<PAGE> 1
As filed with the Securities and Exchange Commission on September 10, 1997
Registration No. 333-31991
================================================================================
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM SB-2
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
------------------------
ROCKWELL MEDICAL TECHNOLOGIES, INC.
(Name of small business issuer in its charter)
<TABLE>
<S> <C> <C>
Michigan 3845 38-3317208
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification No.)
incorporation or organization) Classification Code Number)
</TABLE>
28025 Oakland Oaks Drive
Wixom, Michigan 48393
Telephone: (248) 449-3353
(Address and telephone number of principal executive offices)
28025 Oakland Oaks Drive
Wixom, Michigan 48393
(Address of principal place of business or intended principal place of business)
------------------------
ROBERT L. CHIOINI
President and Chief Executive Officer
Rockwell Medical Technologies, Inc.
28025 Oakland Oaks Drive
Wixom, Michigan 48393
Telephone: (248) 449-3353
(Name, address and telephone number of agent for service)
------------------------
COPIES TO:
<TABLE>
<S> <C>
Patrick T. Duerr, Esq. Jay M. Kaplowitz, Esq.
Honigman Miller Schwartz and Cohn Arthur S. Marcus, Esq.
2290 First National Building Gersten, Savage, Kaplowitz,
Detroit, Michigan 48226-3583 Fredericks & Curtin, LLP
Telephone: (313) 256-7736 101 East 52nd Street
Telecopier: (313) 256-4215 New York, New York 10022-6018
Telephone: (212) 752-9700
Telecopier: (212) 980-5192
</TABLE>
------------------------
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: As soon as practicable
after this Registration Statement is declared effective.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please 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. [ ] ____________
------------------------
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.
================================================================================
<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED SEPTEMBER 10, 1997
PROSPECTUS
ROCKWELL MEDICAL TECHNOLOGIES, INC.
1,500,000 UNITS
CONSISTING OF 1,500,000 COMMON SHARES AND
3,000,000 COMMON SHARE PURCHASE WARRANTS.
Each unit ("Unit") of Rockwell Medical Technologies, Inc. (the "Company")
consists of (i) one of the Company's common shares, no par value (the "Common
Shares"), and (ii) two redeemable common share purchase warrants (the
"Warrants"), which are transferable separately immediately upon issuance. Each
Warrant entitles the registered holder thereof to purchase one Common Share at
an exercise price of $4.50 per share, subject to adjustment in certain events,
at any time during the period commencing one year from the date upon which the
Registration Statement of which this Prospectus forms a part is declared
effective by the Securities and Exchange Commission (the "Effective Date") and
expiring on the fourth anniversary of the Effective Date. The Warrants are
subject to redemption by the Company for a redemption price of $.10 per Warrant
at any time commencing one year from the Effective Date (with the prior consent
of Maidstone Financial, Inc. (the "Underwriter")) on no less than 30 days prior
written notice to the holders of the Warrants, provided the closing bid price of
the Common Shares had been greater than $8.50 per share for 20 consecutive
trading days ending on the third day prior to the date on which the Company gave
notice of redemption regardless of the illiquidity of the market for the
Company's Common Shares. The Warrants will be exercisable until the close of
business on the day immediately preceding the date fixed for redemption. See
"Description of Securities." The Common Shares and Warrants offered hereby are
collectively referred to as the "Securities."
Prior to this offering ("Offering"), there has been no public market for
the Units, the Common Shares or the Warrants, and there can be no assurance that
any such market for the Units, the Common Shares or the Warrants will develop
after the closing of the Offering, or that, if developed, it will be sustained.
The offering price of the Units and the exercise price and the other terms of
the Warrants were established by negotiations between the Company and the
Underwriter and do not necessarily bear any direct relationship to the Company's
asset value, earnings, book value per share or other generally accepted criteria
of value. See "Underwriting". It is expected that the initial public offering
price will be $4.20 per Unit.
THE SECURITIES OFFERED HEREBY ARE SPECULATIVE AND INVOLVE A HIGH DEGREE OF
RISK AND IMMEDIATE AND SUBSTANTIAL DILUTION TO THE PUBLIC. ONLY INVESTORS WHO
CAN BEAR THE RISK OF LOSS OF THEIR ENTIRE INVESTMENT SHOULD INVEST. FOR A
DESCRIPTION OF CERTAIN RISKS REGARDING AN INVESTMENT IN THE COMPANY AND
IMMEDIATE SUBSTANTIAL DILUTION, SEE "RISK FACTORS" COMMENCING ON PAGE 8 AND
"DILUTION" AT PAGES 17-18.
-------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
<TABLE>
<CAPTION>
=================================================================================================================
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Unit.............................. $ $ $
- -----------------------------------------------------------------------------------------------------------------
Total(3).............................. $ $ $
=================================================================================================================
</TABLE>
(footnotes appear on page 2)
-------------------------
MAIDSTONE FINANCIAL, INC.
MAIDSTONE LOGO
-------------------------
The date of this Prospectus is , 1997
<PAGE> 3
(1) Does not include additional compensation to be received by the
Underwriter consisting of (i) a non-accountable expense allowance
payable to the Underwriter in the amount of $189,000 ($217,350 if the
Over-Allotment Option (as defined below), is exercised in full), or
$0.126 per Unit, (ii) warrants (the "Underwriter Warrants") entitling
the Underwriter to purchase up to 150,000 Units for a purchase price of
$5.04 per Unit (120% of the initial public offering price), exercisable
at any time during the period commencing one year from the Effective
Date and expiring on the fourth anniversary of the Effective Date, and
(iii) a financial advisory agreement with the Underwriter for 24 months
commencing on the date of the closing of the Offering for a fee of
$4,166 per month, or an aggregate of $99,984, payable in its entirety
at the closing of the Offering. In addition, the Company has (i)
granted to the Underwriter, effective upon completion of this Offering,
a right of first refusal for a period of three years after the
Effective Date for any public or private offering of securities by the
Company, its affiliates or any present or future subsidiaries to raise
capital, and (ii) agreed to pay the Underwriter, under certain
circumstances, a warrant solicitation fee of 5% of the exercise price
of each Warrant exercised and to indemnify the Underwriter against
certain civil liabilities, including those arising under the Securities
Act of 1933, as amended (the "Securities Act"). See "Underwriting."
(2) After deducting discounts and commissions payable to the Underwriter,
but before deducting the expenses of this Offering payable by the
Company, estimated at $700,000 (approximately $0.47 per Unit),
including the Underwriter's non-accountable expense allowance and the
financial advisory fee. See "Underwriting."
(3) The Company has granted the Underwriter an option, exercisable for a
period of 45 days after the Effective Date, to purchase up to an
additional 225,000 Units, upon the same terms and conditions as the
Units being offered by this Prospectus solely for the purpose of
covering over-allotments, if any (the "Over-Allotment Option"). If the
Over-Allotment Option is exercised in full, the total Price to Public,
Underwriting Discounts and Commissions and Proceeds to Company will be
$7,245,000, $724,500 and $6,520,500, respectively. See "Underwriting."
