................ $ 72,000 $ 1,600
Effect of Permanent Differences Principally Related to
Non-deductible expenses................................ -- --
Effect of Change in Valuation Allowance................... (72,000) (1,600)
-------- -------
Total Income Tax Benefit.................................. $ -0- $ -0-
======== =======
The details of the net deferred tax asset are as follows:
2004 2003
----------- -----------
Total Deferred Tax Assets.................................. $ 2,721,400 $ 2,793,400
Total Deferred Tax Liabilities............................. (45,000) (45,000)
Valuation Allowance Recognized for Deferred Tax Assets..... (2,676,400) (2,748,400)
----------- -----------
Net Deferred Tax Asset..................................... $ -0- $ -0-
=========== ===========
Deferred income tax liabilities result primarily from the use of
accelerated depreciation for tax reporting purposes. Deferred income tax assets
result primarily from net operating loss carryforwards. For tax purposes, we
have net operating loss carryforwards of approximately $7,700,000 that expire
between 2012 and 2024.
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will be realized upon the generation of future taxable income during the
periods in which those temporary differences become deductible. Due to our
history of operating losses, management has placed a full valuation allowance
against the net deferred tax assets as of December 31, 2004 and 2003.
13. CAPITAL STOCK
Our authorized capital stock consists of 20,000,000 common shares, no par
value per share, of which 8,556,531 shares were outstanding at December 31, 2004
and 8,519,405 shares were outstanding at December 31, 2003; 2,000,000 preferred
shares, none issued or outstanding, and 1,416,664 of 8.5% non-voting cumulative
redeemable Series A Preferred Shares, $1.00 par value, of which none were
outstanding at either December 31, 2004 or December 31, 2003.
During 2004, we issued 32,126 common shares as a result of the exercise of
stock options by employees and realized proceeds of $34,989 or $1.09 per share
on average. We also issued 5,000 common shares upon the exercise of warrants to
investors in our private placement. We realized proceeds of $3,700 or $.74 per
share on average. Investors exercising these private placement warrants received
unregistered common shares which may not be resold for a period of one year
following the date they were acquired.
During 2003, we issued 18,733 common shares as a result of the exercise of
stock options by employees and realized proceeds of $24,914 or $1.33 per share
on average. We also issued 12,389 common shares upon the exercise of warrants to
investors in our private placement. We realized proceeds of $12,800 or $1.03 per
F-14
ROCKWELL MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
share on average. Investors exercising these private placement warrants received
unregistered common shares which may not be resold for a period of one year
following the date they were acquired.
COMMON SHARES
Holders of the common shares are entitled to one vote per share on all
matters submitted to a vote of our shareholders and are to receive dividends
when and if declared by the Board of Directors. The Board is authorized to issue
additional common shares within the limits of the Company's Articles of
Incorporation without further shareholder action.
WARRANTS
We have both publicly traded common share purchase warrants ("Public
Warrants") issued in 1998 and common share purchase warrants ("Private
Warrants") issued in conjunction with a private placement of our common shares
in 2002 and other investment banking activities.
Holders of the Public Warrants, were entitled to purchase one common share
at the exercise price of $4.50 per share for a period of three years commencing
January 26, 1999 and expiring January 26, 2002. The Board of Directors approved
extending the expiration date of these warrants until January 26, 2006 under the
same terms and conditions. The exercise price and the number of common shares to
be issued upon the exercise of each warrant are subject to adjustment in the
event of share split, share dividend, recapitalization, merger, consolidation or
certain other events. There were 3,625,000 Public Warrants issued and
outstanding at both December 31, 2004 and 2003.
Under certain conditions, the Public Warrants may be redeemed by the
Company at a redemption price of $.10 per Public Warrant upon not less than 30
days prior written notice to the holders of such Public Warrants; provided the
closing bid price of the common shares has been at least $7.00 per common share
for 20 consecutive trading days ending on the third day prior to the date the
notice of redemption is given.
Holders of the Private Warrants issued in conjunction with subscriptions to
private placement offerings of common shares in 2002 are entitled to purchase
one common share at a stated price. The Private Warrants have a three year term
expiring between May 2005 and October 2005. The common shares underlying these
Private Warrants have not been registered. Investors exercising these Private
Warrants would receive unregistered common shares which may not be resold for a
period of one year following the date they are acquired. In 2003, we issued
25,000 Private Warrants to an investment banker with an exercise price of $2.50
per common share. In 2002, we issued 128,460 Private Warrants to investors and
investment bankers with exercise prices ranging from $.50 per common share to
$2.70 per common share.