The Units are being offered by the Underwriter on a "firm commitment"
basis, subject to prior sale, when, as and if delivered to the Underwriter and
subject to certain conditions. Subject to the provisions of the underwriting
agreement between the Underwriter and the Company, the Underwriter reserves the
right to withdraw, cancel or modify the Offering and to reject any order in
whole or in part. It is expected that delivery of certificates representing the
Common Shares and the Warrants will be made against payment therefor at the
offices of the Underwriter, 101 East 52nd Street, New York, New York 10022, on
or about , 1997.
------------------------------
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE UNITS, THE COMMON
SHARES AND THE WARRANTS OFFERED HEREBY, INCLUDING PURCHASES OF THE UNITS, THE
COMMON SHARES OR THE WARRANTS TO STABILIZE THEIR MARKET PRICES, PURCHASES OF THE
UNITS, THE COMMON SHARES OR THE WARRANTS TO COVER SOME OR ALL OF A SHORT
POSITION IN THE UNITS, THE COMMON SHARES OR THE WARRANTS MAINTAINED BY THE
UNDERWRITER AND PENALTY BID TRANSACTIONS. FOR A DESCRIPTION OF THESE ACTIVITIES,
SEE "UNDERWRITING."
2
<PAGE> 4
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form SB-2 under the Securities Act
with respect to the securities offered hereby (the "Registration Statement").
This Prospectus does not contain all the information set forth in the
Registration Statement and the exhibits thereto as permitted by the Rules and
Regulations of the Commission. For further information with respect to the
Company and such securities, reference is made to the Registration Statement and
to the exhibits filed therewith. Statements contained in this Prospectus as to
the contents of any contracts or other documents referred to herein are not
necessarily complete and where such contract or other document is an exhibit to
the Registration Statement, each such statement is qualified in all respects by
the provisions of such exhibit to which reference is made for a full statement
of the provisions thereof. The Registration Statement, including exhibits filed
therewith, may be inspected, without charge, at the principal office of the
Commission located at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549.
Copies of all or any part of the Registration Statement (including the exhibits
thereto) also may be obtained from the Public Reference Section of the
Commission at the its principal office in Washington, D.C., at the Commission's
prescribed rates. Electronic registration statements made through the Electronic
Data Gathering Analysis and Retrieval system are publicly available through the
Commission's web site at http://www.sec.gov.
Before the Effective Date, the Company was not obligated to file periodic
reports with the Commission under Section 15(d) or 13(a) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). The Company intends to
furnish its shareholders and holders of the Warrants with annual reports
containing audited financial statements and such other reports as the Company
deems appropriate or as may be required by law. The Company does not intend to
voluntarily file reports under the Exchange Act if it is not obligated to do so
under applicable laws.
3
<PAGE> 5
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to the more
detailed information, financial statements and related notes appearing elsewhere
in this Prospectus. Each prospective investor is urged to read this Prospectus
in its entirety and carefully consider the information set forth under the
heading "Risk Factors." Unless the context requires otherwise, all references
herein to the Company include Rockwell Medical Technologies, Inc., a Michigan
corporation, and Rockwell Transportation, Inc., a Michigan corporation, a
wholly-owned subsidiary of the Company. Except as otherwise stated, all
information assumes no exercise of the Over-Allotment Option.
THE COMPANY
Rockwell Medical Technologies, Inc. manufactures hemodialysis concentrates
and dialysis kits, and sells, distributes and delivers such concentrates and
dialysis kits, as well as over 120 other hemodialysis products, to hemodialysis
providers in the United States and Venezuela. Hemodialysis is a process which
duplicates kidney function in patients whose kidneys have failed to function
properly. Without properly functioning kidneys, the patient's body cannot rid
itself of excess water and waste products nor regulate the amount of
electrolytes in the patient's blood. Without hemodialysis, these patients would
die.
Hemodialysis patients generally receive their treatment at hospitals or
independent hemodialysis providers. According to the United States Department of
Health and Human Services (the "DHHS"), since 1973 the total number of
hemodialysis providers in the U.S. has more than quintupled from 606 in 1973 to
over 3,082 in December 1996. Independent providers comprised 2,212 of such
providers and hospitals comprised 746 of such providers. The Company currently
supplies over 220 hemodialysis providers in 18 states across the United States,
as well as hemodialysis providers in Venezuela. The number of patients receiving
hemodialysis has also grown substantially in recent years. According to the
DHHS, in 1985, there were approximately 68,390 patients receiving hemodialysis
treatments in the United States. It is estimated by the DHHS that in 1996 over
216,000 patients received hemodialysis treatments. According to the DHHS, from
1985 to 1996, the number of hemodialysis stations, which are areas equipped to
provide adequate and safe dialysis therapy, grew from 17,845 stations to 45,244
stations.
A hemodialysis station contains a dialysis machine that takes a concentrate
solution and certain chemical powders and accurately dilutes them with purified
water. The resulting solution, known as dialysate, is them pumped through a
device known as an artificial kidney (dialyzer), while at the same time, the
patient's blood is pumped through a 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 chemicals in the dialysate pass through the
membrane into the patient's blood to maintain proper chemical levels in the
body. In addition to using concentrate solutions and chemical powders (which
must be replaced for each use by each patient), a dialysis station 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 and over 120 other ancillary products, all of which the Company sells.
The Company's objective is to increase its market share in the expanding
hemodialysis market and become profitable by (i) acting as a single source
supplier to hemodialysis clinics by continuing to offer over 120 different
products used by hemodialysis providers, (ii) increasing revenue by
manufacturing and/or distributing new products which may offer the Company
opportunities to earn higher profit margins than some of the Company's existing
products (based on current selling prices in the marketplace and the Company's
estimated costs to produce such products), and generating additional "back-haul"
revenue from its trucking operations, and (iii) using its own delivery vehicles
and drivers to deliver its products, thereby offering a high level of customer
service to hemodialysis providers.
The Company is a Michigan corporation, incorporated on October 25, 1996. On
February 19, 1997, the Company acquired substantially all of the assets of
Rockwell Medical Supplies, LLC (the "Supply Company") and of Rockwell
Transportation, LLC (the "Transportation Company") (collectively, the
"Predecessor Company" or "Sellers") used in connection with the business of
manufacturing hemodialysis
4
<PAGE> 6
concentrates and dialysis kits and distributing and delivering these and other
products to hemodialysis clinics. The Predecessor Company began operations in
January 1996.
In connection with the acquisition of the business of the Predecessor
Company, the Company has issued 1,416,664 shares of non-voting Series A
Preferred Stock, $1.00 par value per share (the "Series A Preferred Stock"), to
the Supply Company, which Series A Preferred Stock pays an 8.5% cumulative
dividend. The Company has an obligation to redeem the Series A Preferred Stock
on or before January 31, 1998 (the "Mandatory Redemption Date"). See "Certain
Transactions -- Acquisition of Business of Predecessor Company" and Note 9 of
Notes to Consolidated Financial Statements included in this Prospectus. The
Company intends to use a portion of the net proceeds of the Offering to redeem
the Series A Preferred Stock. See "Use of Proceeds."
The executive offices of the Company are located at 28025 Oakland Oaks,
Wixom, Michigan 48393 (telephone number (248) 449-3353).
THE OFFERING
Securities Offered......... 1,500,000 Units each consisting of one Common Share
and two redeemable Warrants. Each Warrant entitles
the holder thereof to purchase one Common Share at
an exercise price of $4.50, subject to adjustment
in certain events. The Warrants are separately
tradeable and transferable upon issuance. See
"Description of Securities" and "Underwriting."
Offering Price............. $4.20 per Unit.
Terms of Warrants:
Exercise price........... $4.50 per share, subject to adjustment in certain
events. See "Description of Securities --
Warrants."
Exercise period.......... Any time during the period commencing one year
after the Effective Date and ending on the fourth
anniversary of the Effective Date.
Redemption............... Redeemable by the Company, with the prior written
consent of the Underwriter, at a price of $.10 per
Warrant upon not less than 30 days prior written
notice to the holders of the Warrants at any time
commencing one year after the Effective Date,
provided the closing bid price of the Common Shares
had been greater than $8.50 for 20 consecutive
trading days ending on the third 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 -- Warrants."
Common Shares Outstanding:
Prior to the Offering.... 3,015,000 Common Shares. (1)
After the Offering....... 4,609,286 Common Shares. (1)(2)
Use of Proceeds............ The net proceeds of the Offering will be used (i)
to redeem 1,416,664 shares of Series A Preferred
Stock for a total redemption price of approximately
$1,453,458 (assuming the redemption occurs on
September 19, 1997), (ii) to purchase equipment,
(iii) to pay approximately $200,000 of accounts
payable and accrued expenses, and (iv) for working
capital, including the financing of marketing and
sales activities. See "Use of Proceeds."
5
<PAGE> 7
Risk Factors............... Investment in the Securities offered hereby
involves a high degree of risk and immediate
substantial dilution to public investors. See "Risk
Factors" and "Dilution."
Proposed Nasdaq SmallCap
Market Symbols:.......... Units -- RMTIU; Common Shares -- RMTI; Warrants --
RMTIW.
- ------------------
(1) Does not include (i) 520,000 Common Shares reserved for issuance upon
exercise of outstanding warrants (the "Bridge Warrants"), at an exercise
price of $4.50 per share, which Bridge Warrants are exercisable at any time
commencing one year from the Effective Date and ending on the fourth
anniversary of the Effective Date and will be automatically converted into
warrants having terms identical to the Warrants offered hereby on the
Effective Date, (ii) 450,000 Common Shares reserved for issuance under the
Company's 1997 Stock Option Plan, under which options to acquire an
aggregate of 295,000 Common Shares have been granted, and (iii) 94,286
Common Shares (the "Additional Shares") to be issued to investors in the
First Prior Financing (as defined below). See "Management -- Compensation --
-- Compensation of Directors" and "Description of Securities -- Prior
Financings."
(2) Includes the 94,286 Additional Shares. See "Description of Securities --
Prior Financings." Does not include (i) 3,000,000 Common Shares reserved for
issuance upon exercise of the Warrants, and (ii) 450,000 Common Shares
reserved for issuance upon exercise of the Underwriter Warrants and upon
exercise of the 300,000 underlying Warrants. See "Description of Securities"
and "Underwriting."
6
<PAGE> 8
SUMMARY COMBINED/CONSOLIDATED FINANCIAL INFORMATION
(IN WHOLE DOLLARS)
COMBINED/CONSOLIDATED STATEMENT OF INCOME (LOSS) DATA:
<TABLE>
<CAPTION>
PREDECESSOR COMPANY(1) COMPANY
------------------------------ ------------
FOR THE FROM JANUARY 1 FROM
YEAR ENDED TO INCEPTION TO
DECEMBER 31, FEBRUARY 19, MAY 31,
1996(2) 1997 1997(3)
------------ -------------- ------------
<S> <C> <C> <C>
Total Sales............................................ $ 1,019,856 $ 343,555 $ 795,271
Cost of Sales.......................................... 1,617,363 529,121 1,103,088
----------- --------- ----------
Gross Margin (Deficit)................................. (597,507) (185,566) (307,817)
Selling, General and Administrative.................... 773,344 177,015 421,060
----------- --------- ----------
Operating Loss......................................... (1,370,851) (362,581) (728,877)
Interest Expense, Net.................................. 12,634 3,438 43,512
----------- --------- ----------
Net Loss............................................... $(1,383,485) $(366,019) $ (772,389)
=========== ========= ==========
Net Loss Per Common Share (4).......................... $ (0.30)
Weighted Average Number of Common Shares Outstanding... 2,617,553
</TABLE>
COMBINED/CONSOLIDATED BALANCE SHEET DATA:
<TABLE>
<CAPTION>
COMPANY
PREDECESSOR COMPANY(1) ----------------------------
---------------------------- MAY 31, 1997
DECEMBER 31, FEBRUARY 19, ----------------------------
1996 1997 ACTUAL AS ADJUSTED(5)
------------ ------------ ---------- --------------
<S> <C> <C> <C> <C>
Cash...................................... $ 65,978 $ 44,270 $ 0 $1,903,539
Working Capital (Deficit)(6).............. (2,120,969) (2,429,316) 43,164 2,146,703
Total Assets.............................. 1,391,659 1,197,974 3,467,257 7,170,796
Series A Preferred Stock.................. -- -- 1,416,664 --
Accumulated Deficit....................... (1,442,412) (1,808,431) (772,389) (772,389)
Total Shareholders' Equity (Deficiency)... (1,392,412) (1,758,431) 1,333,961 6,654,164
</TABLE>
- ------------------
(1) The financial statements of the Predecessor Company are presented on a
combined basis as they are entities under common control.
(2) The Predecessor Company was formed in 1995. The Predecessor Company engaged
in limited activity in 1995, consisting primarily of the purchase of certain
equipment, the payment of a facility lease deposit, and the payment of
$58,927 for certain start-up expenses.
(3) The Company was incorporated on October 25, 1996 (the date of inception) and
engaged in organizational matters until the acquisition of the Predecessor
Company which was consummated at the close of business on February 19, 1997.
(4) See Note 2 of Notes to Consolidated Financial Statements included in this
Prospectus for information with respect to the calculation of per share
data.
(5) Adjusted to reflect the sale of 168,333 Common Shares from the Second Prior
Financing (as defined below) issued subsequent to May 31, 1997 and the sale
of 1,500,000 Units offered hereby at the assumed public offering price of
$4.20 per Unit and the receipt and application of the estimated net proceeds
from such sale, including the redemption of the Series A Preferred Stock,
including accrued dividends. See "Use of Proceeds" and "Capitalization."
(6) Working Capital (Deficit) for Predecessor Company includes the Obligation
Payable to Members of $1,868,149 at December 31, 1996 and at February 19,
1997.
7
<PAGE> 9
RISK FACTORS
The securities offered hereby are highly speculative in nature, involve a
high degree of risk and should be purchased only by persons who can afford to
lose their entire investment. Each prospective investor should carefully
consider the following risk factors, as well as all other information set forth
in this Prospectus, before making an investment decision.