14. STOCK OPTIONS
EMPLOYEE STOCK OPTIONS
The Board of Directors approved the Rockwell Medical Technologies, Inc.,
1997 Stock Option Plan on July 15, 1997 (the "Plan"). The Stock Option Committee
as appointed by the Board of Directors administers the Plan, which provides for
grants of nonqualified or incentive stock options to key employees, officers,
directors, consultants and advisors to the Company. Currently the Stock Option
Committee consists of our entire Board of Directors. On May 27, 2004, our
shareholders adopted an amendment to the stock option plan to increase the
number of options available to be granted to 3,900,000 from 2,900,000. Under the
amendment to the stock option plan, we may grant up to 3,900,000 options to
purchase common shares. Exercise prices, subject to certain plan limitations,
are at the discretion of the Stock Option Committee of the Board of Directors.
Options granted normally expire 10 years from the date of grant or upon
termination of employment. The Stock Option Committee of the Board of Directors
determines vesting rights on the date of grant. Employee options typically vest
over a three year period from the date of grant.
F-15
ROCKWELL MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of the status of the Company's Employee Stock Option Plan
excluding options granted to consultants is as follows:
SHARES PRICE
--------- -----
Outstanding at December 31, 2002............................ 1,215,160 $1.38
Granted................................................... 728,000 1.99
Exercised................................................. (18,733) 1.33
Cancelled................................................. (6,000) 1.10
---------
Outstanding at December 31, 2003............................ 1,918,927 1.51
Granted................................................... 858,000 3.17
Exercised................................................. (32,126) 1.09
Cancelled................................................. (37,084) 1.56
---------
Outstanding at December 31, 2004............................ 2,707,717 2.12
OPTIONS OUTSTANDING OPTIONS EXERCISED
------------------------ --------------------------
REMAINING WEIGHTED
RANGE OF NUMBER OF CONTRACTUAL WEIGHTED NUMBER OF AVERAGE
EXERCISE PRICES OPTIONS LIFE EXERCISE PRICE OPTIONS EXERCISE PRICE
--------------- --------- ------------ -------------- --------- --------------
$ .55 to $1.50........... 700,467 2.6-8.0 yrs. $0.76 641,300 $ .78
$1.81 to $2.79........... 1,487,250 4.1-10 yrs. $2.25 811,750 $2.10
$3.00 to $4.05........... 520,000 2.6-9.0 yrs. $3.56 297,500 $3.27
--------- ---------
Total.................. 2,707,717 7.7 yrs. $2.12 1,750,550 $1.81
The per share weighted average fair values at the date of grant for the
options granted to employees during the years ended December 31, 2004 and 2003
were $3.17 and $1.43 respectively. For the period ended December 31, 2004, the
fair value was determined using the Black Scholes option pricing model using the
following assumptions: dividend yield of 0.0 percent, risk free interest rates
of 1.6-3.2 percent, volatility of 94% and expected lives of 2.0-3.0 years. For
the period ended December 31, 2003 the fair value was determined using the Black
Scholes option pricing model using the following assumptions: dividend yield of
0.0 percent, risk free interest rate of 1.6-2.1 percent, volatility of 123% and
expected lives of 3.0 years.
As of December 31, 2004, the remaining number of stock options available
for future grants was 453,355.
NON-EMPLOYEE STOCK OPTIONS AND PURCHASE WARRANTS
In 2003, we issued warrants to purchase 25,000 common shares at an exercise
price of $2.50 to an investment banker in consideration for investment banking
services. These warrants had a fair market value of $14,025 on the date of
grant. Upon exercise of these warrants, the investment banker would receive
unregistered common shares which may not be resold for a period of one year
following the date they were acquired.
Our policy is to amortize the fair market value of options and warrants
granted to non-employees to expense over the term of the related consulting
agreement. There was no expense recognized for the year ended December 31, 2004.
We recognized $84,042 of amortization expense for the year ended December 31,
2003.
15. RELATED PARTY TRANSACTIONS
During the years ended December 31, 2004 and 2003, we had revenue from
companies in which our outside directors held an equity interest. Mr. Ronald D.
Boyd, a director of the Company as of March 14,
F-16
ROCKWELL MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2000, held an equity interest in certain customers of our products. Revenue from
these entities was $15,000 and $101,000 in 2004 and 2003, respectively. Mr.
Kenneth L. Holt, a director of the Company as of March 14, 2000, holds an equity
interest in certain other customers of ours. Revenue from these entities was
$119,000 and $156,000 in 2004 and 2003, respectively.
16. SUPPLEMENTAL CASH FLOW INFORMATION
We entered into non-cash transactions described below during the years
ended December 31, 2004 and 2003 which have not been included in the
Consolidated Statement of Cash Flows.
We entered into capital leases on equipment with a cost of $315,282 and
$477,533 for the years ended December 31, 2004 and 2003, respectively, and
financed those with capital lease obligations.
17. SUBSEQUENT EVENT -- LITIGATION SETTLEMENT
We were the plaintiff in certain litigation that was settled in the first
quarter of 2005. We expect to receive gross proceeds from this settlement of
approximately $241,000. We received cash of $130,000 during the first quarter of
2005. A portion of the cash received was from the exercise of stock options by
the defendant during the first quarter of 2005 which totaled $103,750. The
balance of the settlement is due by April 29, 2005. As of December 31, 2004, we
have not recognized income for any portion of this settlement.
18. RECENT ACCOUNTING PRONOUNCEMENTS
In December 2004, the Financial Accounting Standards Board ("FASB") issued
Statement No. 123R ("SFAS 123R"), a revision to Statement No. 123, "Accounting
for Stock-Based Compensation." This standard requires the Company to measure the
cost of employee services received in exchange for equity awards, including
stock options, based on the grant date fair value of the awards. The cost will
be recognized as compensation expense over the vesting period of the awards. The
Company is required to adopt SFAS 123R beginning January 1, 2006. The standard
provides for a prospective application. Under this method, the Company will
begin recognizing compensation cost for equity based compensation for all new or
modified grants after the date of adoption. In addition, the Company will
recognize the unvested portion of the grant date fair value of awards issued
prior to adoption based on the fair values previously calculated for disclosure
purposes. At December 31, 2004, the aggregate value of unvested options, as
determined using a Black-Scholes option valuation model, was $1,413,000. Upon
adoption of SFAS 123R, approximately $750,000 of this amount will be recognized
over the remaining vesting period of these options.
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs" ("SFAS
151"). SFAS 151 requires that abnormal amounts of idle facility expense,
freight, handling costs, and spoilage, be charged to expense in the period they
are incurred rather than capitalized as a component of inventory costs.
Statement 151 is effective for inventory costs incurred after January 1, 2006.
The Company is currently evaluating the impact this new standard will have on
its financial statements.
F-17
ROCKWELL MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 2005 AND DECEMBER 31, 2004
JUNE 30, DECEMBER 31,
2005 2004
---------- ------------
(UNAUDITED)
(WHOLE DOLLARS)
ASSETS
Cash and Cash Equivalents................................... $1,275,910 $ 166,195
Restricted Cash Equivalents................................. 8,662 8,662
Accounts Receivable, net of a reserve of $44,500 in 2005 and
$44,500 in 2004........................................... 2,383,340 2,302,093
Inventory................................................... 2,379,666 1,652,457
Other Current Assets........................................ 238,759 111,630
---------- -----------
Total Current Assets...................................... 6,286,337 4,241,037
Property and Equipment, net................................. 2,028,495 2,048,665
Intangible Assets........................................... 403,817 369,508
Goodwill.................................................... 920,745 920,745
Other Non-current Assets.................................... 116,680 120,597
---------- -----------
Total Assets................................................ $9,756,074 $ 7,700,552
========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Short Term Borrowings....................................... $ 991,884 $ 452,682
Notes Payable & Capitalized Lease Obligations............... 467,820 389,602
Accounts Payable............................................ 1,865,435 2,124,679
Customer Deposits........................................... 1,504,273 11,005
Accrued Liabilities......................................... 440,995 481,587
---------- -----------
Total Current Liabilities................................. 5,270,407 3,459,555
Long Term Notes Payable & Capitalized Lease Obligations..... 643,654 818,678
Shareholders' Equity:
Common Share, no par value, 8,674,619 and 8,556,531 shares
issued and outstanding.................................... 12,095,931 11,870,909
Common Share Purchase Warrants, 3,710,832 and 3,761,071
shares issued and outstanding............................. 320,150 320,150
Accumulated Deficit......................................... (8,574,068) (8,768,740)
---------- -----------
Total Shareholders' Equity.................................. 3,842,013 3,422,319
---------- -----------
Total Liabilities And Shareholders' Equity.................. $9,756,074 $ 7,700,552
========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
F-18
ROCKWELL MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED INCOME STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2005 AND JUNE 30, 2004
SIX MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
2005 2004
----------- ----------
(WHOLE DOLLARS)
(UNAUDITED)
SALES....................................................... $13,410,541 $8,690,768
Cost of Sales............................................... 11,930,680 7,313,570
----------- ----------
GROSS PROFIT.............................................. 1,479,861 1,377,198
Selling, General and Administrative......................... 1,336,126 1,153,388
----------- ----------
OPERATING INCOME.......................................... 143,735 223,810
Other Income................................................ 137,468 --
Interest Expense, net....................................... 86,531 88,968
----------- ----------
NET INCOME................................................ $ 194,672 $ 134,842
=========== ==========
BASIC EARNINGS PER SHARE.................................. $ 0.02 $ 0.02
DILUTED EARNINGS PER SHARE................................ $ 0.02 $ 0.01
The accompanying notes are an integral part of the consolidated financial
statements.