1. CONTINUING LOSSES; ACCUMULATED DEFICIT; NEGATIVE GROSS MARGINS. Since
inception, the Company (including the business engaged in by the Predecessor
Company) has experienced losses and negative gross margins. Since inception
through July 31, 1997, the Company has incurred a net loss and an accumulated
deficit of $1,186,491 (on sales of $1,487,088) for such period. On a cumulative
basis, the businesses of the Company and the Predecessor Company have incurred a
net loss and an accumulated deficit of $2,994,921 (on sales of $2,850,499)
through July 31, 1997. In addition, the Company experienced a gross margin
deficit of $386,230 for the period from inception to July 31, 1997. The gross
margin deficit is primarily attributable to excess transportation costs that the
Company has incurred as a result of its trucking operations and to overhead
costs associated with the Company's manufacturing operations. There can be no
assurance that the Company will ever operate profitably. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -- Plan
of Operation" and Note 3 of the Notes to Consolidated Financial Statements
appearing elsewhere herein.
2. LOSSES ASSOCIATED WITH THE COMPANY'S TRANSPORTATION BUSINESS. As a
result of operating its own fleet of trucks to deliver its products, the
Company's costs of delivery have been significantly in excess of the costs that
the Company would have incurred had it used common carriers to deliver its
products. While the Company has implemented plans to improve its operating
efficiencies and to seek additional revenue from its trucking operations by
contracting for its trucks to act as common carriers during their return to the
Company's manufacturing facility after delivery of the Company's products, no
assurance can be given that the Company will be successful in improving such
operations or obtaining sufficient revenue to offset the additional costs of the
Company's transportation business. If the Company were unsuccessful in improving
such operations or obtaining sufficient additional transportation-related
revenue to offset such additional costs, the Company may be forced to abandon
its strategy of using its own trucks to deliver its products. In such event, the
Company is unable to predict what effect, if any, such change in strategy would
have on the Company's customers and the ability of the Company to successfully
market its products. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business -- Trucking Operations."
3. "GOING CONCERN UNCERTAINTY." Due to the Company's history of losses,
negative gross margins and its current financial condition, the Company's
independent auditors' report expresses an uncertainty concerning the Company's
ability to continue as a going concern. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Report of
Independent Accountants" on the Company's Consolidated Financial Statements
appearing at page F-2 hereof.
4. LIMITED OPERATING HISTORY. The Company commenced operations in February
1997 when it consummated the purchase of the assets of the Predecessor Company.
The Predecessor Company commenced operations in January 1996. Accordingly, the
Company has a limited operating history upon which an evaluation of its business
and prospects can be based. An investment in the securities of the Company is
subject to all of the risks involved in a newly established business venture.
Potential investors should evaluate the Company in light of the problems,
delays, expenses and difficulties frequently encountered by companies at this
early stage of operations, many of which may be beyond the Company's control,
including, but not limited to, those relating to marketing, competition, and
unanticipated problems and additional costs relating to the Company's
operations.
5. SUBSTANTIAL PORTION OF PROCEEDS USED TO REDEEM SERIES A PREFERRED STOCK
AND TO PAY CURRENT LIABILITIES. $1,453,458 (29.2%) of the net proceeds of the
Offering will be used to redeem the Company's Series A Preferred Stock, assuming
it is redeemed on September 19, 1997. At July 31, 1997, the Company's accounts
receivable were approximately $397,000 and its accounts payable and accrued
liabilities were approximately $867,000. Approximately $470,000 (9.5%) of the
net proceeds of the Offering are budgeted to pay accounts payable and accrued
liabilities incurred in the Company's operations and not related to this
8
<PAGE> 10
Offering. Accordingly, fewer proceeds will be available to the Company for
future operations and marketing activities or for working capital. See "Use of
Proceeds."
6. COMPETITION. The Company is involved in a field characterized by intense
competition in which the Company will be selling products that are the same as
those readily available from more established companies which have substantially
greater financial, technical, manufacturing, marketing, research and development
and management resources than those of the Company. There can be no assurance
that the Company will be able to compete successfully in the future. See
"Business -- Competition."
7. POSSIBLE DELISTING. The Company has applied to list the Units, the
Common Shares and the Warrants on the Nasdaq Stock Market's SmallCap Market. The
Nasdaq Stock Market adopted amendments to its rules which have increased the
eligibility and maintenance criteria for The Nasdaq SmallCap Market. Under the
amended rules, in order to qualify for initial listing in The Nasdaq SmallCap
Market, a company must, among other things, have (i) at least one year of
operating history (or have at least $50 million in market capitalization), (ii)
net tangible assets (i.e., total assets less total liabilities and goodwill) of
at least $4 million (or net income in two of the most recent three fiscal years
of at least $750,000, or a market capitalization of $50 million), (iii) a market
value of public float (shares held by non-affiliates of the Company) of at least
$5 million, (iv) a minimum bid price of $4.00, and (v) at least 300
shareholders. Under Nasdaq's amended rules, the Company is also required to have
at least three securities dealers acting as market makers for the listed
securities. Currently, the Company has commitments from three securities dealers
to act as market makers for the Units, the Common Shares and the Warrants. It is
possible that the Company will be unable to satisfy the revised listing
criteria. If the Company does not satisfy the revised listing criteria, Nasdaq
will probably not allow the inclusion of the Company's securities for listing on
the Nasdaq SmallCap Market.
Even if the Company's securities meet the requirements for initial
inclusion in The Nasdaq SmallCap Market, there can be no assurance that they
will meet the maintenance criteria for continued listing. Existing maintenance
criteria require, among other things, that an issuer have total assets of $2
million and total equity of $1 million and that the listed security has a
minimum bid price of $1.00 (or at least $2 million in capital surplus and a
market value of public float of at least $1 million). The proposed amendment
would require, among other things, that an issuer have net tangible assets of $2
million (or alternatively net income of $500,000 in two of the most recent three
fiscal years, or a market capitalization of $35 million) and that the listed
security has a minimum bid price of $1.00. If the Company is unable to satisfy
The Nasdaq SmallCap maintenance criteria in the future, the Units, the Common
Shares and Warrants may be delisted from trading on The Nasdaq SmallCap Market.
If the Company's securities are delisted from the Nasdaq SmallCap Market,
trading, if any, would thereafter 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. ("NASD"), and, consequently, an investor
could find it more difficult to dispose of, or to obtain accurate quotations as
to the price of, the Company's securities. In addition, if the Company's
securities are delisted from The Nasdaq SmallCap Market, they would be subject
to Rules 15g-1 to 9 and Schedule 15G under the Exchange Act regarding "penny
stock" transactions that impose additional sales practice requirements on
broker-dealers who sell such securities to persons other than established
customers and accredited investors (generally institutions and persons with net
worth in excess of $1,000,000 or annual income exceeding $200,000, or $300,000
together with their spouse). For transactions covered by this rule, the
broker-dealer must make disclosures to the purchaser, make a special suitability
determination for the purchaser and have received the purchaser's written
consent to the transaction prior to purchase. Consequently, the rule may
restrict the ability of broker-dealers to sell the Company's securities and may
affect the ability of holders of the Company's securities, including purchasers
in this Offering, to sell such securities in the secondary market. Delisting
from The Nasdaq SmallCap Market may also cause a decline in share price, loss of
news coverage of the Company and difficulty in obtaining subsequent financing.
8. BROAD DISCRETION IN THE APPLICATION OF NET PROCEEDS. Approximately
$946,000, or approximately 19.0%, of the net proceeds of the Offering have been
allocated to working capital and general corporate
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purposes. Accordingly, management will have broad discretion with respect to
that portion of the net proceeds. See "Use of Proceeds."