F-19
ROCKWELL MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2005 AND JUNE 30, 2004
2005 2004
----------- -----------
(UNAUDITED)
(WHOLE DOLLARS)
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME................................................ $ 194,672 $ 134,842
Adjustments To Reconcile Net Income To Net Cash Used For
Operating Activities:
Depreciation and Amortization.......................... 335,288 297,765
Changes in Assets and Liabilities:
(Increase) in Accounts Receivable...................... (81,247) (56,631)
(Increase) in Inventory................................ (727,209) (83,067)
(Increase) in Other Assets............................. (123,212) (25,392)
(Decrease) Increase in Accounts Payable................ (259,244) 369,954
Increase in Customer Deposits.......................... 1,493,268 -0-
(Decrease) Increase in Other Liabilities............... (40,592) 22,061
----------- -----------
Changes in Assets and Liabilities...................... 261,764 226,925
----------- -----------
CASH PROVIDED BY OPERATING ACTIVITIES....................... 791,724 659,532
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of Equipment....................................... (282,418) (187,243)
Purchase of Intangible Assets............................... (50,000) -0-
----------- -----------
CASH (USED IN) INVESTING ACTIVITIES......................... (332,418) (187,243)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Borrowing on Line of Credit................. 5,129,279 8,108,522
Payments on Line of Credit................................ (4,590,077) (8,251,945)
Payments on Notes Payable and Capital Lease Obligations..... (113,815) (162,349)
Issuance of Common Shares................................... 225,022 32,876
----------- -----------
CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES............. 650,409 (272,896)
INCREASE IN CASH............................................ 1,109,715 199,393
CASH AT BEGINNING OF PERIOD................................. 166,195 106,639
----------- -----------
CASH AT END OF PERIOD....................................... $ 1,275,910 $ 306,032
=========== ===========
Supplemental Cash Flow Disclosure:
Interest Paid............................................... $ 86,579 $ 89,052
=========== ===========
Non-Cash Investing and Financing Activity -- Equipment
Acquired Under Capital Lease Obligations.................. $ 17,009 $ 185,648
=========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
F-20
ROCKWELL MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS
We manufacture, sell and distribute hemodialysis concentrates and other
ancillary medical products and supplies used in the treatment of patients with
kidneys that do not function properly. We supply our products to medical service
providers who treat patients with kidney disease. Our products are used to
cleanse patients' blood and replace nutrients during the kidney dialysis
process. We primarily sell our products in the United States.
We are regulated by the United States Food and Drug Administration (the
"FDA") under the Federal Drug and Cosmetics Act, as well as by other Federal,
state and local agencies. We have received 510(k) approval from the FDA to
market hemodialysis solutions and powders. We also have 510(k) approval to sell
our Dri-Sate(R) Dry Acid Concentrate product line and Dri-Sate(R) Dry Acid
Mixing System.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
Our consolidated financial statements include our accounts and the accounts
of our wholly owned subsidiary, Rockwell Transportation, Inc. All intercompany
balances and transactions have been eliminated.
In the opinion of our management, all adjustments have been included which
are necessary to make the financial statements not misleading. All of these
adjustments that are material are of a normal and recurring nature. Our
operating results for the three month period ended June 30, 2005 are not
necessarily indicative of the results to be expected for the year ending
December 31, 2005. You should read our unaudited interim financial statements
together with the financial statements and related footnotes for the year ended
December 31, 2004 included in our Annual Report on Form 10-KSB for the fiscal
year ended December 31, 2004. Our Annual Report on Form 10-KSB for the fiscal
year ended December 31, 2004 includes a description of our significant
accounting policies.
Revenue Recognition
We recognize revenue at the time we transfer title to our products to our
customers consistent with generally accepted accounting principles. Generally,
we recognize revenue when our products are delivered to our customer's location
consistent with our terms of sale. In most instances title for goods shipped
internationally transfers to the buyer once it leaves our facility and
therefore, we recognize revenue upon shipment to foreign customers.
We require certain customers, mostly international customers, to pay for
product prior to the transfer of title to the customer. Deposits received from
customers and payments in advance for orders are recorded as liabilities under
Customer Deposits until such time as orders are filled and title transfers to
the customer consistent with our terms of sale. At June 30, 2005, we had
customer deposits of $1,504,273.
EARNINGS PER SHARE
We computed our basic earnings per share using weighted average shares
outstanding for each respective period. Diluted earnings per share also reflect
the weighted average impact from the date of issuance of all potentially
dilutive securities, consisting of stock options and common share purchase
warrants, unless
F-21
ROCKWELL MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
inclusion would have had an antidilutive effect. Actual weighted average shares
outstanding used in calculating basic and diluted earnings per share were:
SIX MONTHS ENDED
JUNE 30,
---------------------
2005 2004
--------- ---------
Basic Weighted Average Shares Outstanding................... 8,610,029 8,539,889
Effect of Dilutive Securities............................... 675,029 772,230
--------- ---------
Diluted Weighted Average Shares Outstanding................. 9,285,058 9,312,119
========= =========
Our reported and pro forma information for the six months ended June 30:
SIX MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, 2005 JUNE 30, 2004
------------- -------------
As reported net income (loss) available to common
shareholders.............................................. $ 194,672 $134,842
Less: Stock based compensation expense determined under the
fair market value method, net of tax...................... 324,510 208,769
--------- --------
Pro forma (loss)............................................ $(129,838) $(73,927)
========= ========
As reported basic earnings per share........................ $ .02 $ .02
As reported diluted earnings per share...................... $ .02 $ .01
Pro forma earnings (loss) per share and diluted earnings
(loss)
per share................................................. $ (.02) $ (.01)
3. LINE OF CREDIT
On March 29, 2005, we entered into a new line of credit with a financial
institution. The loan agreement provides for revolving borrowings by us of up to
$2,750,000. We are permitted to borrow up to 80% of eligible accounts receivable
and 40% of eligible inventory up to $600,000. Borrowings under the loan
agreement are secured by accounts receivable, inventory and certain other
assets. The annual interest rate payable on revolving borrowings under the loan
agreement is the lender's prime rate plus 75 basis points. The lender's
commitment to make revolving borrowings under the loan agreement expires on
March 31, 2006. As of June 30, 2005, we had borrowed $991,884 under this line of
credit.
4. OTHER INCOME
We were the plaintiff in certain litigation that was settled in the first
quarter of 2005. Since we have realized the full proceeds of the settlement,
which totaled approximately $241,000, we have recognized $137,468 of other
income from this settlement in the first quarter of 2005. A portion of the cash
received was from the exercise of stock options by the defendant during the
first quarter of 2005 which totaled $103,750.
F-22
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
YOU MAY RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE HAVE
NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH DIFFERENT OR ADDITIONAL INFORMATION.
THIS PROSPECTUS IS NOT AN OFFER TO SELL NOR IS IT SEEKING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. THE
INFORMATION CONTAINED IN THIS PROSPECTUS IS ACCURATE ONLY AS OF THE DATE OF THIS
PROSPECTUS, REGARDLESS OF THE TIME OF DELIVERY OF THIS PROSPECTUS OR OF ANY SALE
OF THESE SECURITIES.
ROCKWELL MEDICAL TECHNOLOGIES, INC.
PROSPECTUS
OFFER TO EXCHANGE
UP TO
3,625,000 COMMON SHARE PURCHASE WARRANTS
WITH AN EXERCISE PRICE OF $[ ] PER SHARE
FOR
3,625,000 CURRENTLY OUTSTANDING COMMON SHARE PURCHASE WARRANTS WITH AN EXERCISE
PRICE OF $4.50 PER SHARE
OFFER OF SALE
UP TO
3,625,000 COMMON SHARES
ISSUABLE UPON EXERCISE OF COMMON SHARE PURCHASE
WARRANTS WITH AN EXERCISE PRICE
OF $[ ] PER SHARE
FOR AN AGGREGATE OFFERING PRICE OF [$ ]
THE EXCHANGE OFFER EXPIRES AT 5:00 P.M., EASTERN STANDARD TIME, ON
[ ],
2005, UNLESS EXTENDED.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20/24 (SB-2). INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Michigan Business Corporation Act, as amended, authorizes a corporation
under specified circumstances to indemnify its directors and officers (including
reimbursement for expenses incurred). The provisions of the Company's Bylaws
relating to indemnification of directors and executive officers generally
provide that Directors and Executive Officers will be indemnified to the fullest
extent permissible under Michigan law. The provision also provides for the
advancement of litigation expenses at the request of a Director or Executive
Officer. These obligations are broad enough to permit indemnification with
respect to liabilities arising under the Securities Act or the Michigan Uniform
Securities Act, as amended. The Company believes that such indemnification will
assist the Company in continuing to attract and retain talented Directors and
Officers in light of the risk of litigation directed against directors and
officers of publicly-held corporations.
The Michigan Business Corporation Act, as amended, also permits Michigan
corporations to limit the personal liability of Directors for a breach of their
fiduciary duty. The provisions of the Company's Articles of Incorporation limit
Director liability to the maximum extent currently permitted by Michigan law.