9. GOVERNMENT REGULATION. The testing, manufacture and sale of medical
products, such as the hemodialysis concentrates manufactured by the Company, as
well as the ancillary products for hemodialysis distributed by the Company, are
subject to extensive regulation by the Food and Drug Administration ("FDA")
pursuant to the Federal Food Drug and Cosmetic Act ("FDC Act"), and by other
federal, state and foreign authorities. Pursuant to the FDC Act, and the
regulations promulgated thereunder, the FDA regulates the preclinical and
clinical testing, manufacture, labeling, distribution and promotion of medical
devices. Under the FDC Act, medical devices must receive either 510(k) clearance
or PMA approval before they may be commercially marketed in the United States.
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 premarket
clearance or premarket approval for devices, withdrawal of marketing clearances
or approvals and criminal prosecution, any of which actions could have an
adverse effect on the Company's business, financial condition or results of
operations.
The Company's hemodialysis concentrates have FDA clearance. There can be no
assurance, however, that current FDA clearances for the Company's concentrates
will not be rescinded or that, if and when any additional products are developed
by the Company or the Company modifies its existing concentrates, they will
receive FDA clearance. If any current or future clearances or approvals are
rescinded or denied, sales of the affected products in the United States would
be prohibited during the period the products do not have such clearances. There
can be no assurance that the Company will be able to obtain necessary regulatory
approvals or clearances on a timely basis or at all, and delays in receipt of or
failure to receive such approvals or clearances, the loss of previously received
approvals or clearances, limitations on intended use imposed as a condition of
such approvals or clearances, any limitations on the Company's market required
by any clearances, any resulting delays in market introduction or failure to
comply with existing or future regulatory requirements would have an adverse
effect on the Company's business, financial condition and results of operations.
In addition, new FDA-related legislation or new FDA regulations could impose
additional regulatory requirements including, but not limited to, imposing
significant fees for seeking market clearance or approval for medical devices.
See "Business -- Government Regulation."
The Company's products are subject to strict federal regulations regarding
the quality of manufacturing known as Good Manufacturing Practices ("GMP"). The
FDA conducts periodic inspections and surveillance of the manufacturing and the
packaging facilities of medical device manufacturers to determine compliance
with GMP. No assurance can be given that, when the Company is inspected, it will
be found to be in compliance with GMP. In addition, the Medical Device Reporting
("MDR") regulation obligates the Company to report to the FDA any incident in
which its product may have caused or contributed to a death or serious injury,
or in which its product malfunctioned and, if the malfunction were to recur, it
would be likely to cause or contribute to a death or serious injury. Changes in
existing requirements or adoption of new requirements could have an adverse
effect on the Company's business, financial condition and results of operations.
There can be no assurance that the Company will not incur significant costs to
comply with laws and regulations in the future or that laws and regulations will
not have an adverse effect upon the Company's business, financial condition and
results of operation. If, as a result of FDA inspections, MDR reports or other
information, the FDA believes that the Company is not in compliance with
applicable laws and regulations, the FDA can institute proceedings or recall,
detain or seize products, totally or partially suspend production, enjoin future
violations, or assess civil and/or criminal fines and penalties against the
Company, its officers or employees. Any action by the FDA could result in
disruption of the Company's operations for an indeterminate period of time and
have a material adverse affect on the Company's business, financial condition
and results of operations. See "Business -- Government Regulation."
10. ADVERSE EFFECT OF REDEMPTION OF WARRANTS. The Warrants are subject to
redemption by the Company on 30 days prior written notice under certain
conditions. If the Warrants are so redeemed, Warrant holders will lose the right
to exercise the Warrants so redeemed, except during such 30-day notice period.
Redemption of the Warrants could force the holders to exercise the Warrants and
pay the exercise price at a time when it may be disadvantageous for the holders
to do so, to sell the Warrants at the current market price for the Warrants
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<PAGE> 12
when they might otherwise wish to hold the Warrants, or to accept the redemption
price, which is likely to be substantially less than the market value of the
Warrants at the time of redemption. See "Description of Securities -- Warrants."
11. NON-REGISTRATION IN CERTAIN JURISDICTIONS OF COMMON SHARES UNDERLYING
THE WARRANTS; EXERCISE OF WARRANTS. The Warrants, which are part of the Units
offered hereby, will be detachable immediately from the Units and separately
tradeable. The Company has applied to register or otherwise qualify for sale the
Units, the Common Shares and the Warrants in the following states (although no
assurance can be given that the Company will be successful in registering or
otherwise qualifying its securities in such states): Alabama, Arizona,
California, Colorado, Connecticut, Delaware, Florida, Georgia, Illinois, Kansas,
Louisiana, Maryland, Nevada, New Hampshire, New Jersey, New York, Pennsylvania,
Rhode Island, Utah, Virginia, Wisconsin and the District of Columbia. Although
the Units will not knowingly be sold to purchasers in jurisdictions in which the
Units are not registered or otherwise qualified for sale, purchasers may buy
Units or Warrants in the after-market or may move to jurisdictions in which the
shares underlying the Warrants are not so registered or qualified during the
period that the Warrants are exercisable. In this event, the Company would be
unable to issue Common Shares to those persons desiring to exercise their
Warrants unless and until such shares could be qualified for sale in
jurisdictions in which such purchasers reside, or an exemption to such
qualification exists in such jurisdiction.
In addition, investors purchasing Units in this Offering will not be able
to exercise the Warrants unless at the time of exercise this registration
statement is current and the Common Shares issuable upon exercise of such
Warrants have been qualified or deemed to be exempt under the securities laws of
the state of residence of the holder of such Warrants. The Company intends to
maintain a current prospectus and to use reasonable efforts to cause the
Company's Common Shares to be registered in all required jurisdictions. There
can be no assurance that such shares can be qualified on or before the exercise
date or that the Company will maintain a current prospectus relating thereto
until the expiration of the Warrants.
12. DEPENDENCE ON KEY PERSONNEL. The success of the Company is materially
dependent upon the efforts of Robert L. Chioini, the Company's President and
Chief Executive Officer. The Company and Mr. Chioini have entered into a
three-year employment agreement expiring in February 2000, and the Company
maintains a key-man life insurance policy on the life of Mr. Chioini in the
amount of $1,000,000. If the Company were to lose the services of Mr. Chioini,
such event could materially and adversely affect the Company's business,
financial condition and results of operations. See "Management -- Employment
Agreement."
13. POSSIBLE INSUFFICIENCY OF INSURANCE. As a supplier of medical products,
the Company may face potential liability from a person who claims that he or she
suffered physical harm as a result of the use of the Company's products. If
litigation is initiated because of such harm, the Company may be sued, and
regardless of whether it is ultimately determined to be liable, the Company may
incur significant legal expenses not covered by insurance. In addition, product
liability litigation could damage the Company's reputation and therefore impair
its marketing ability. Such litigation could also impair the Company's ability
to retain products liability insurance or make such insurance more expensive.
The Company maintains products liability insurance in the amount of $5 million
per occurrence and $6 million in the aggregate. The Company believes that its
current insurance will be sufficient to cover any potential liabilities to the
Company arising from its business and operations. There is, however, no
assurance that the Company can retain such insurance or that such insurance
would be sufficient to protect the Company against liabilities associated with
its business. In the event of an uninsured or inadequately insured product
liability claim in the future, the Company's business financial condition and
results of operations could be adversely affected.
14. ABSENCE OF PUBLIC MARKET; ARBITRARY DETERMINATION OF OFFERING
PRICE. Prior to this Offering, there has been no public market for the Company's
Units, Common Shares or Warrants and there can be no assurance that a regular
trading market will develop for any or all of these securities upon completion
of this Offering. The public offering price for the Units and the exercise price
of the Warrants have been determined by negotiation between the Company and the
Underwriter and are not necessarily related to the Company's asset value, net
worth or other established criteria of value. See "Underwriting."
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<PAGE> 13
15. SUBSTANTIAL DILUTION; PURCHASE OF COMMON SHARES BY INSIDERS AT BELOW
OFFERING PRICE. A purchaser in this Offering will experience immediate and
substantial dilution of $3.17 per share (approximately 75%) in that the offering
price exceeds the net tangible book value of the Company after giving effect to
the Offering. The Common Shares held by the Company's Principal Shareholders
were purchased for prices significantly lower than the public offering price.
Accordingly, investors in the Offering will bear a disproportionate share of the
risk of an investment in the Company. See "Dilution."
16. VOTING CONTROL; POTENTIAL ANTI-TAKEOVER EFFECT. Upon the completion of
this Offering, the officers and directors of the Company will beneficially own
approximately 43.4% of the Company's voting shares (43.9% 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 elect all of the directors of the Company and 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, no par value per share (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. The Company has agreed with the
Underwriter that, except for issuances disclosed in or contemplated by this
Prospectus, it will not issue any securities, including but not limited to any
shares of Preferred Stock, for a period of 24 months following the Effective
Date, without the prior written consent of the Underwriter. 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 "Principal Stockholders" 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."
17. SHARES ELIGIBLE FOR FUTURE SALE. The Company is unable to predict the
effect, if any, that future sales of Common Shares, or the availability of
Common Shares for future sales, will have on the market price of the Common
Shares from time to time. Sales of substantial amounts of 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 the Units,
Common Shares or 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 4,609,286 Common Shares outstanding
(assuming no exercise of the Underwriter Over-Allotment Option, the Warrants,
the Bridge Warrants, the Underwriter Warrants and other outstanding options and
warrants). Of these shares, the 1,500,000 Common Shares sold in this Offering
will be freely tradeable 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. The remaining 3,109,286 Common
Shares outstanding are, and the shares issuable upon exercise of the Bridge
Warrants will be "restricted securities" (as that term is defined in Rule 144
promulgated under the Securities Act) which may be publicly sold only if
registered under the
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<PAGE> 14
Securities Act or if sold in accordance with an applicable exemption from
registration, such as Rule 144. Officers, directors and other security holders
of the Company owning and/or having rights to acquire in the aggregate
Common Shares have entered into agreements (the "Lock-Up Agreements")
with the Underwriter not to sell or otherwise dispose of any securities of the
Company, including Common Shares, for a period of 13 months following the
Effective Date, without the prior written consent of the Underwriter, which may
be granted or withheld in the sole and absolute discretion of the Underwriter,
subject to an exemption for certain tender offers. Following expiration of the
term of the Lock-Up Agreements, 3,109,286 shares will become eligible for resale
pursuant to Rule 144, subject to the volume limitations and compliance with the
other provisions of Rule 144. Furthermore, the holders of the Underwriter
Warrants (including the securities issuable upon exercise thereof) have demand
and piggyback registration rights with respect to the Common Shares issuable
upon exercise of the Underwriter Warrants and the underlying Warrants, which
Common Shares have been registered by the Company on the Registration Statement
on Form SB-2 of which this Prospectus is a part. The Company also intends to
register the Common Shares issuable upon the exercise of options available under
the Company's 1997 Stock Option Plan; which shares will become, upon
registration, freely tradeable subject to the Lock-Up Agreements. In addition,
the investors in the First Prior Financing and the investors in the Second Prior
Financing have piggy-back registration rights with respect to their Common
Shares, Bridge Warrants and the underlying Common Shares. These rights have been
waived in connection with this Offering, but any future exercise of these rights
could involve substantial expense to the Company and may adversely affect the
terms upon which the Company may obtain additional financing. Any substantial
sale of restricted securities pursuant to Rule 144 or a registration statement
may have an adverse effect on the market price of the Units, Common Shares or
Warrants. See "Description of Securities -- Registration Rights," "Description
of Securities -- Warrants," "Description of Securities -- Prior Financings" and
"Underwriting".
18. OUTSTANDING WARRANTS AND OPTIONS. In addition to the 3,000,000 Warrants
to be issued in connection with this Offering (3,450,000 Warrants if the
Over-Allotment Option is exercised in full), upon completion of this Offering
the Company will sell the Underwriter the Underwriter Warrants to purchase
150,000 Units. Furthermore, the Company has outstanding Bridge Warrants to
purchase an aggregate of 520,000 Common Shares. The Company has also reserved an
additional 450,000 Common Shares for issuance upon exercise of options under the
Company's 1997 Stock Option Plan, of which options covering an aggregate of
295,000 Common Shares have already been granted. The exercise of warrants or
options and the sale of the underlying Common Shares (or even the potential of
such exercise or sale) may have a depressive effect on the market price of the
Common Shares and the Warrants. Holders of such warrants and options are likely
to exercise them when, in all likelihood, the Company could obtain additional
capital on terms more favorable than those provided by the options and warrants.
Further, while its warrants and options are outstanding, the Company's ability
to obtain additional financing on favorable terms may be adversely affected. In
addition, exercise of such options would substantially dilute a prospective
investor's investment in the Company. See "Underwriting" and "Description of
Securities."
19. EFFECT OF ISSUANCE OF COMMON SHARES. Immediately after the Offering,
assuming the Over-Allotment Option is not exercised, the Company will have an
aggregate of approximately 10,970,714 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 public
shareholders. The Company has agreed with the Underwriter that, except for the
issuances disclosed in or contemplated by this Prospectus (including issuance of
the currently reserved shares), it will not issue any securities, including but
not limited to any Common Shares, for a period of 24 months following the
Effective Date, without the prior written consent of the Underwriter. See
"Underwriting."
20. ABILITY TO MANAGE GROWTH. If the Company were to experience significant
growth in the future, such growth would likely result in new and increased
responsibilities for management personnel and place significant strain upon the
Company's management, operating and financial systems and resources. To
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<PAGE> 15
accommodate such growth and compete effectively, the Company must continue to
implement and improve its operational, financial, management and information
systems, procedures and controls, and to expand, train and manage its personnel.
There can be no assurance that the Company's personnel, systems, procedures and
controls will be adequate to support the Company's future operations. Any
failure to implement and improve the Company's operational, financial,
management and information systems, procedures or controls or to expand, train
or manage employees or to manage effectively any actual or expected future
growth, could materially and adversely affect the Company's business, financial
condition and results of operations. See "Risk Factors -- Dependence on Key
Personnel," "Business -- Employees" and "Management -- Directors, Executive
Officers and Key Employees."