Michigan law allows a corporation to provide in its articles of incorporation
that a Director of the corporation will not be personally liable to the
corporation or its shareholders for monetary damages for breach of fiduciary
duty as a Director, except for liability for specified acts. As a result of the
inclusion of such a provision, shareholders of the Company may be unable to
recover monetary damages against Directors for actions taken by them which
constitute negligence or gross negligence or which are in violation of their
fiduciary duties, although it may be possible to obtain injunctive or other
equitable relief with respect to such actions. If equitable remedies are found
not to be available to shareholders in any particular case, shareholders may not
have any effective remedy against the challenged conduct. These provisions,
however, do not affect liability under the Securities Act.
In addition, the Company has obtained Directors' and Officers' liability
insurance. The policy provides for $4,000,000 in coverage including prior acts
dating to the Company's inception and liabilities under the Securities Act in
connection with this Offering.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to Directors, Officers and controlling persons of the Company
pursuant to the foregoing provisions or otherwise, the Company has been advised
that, in the opinion of the Securities and Exchange Commission, such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable.
ITEM 21/27 (SB-2). EXHIBITS
See Exhibit Index immediately preceding the exhibits.
ITEM 22/28 (SB-2). UNDERTAKINGS
(a) The undersigned registrant hereby undertakes that it will:
(1) File, during any period in which it offers or sells securities, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by section 10(a)(3) of the
Securities Act;
(ii) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the
information in the registration statement. Notwithstanding the
foregoing, any increase or decrease in volume of securities offered (if
the total dollar value of securities offered would not exceed that which
was registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if, in the
aggregate, the changes in volume and price represent no more than a 20%
change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective registration
statement; and
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(iii) Include any additional or changed material information on the
plan of distribution.
(2) For determining any liability under the Securities Act, treat each
post-effective amendment as a new registration statement relating to the
securities offered, and the offering of such securities at that time to be
the initial bona fide offering.
(3) File a post-effective amendment to remove from registration any of
the securities that remain unsold at the end of the offering.
(b) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the small business issuer pursuant to the foregoing provisions, or
otherwise, the small business issuer has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the small business issuer of the expenses incurred or paid by a director,
officer, or controlling person of the small business issuer in the successful
defense of any action, suit or proceeding) is asserted by such director, officer
or controlling person in connection with the securities being registered, the
small business issuer will, unless in the opinion of its counsel the matter has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
(c) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
ITEM 25 (SB-2). OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the expenses (other than underwriting
discounts and commissions) which will be paid by the Registrant in connection
with the issuance and distribution of the securities being registered hereby.
All amounts indicated are estimates.
SEC Registration Fee........................................ 1,495
Nasdaq Listing Fees......................................... 30,000
Printing expenses (other than stock certificates)........... 4,000
Printing and engraving of stock certificates................ 30,000
Legal fees and expenses (other than blue sky)............... 120,000
Accounting fees and expenses................................ 30,000
Blue sky fees and expenses (including legal and filing
fees)..................................................... 80,000
Transfer Agent fees and expenses............................ 5,000
Miscellaneous............................................... 6,000
--------
Total..................................................... $306,495
========
ITEM 26 (SB-2). RECENT SALES OF UNREGISTERED SECURITIES
During 2005, we issued 43,089 common shares upon exercise of warrants which
were issued to investors in a private placement. The offer and sale of the above
common shares upon exercise of the warrants were exempt from the registration
requirements of the Act under Section 4(2) of the Act. We realized proceeds of
$77,994, or $1.81 per share on average. Investors exercising these private
placement warrants received a legended certificate representing the shares
purchased.
During 2004, we issued 5,000 common shares upon exercise of a Common Share
Purchase Warrant which was acquired by an accredited investor during 2002 as
part of a private placement of our common shares and such Common Share Purchase
Warrants. The offer and sale of the above common shares upon exercise of the
Common Share Purchase Warrants were exempt from the registration requirements of
the Securities Act of 1933, as amended (the "Act"), under Section 4(2) of the
Act and under Regulation D under the Act. We received $3,700 in gross proceeds
as a result of the
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exercise of the Common Share Purchase Warrants. The investor exercising these
warrants received a legended certificate representing the shares purchased.
During 2003, we also issued 12,389 common shares upon the exercise of
warrants issued to investors in a private placement. The offer and sale of the
above common shares upon exercise of the Common Share Purchase Warrants were
exempt from the registration requirements of the Act under Section 4(2) of the
Act. We realized proceeds of $12,800 or $1.03 per share on average. Investors
exercising these private placement warrants received a legended certificate
representing the shares purchased.