21. ABSENCE OF DIVIDENDS ON COMMON SHARES. 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."
22. LIMITED UNDERWRITING EXPERIENCE OF UNDERWRITER. The Underwriter has
served as the sole or managing underwriter of only four firm commitment public
offerings and participated in two other underwritten public offerings as a
member of the underwriting syndicate. Since the Underwriter's experience in
underwriting firm commitment public offerings is limited, there can be no
assurance that its lack of experience may not adversely affect the public
offering of the Company's securities and the subsequent development, if any, of
a trading market for the Company's securities. See "Risk Factors --
Underwriter's Influence on the Market; Possible Limitations on Market Making
Activities."
23. INFORMAL INVESTIGATION OF UNDERWRITER. The Company has been advised
that the Underwriter is subject to an informal investigation commenced in March
1996 by the Commission. To date, the Commission has only requested certain
documents from the Underwriter, and the Underwriter has not been advised of the
status of the investigation. There can be no assurance that a formal order of
investigation will not be issued, or if issued, that sanctions will not be
imposed against the Underwriter. In October 1996, the National Association of
Securities Dealers, Inc. (the "NASD") commenced an examination of certain of the
Underwriter's previous underwritings and has requested documents and information
in connection with those underwritings. The NASD examination is ongoing and no
findings have been made to date. There can be no assurance that such
investigation or examination may not affect the Underwriters' ability to
maintain a market in the Units, Common Shares and Warrants.
24. UNDERWRITER'S INFLUENCE ON THE MARKET; POSSIBLE LIMITATIONS ON MARKET
MAKING ACTIVITIES. A significant number of Units, Common Shares and Warrants may
be sold to customers of the Underwriter. Such customers subsequently may engage
in transactions for the sale or purchase of such securities through or with the
Underwriter or based on the recommendations of the Underwriter. The Company has
applied to list the Units, the Common Shares and the Warrants on the Nasdaq
SmallCap Market. The Underwriter has indicated that it intends to act as a
market-maker and otherwise effect transactions in the Units, Common Shares and
Warrants. To the extent the Underwriter acts as a market-maker in the Units,
Common Shares and Warrants, it may exert a dominating influence in the markets
for those securities. The prices and liquidity of the Units, Common Shares and
Warrants may be significantly affected to the extent, if any, that the
Underwriter participates in such markets. The Underwriter may discontinue such
activities at any time or from time to time. The Underwriter also has the right
to act as the Company's exclusive agent in connection with any future
solicitation of holders of Warrants to exercise their Warrants. Applicable rules
of the Commission prohibit the Underwriter and any other soliciting
broker-dealers from engaging in any market making activities or solicited
brokerage activities with regard to the Units, Common Shares and Warrants for a
period of up to five business days prior to the solicitation of the exercise of
any Warrants until the later of the termination of such solicitation activity or
the termination of any right the Underwriter may have to receive a fee for the
solicitation of the Warrants. As a result, the Underwriter and such soliciting
broker-dealers may be unable to continue to make a market for the Units, Common
Shares and the Warrants during certain periods
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while the Warrants are exercisable. Such a limitation, while in effect, could
impair the liquidity and market price of the Units, Common Shares and the
Warrants. See "Underwriting."
25. UNDERWRITER'S POTENTIAL INFLUENCE ON THE COMPANY. The Company has
agreed that for a period of no less than three years from the Effective Date,
the Company will engage a designee, acceptable to the Underwriter and the
Company, to serve as an advisor ("Advisor") to the Company's Board of Directors.
Such Advisor shall be entitled to attend all meetings of the Board of Directors,
to receive all notices and other correspondence and communications sent by the
Company to the Board of Directors, and to receive compensation equal to the
compensation paid to non-employee directors of the Company. The Company has also
agreed that, in lieu of the Underwriter's right to designate an Advisor, the
Underwriter has the right to designate one person for election as a director of
the Company and the Company has agreed to use its best efforts to obtain the
election of such designee to the Board of Directors. The engagement of such
Advisor and/or the election of such designee, if any, to the Company's Board of
Directors, may enable the Underwriter to exert influence on the Company. See
"Underwriting."
26. POSSIBLE VOLATILITY OF STOCK PRICE. 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. In particular, 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.
In connection with this Offering, the Underwriter and selling group members
and their respective affiliates may engage in stabilizing, syndicate short
covering transactions, or other transactions during the offering that may
stabilize, maintain or otherwise affect the market price of the Units, Common
Shares and Warrants. Stabilization transactions, effected in accordance with
Rule 104 of Regulation M, are bids for or purchases of Units, Common Shares or
Warrants for the purpose of preventing or retarding a decline in the market
price of the Units, Common Shares or Warrants or all of them to facilitate the
Offering. The Underwriter also may create a short position for its account by
selling more Units in connection with the Offering than it is committed to
purchase from the Company, and in such case may purchase Units, Common Shares or
Warrants in the open market to cover all or a portion of such short position.
The Underwriter may also cover all or a portion of such short position by
exercising the Over-Allotment Option. Any of the transactions described in this
paragraph may result in the maintenance of the price of the Units, Common Shares
and Warrants at a level above that which might otherwise prevail in the open
market. None of the transactions described in this paragraph is required, and,
if they are undertaken they may be discontinued at any time. The Underwriter and
selling group members may engage in such transactions from the effective date of
the Registration Statement of which this Prospectus is a part to the closing
date of the Offering. The Underwriter does not intend to provide notice to
shareholders of the discontinuation of such transactions.
27. LIMITED MARKETING CAPABILITY; DEPENDENCE ON SALES REPRESENTATIVES AND
DISTRIBUTORS. The Company intends to market its products through its own
employees and to retain independent sales representatives and distributors. The
Company has only limited experience in the development and marketing of medical
products, and its direct sales force consists of only one person. The Company is
substantially dependent on its independent sales representatives and
distributors to generate sales. Failure of independent sales representatives and
distributors to market, promote and sell the Company's products would have an
adverse affect on the Company's business, financial condition and results of
operations.
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USE OF PROCEEDS
The net proceeds to the Company from the sale of the 1,500,000 Units
offered by this Prospectus (after deducting underwriting commissions and
discounts and estimated offering expenses) are estimated to be approximately
$4,970,000 ($5,820,500 if the Over-allotment Option is exercised in full) at the
assumed public offering price of $4.20 per Unit. The Company expects to use the
net proceeds of the Offering as follows:
<TABLE>
<CAPTION>
APPROXIMATE APPROXIMATE
DOLLAR AMOUNT PERCENTAGE
------------- -----------
<S> <C> <C>
Purchase of Equipment(1).................................. $1,800,000 36.2 %
Redemption of Series A Preferred Stock(2)................. $1,453,458 29.2 %
Payment of Accounts Payable and Accrued Expenses.......... $ 470,000 9.5 %
Repayment of Indebtedness(3).............................. $ 300,000 6.0 %
Working Capital(4)........................................ $ 946,542 19.0 %
---------- -------
$4,970,000 100 %
========== =======
</TABLE>
- ------------------
(1) Consists primarily of additional production equipment and supplies necessary
to increase the Company's production capacity and to produce and package
liquid bicarbonate, a product which the Company has recently obtained
clearance from the FDA to manufacture and distribute. Also includes the
purchase and/or lease of additional tractor-trailers to expand the Company's
transportation capabilities to accommodate the Company's expected sales
growth. The Company has no commitments to date for the purchase of any such
equipment.