In 2002, the Company issued common shares pursuant to private placement
offerings of its common shares. Investors in these offerings received a legended
certificate representing the shares purchased. The offerings were made to
specific accredited investors and others with prior relationships to the Company
or the placement agent. The Company engaged placement agents on a best efforts
basis for which each placement agent was entitled to a fee equal to 10% of the
gross proceeds raised by the placement agent. Placement agents were paid $69,485
in 2002. During 2002, the Company issued 982,095 common shares in two separate
offerings at prices between $.54-$2.10 realizing gross proceeds of $1,320,500
under these offerings and net proceeds of $1,205,350 after expenses. The sale of
shares pursuant to its offering were exempt from the registration requirements
of the Act under Section 4(2) of the Act and under Regulation D of the
Securities Act of 1933.
We recently discovered that supplemental or new registration statements
were not filed with the SEC with respect to the sale of certain shares pursuant
to options granted under our stock option plan. Consequently, certain shares
were sold without registration under the Securities Act of 1933, which may give
rise to certain claims under Section 12(a)(1) of the Securities Act. We do not
believe that it is likely any such claims would be brought, we would vigorously
defend against any such claims and we believe that the aggregate impact of such
claims, if successful, would be immaterial. We also believe it would be
extremely difficult to determine which exact options or shares were affected. We
have filed a new Form S-8 Registration Statement for the Rockwell Medical
Technologies, Inc. 1997 Stock Option Plan, which has been incorporated by
reference as Exhibit 10.1. During 2005, we issued 54,999 unregistered common
shares as a result of the exercise of stock options by employees and realized
proceeds of $87,038.61, or $1.58 per share on average. During 2004, we issued
30,950 unregistered common shares as a result of the exercise of stock options
by employees and realized proceeds of $33,186.63, or $1.07 per share on average.
During 2003, we issued 12,066 unregistered common shares as a result of the
exercise of stock options by employees and realized proceeds of $15,330.30, or
$1.27 per share on average. During 2002, the Company issued 310,313 unregistered
common shares to employees and non-employees. The Company issued 4,000 common
shares to employees upon the exercise of stock options and realized proceeds of
$64,000, or $0.83, per share on average. The Company also issued 246,313 common
shares to consultants and other service providers upon exercise of options
issued in exchange for services. Such options had an aggregate fair market value
of $241,050 on the dates of the option grants.
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SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorized this Amendment No. 1
to the Registration Statement to be signed on its behalf by the undersigned, in
the City of Wixom, State of Michigan, on September 22, 2005. Pursuant to the
requirements of the Securities Act, the registrant has duly caused this
Amendment No. 1 to the registration statement on Form S-4 to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Wixom,
State of Michigan, on September 22, 2005.
ROCKWELL MEDICAL TECHNOLOGIES, INC.
(Registrant)
By: /s/ ROBERT L. CHIOINI
-------------------------------------
Robert L. Chioini
President and Chief Executive Officer
In accordance with the requirements of the Securities Act of 1933, this
Amendment No. 1 to the Registration Statement has been signed by the following
persons in the capacities and on the dates stated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ ROBERT L. CHIOINI President, Chief Executive Officer and September 22, 2005
------------------------------------------------ Director (Principal Executive Officer)
Robert L. Chioini
/s/ THOMAS E. KLEMA Vice President of Finance, September 22, 2005
------------------------------------------------ Chief Financial Officer, Treasurer and
Thomas E. Klema Secretary
(Principal Financial Officer and
Principal Accounting Officer)
* Director September 22, 2005
------------------------------------------------
Kenneth L. Holt
* Director September 22, 2005
------------------------------------------------
Ronald D. Boyd
* Director September 22, 2005
------------------------------------------------
Patrick J. Bagley
*By: /s/ THOMAS E. KLEMA
------------------------------------------
Thomas E. Klema, Attorney-in-Fact
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EXHIBIT INDEX
EXHIBIT DESCRIPTION
------- -----------
3(i).1 Articles of Incorporation of the Registrant, incorporated by
reference to Exhibit 3(i).1 to the Company's Registration
Statement on Form SB-2, File No. 333-31991 filed on July 27,
1997.
3(i).2 Certificate of Amendment to Articles of Incorporation of the
Registrant, incorporated by reference to Exhibit 3(i).2 to
the Company's Registration Statement on Form SB-2, File No.
333-31991 filed on July 27, 1997.
3(i).3 Certificate of Correction to Articles of Incorporation of
the Registrant, incorporated by reference to Exhibit 3(i).3
to the Company's Registration Statement on Form SB-2, File
No. 333-31991 filed on July 27, 1997.
3(i).4 Certificate of Amendment to Articles of Incorporation of the
Registrant, incorporated by reference to Exhibit 3(i).4 to
the Company's Registration Statement on Form SB-2, File No.
333-31991 filed on July 27, 1997.
3(ii) Bylaws of the Registrant, incorporated by reference to
Exhibit 3(ii) to the Company's Registration Statement on
Form SB-2, File No. 333-31991 filed on July 27, 1997.
4.1 Form of Old Warrant Agreement, incorporated by reference to
Exhibit 4.1 to the Company's Registration Statement on Form
SB-2, File No. 333-31991 filed on July 27, 1997.
4.2 Form of Underwriters Warrant Agreement, incorporated by
reference to Exhibit 4.2 to the Company's Registration
Statement on Form SB-2, File No. 333-31991 filed on July 27,
1997.
4.3 Specimen Common Share Certificate, incorporated by reference
to Exhibit 4.3 to the Company's Registration Statement on
Form SB-2, File No. 333-31991 filed on July 27, 1997.
4.4 Specimen Old Warrant Certificate, incorporated by reference
to Exhibit 4.4 to the Company's Registration Statement on
Form SB-2, File No. 333-31991 filed on July 27, 1997.
4.5 Form of Bridge Warrant, incorporated by reference to Exhibit
4.5 to the Company's Registration Statement on Form SB-2,
File No. 333-31991 filed on July 27, 1997.
4.6 Registration Rights Agreement among the Registrant and the
holders of the Bridge Warrants, incorporated by reference to
Exhibit 4.6 to the Company's Registration Statement on Form
SB-2, File No. 333-31991 filed on July 27, 1997.
4.7 Form of New Warrant Agreement.
4.8 Form of New Warrant Certificate.
4.9 Form of Letter of Transmittal.
4.10 Form of Exchange Agent Agreement.
4.11 Form of Notice of Guaranteed Delivery.
5.1 Opinion of Honigman Miller Schwartz and Cohn LLP concerning
the legality of the securities being offered.
8.1 Opinion of Honigman Miller Schwartz and Cohn LLP concerning
the tax consequences of the Exchange Offer.
10.1 Rockwell Medical Technologies, Inc. 1997 Stock Option Plan,
incorporated by reference to the Proxy Statement for the
Annual Meeting of Shareholders filed on April 21, 2005.
10.2 Lease Agreement dated March 12, 2000 between the Company and
DFW Trade Center III Limited Partnership incorporated by
reference to the annual report on Form 10-KSB filed on March
30, 2000.
10.3 Lease Agreement dated October 23, 2000 between the Company
and International-Wixom, LLC incorporated by reference to
the quarterly report on Form 10-QSB filed on November 14,
2000.
10.4 Licensing Agreement between the Company and Ash Medical
Systems, Inc. dated October 3, 2001 with certain portions of
the exhibit deleted under a request for confidential
treatment under Rule 24b-2 of the Securities Act of 1934
incorporated by reference to the annual report on form
10-KSB filed on April 1, 2002.
10.5 Licensing Agreement between the Company and Charak LLC and
Dr. Ajay Gupta dated January 7, 2002 with certain portions
of the exhibit deleted under a request for confidential
treatment under Rule 24b-2 of the Securities Act of 1934
incorporated by reference to the annual report on Form
10-KSB filed on April 1, 2002.
10.6 Supply Agreement between the Company and DaVita, Inc. dated
May 5, 2004 with certain portions of the exhibit deleted
under a request for confidential treatment under Rule 24b-2
of the Securities Exchange Act of 1934 incorporated by
reference to the quarterly report on Form 10-QSB filed on
May 17, 2004.
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EXHIBIT DESCRIPTION
------- -----------
10.7 Loan and Security Agreement dated as of March 29, 2005
between the Company and Standard Federal Bank National
Association incorporated by reference to the annual report
on Form 10-KSB filed March 31, 2005.
10.8 Revolving Note dated as of March 29, 2005 executed by the
Company for the benefit of Standard Federal Bank National
Association incorporated by reference to the annual report
on Form 10-KSB filed March 31, 2005.
10.9 Unconditional Guaranty dated as of March 29, 2005 executed
by Rockwell Transportation, Inc. for the benefit of Standard
Federal Bank National Association incorporated by reference
to the annual report on Form 10-KSB filed March 31, 2005.
10.10 Second Amendment to Industrial Lease Agreement between
Rockwell Medical Technologies, Inc. and DCT DFW, LP dated
August 17, 2005 incorporated by reference to the current
report on Form 8-K filed August 19, 2005.
21.1 List of Subsidiaries incorporated by reference to Exhibit
21.1 to the Company's Registration Statement on Form SB-2,
File No. 333-31991 filed on July 24, 1997.
23.1 Consent of Plante & Moran, PLLC.*
23.2 Consent of Honigman Miller Schwartz and Cohn LLP contained
in an opinion (filed as Exhibit 5.1).
24.1 Power of Attorney (included after the signature of the
registrant contained on page 54 of the original registration
statement).
24.2 Power of Attorney.
---------------
* Filed with the original registration statement on Form S-4 and Form SB-2, file
no. 333-127048, and incorporated by reference to the corresponding exhibit
number in that registration statement.
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