(2) The Series A Preferred Stock was issued in partial payment of the deferred
purchase price for the Predecessor Company. See "Certain Transactions --
Acquisition of Business of Predecessor Company." Holders of Series A
Preferred Stock are entitled to receive, out of funds legally available for
the payment of dividends, cumulative cash dividends in the amount of $0.085
per share per year (prorated for partial years) accruing from June 1, 1997.
The redemption price for the Series A Preferred Stock equals $1.00 per share
plus accumulated and unpaid dividends on the redemption date. Upon
completion of the Offering, the Company expects that it will redeem the
Series A Preferred Stock on September 19, 1997. See "Description of
Securities -- Series A Preferred Stock."
(3) The Company is currently negotiating with a lender to obtain a $300,000 line
of credit. The line of credit will be used to repay a $100,000 loan made to
the Company by Karen Bagley and to fund the Company's working capital needs
during the period prior to completion of the Offering. The Company expects
that the line of credit will bear interest at the prime rate of interest
plus 3%, and that the line of credit will be secured by substantially all of
the Company's assets. The Company expects that it will pay aggregate
origination and closing fees of approximately $20,000 in connection with the
obtaining of such line of credit. Upon completion of this Offering, the
Company will use a portion of the net proceeds of the Offering to repay the
expected outstanding balance owing on the line of credit plus accrued
interest. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Overview."
(4) Includes working capital and other ongoing selling, general and
administrative expenses. See the Consolidated Financial Statements as of,
and for the period ended May 31, 1997, included elsewhere in this
Prospectus, for information about the Company's current working capital
needs (including accounts payable and accrued expenses) and ongoing selling,
general and administrative expenses.
The foregoing represents the Company's best estimate of its allocation of
the net proceeds of the Offering based upon the current state of its business
development and management estimates of current industry conditions. The net
proceeds may be reallocated among the categories set forth above or otherwise in
response to, among other things, changes in the Company's 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 the Company's contemplated operations or business plans and
changes in economic and industry conditions. Any such shifts will be at the
discretion of the Board of Directors and officers of the Company.
Pending such uses, the net proceeds of the 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.
16
<PAGE> 18
CAPITALIZATION
The following table sets forth the capitalization of the Company (i) as of
May 31, 1997 (assuming the issuance of the Series A Preferred Stock), (ii) on a
pro forma basis after giving effect to the issuance of 168,333 Common Shares
pursuant to the Second Prior Financing, which shares were issued between May 31,
1997 and July 15, 1997, and (iii) on a pro forma as adjusted basis after giving
effect to the issuance and sale of the 1,500,000 Units in the Offering at the
assumed public offering price of $4.20 per Unit, the application of the
estimated net proceeds of $4,970,000 thereof, and the issuance of 94,286
Additional Shares. 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."
<TABLE>
<CAPTION>
AT MAY 31, 1997
---------------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
------ --------- -----------
<S> <C> <C> <C>
Series A Preferred Stock, $1.00 par value,
1,416,664 shares authorized; 1,416,664 shares
issued and outstanding at May 31, 1997 and pro
forma; no shares issued and outstanding, as
adjusted........................................ $1,416,664 $1,416,664 --
Shareholders' equity:
Preferred Stock, no par value, no shares issued
and outstanding at May 31, 1997, pro forma or
as adjusted.................................. -- -- --
Common Shares, no par value, 20,000,000 shares
authorized; 2,846,667 shares issued and
outstanding at May 31, 1997; 3,015,000 shares
issued and outstanding, pro forma; and
4,609,286 shares issued and outstanding, as
adjusted(1).................................. 2,106,350 2,493,347 7,426,553
---------- ---------- ----------
Accumulated Deficit(2).......................... (772,389) (772,389) (772,389)
---------- ---------- ----------
Total Shareholders' Equity...................... 1,333,961 1,720,958 6,654,164
---------- ---------- ----------
Total Capitalization............................ $2,750,625 $3,137,622 $6,654,164
========== ========== ==========
</TABLE>
- ------------------
(1) Includes (i) at May 31, 1997 351,667 Common Shares issued in connection with
the Second Prior Financing prior to May 31, 1997 and, on a pro forma and pro
forma as adjusted basis, an additional 168,333 Common Shares issued in
connection with the Second Prior Financing between May 31, 1997 and July 15,
1997, and (ii) on an as adjusted basis, the 94,286 Additional Shares to be
issued to the investors in the First Prior Financing. Excludes, (i) 520,000
Common Shares issuable upon exercise of the Bridge Warrants, (ii) 450,000
Common Shares reserved for issuance under the Company's 1997 Stock Option
Plan, of which options to acquire an aggregate of 295,000 Common Shares have
been granted, (iii) 3,000,000 Common Shares reserved for issuance upon
exercise of the Warrants, and (iv) 450,000 Common Shares reserved for
issuance upon exercise of the Underwriter Warrants and upon exercise of the
300,000 underlying Warrants. See "Description of Securities" and
"Underwriting."
(2) Management believes the accumulated deficit has continued to increase during
the third quarter ending September 30, 1997.
DILUTION
The net tangible book value (deficit) of the Company as of May 31, 1997, on
a pro forma basis assuming completion of the Second Prior Financing, was
($189,249), or ($.06) per Common Share, based on 3,015,000 Common Shares
outstanding. Net tangible book value (deficit) per share is equal to the
Company's total tangible assets (total assets less intangible assets) less its
total liabilities, divided by the number of Common Shares outstanding. After
giving effect to the sale of the 1,500,000 Units offered hereby at an assumed
initial
17
<PAGE> 19
public offering price of $4.20 per Unit (allocating no value to the Warrants
included in the Units), and the application of the estimated net proceeds
therefrom as described under "Use of Proceeds", the pro forma as adjusted net
tangible book value of the Company at May 31, 1997 would have been $4,743,957,
or $1.03 per share, based on 4,609,286 Common Shares outstanding after this
Offering (including the Additional Shares to be issued to investors in the First
Prior Financing). This represents an immediate increase of $1.09 per share in an
adjusted net tangible book value to existing shareholders and immediate dilution
of $3.17 per share from the assumed public offering price to the new investors
purchasing Units in the Offering. Dilution per share represents the difference
between the public offering price and the pro forma net tangible book value per
share after the Offering. The following table illustrates the per share dilution
to the new investors:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $4.20
Net tangible book value (deficit) per share before the
Offering.................................................. $(.06)
Increase per share attributable to new investors............ 1.09
-----
Pro forma net tangible book value per share after the
Offering.................................................. 1.03
-----
Dilution per share to new investors......................... $3.17
=====
</TABLE>
The following table sets forth the difference between (i) the current
shareholders who are promoters, officers, directors or beneficial owners of 5%
or more of the outstanding Common Shares ("Insiders"), (ii) the other present
shareholders, and (iii) the new investors, with respect to the number of shares
purchased from the Company, the total consideration paid (other than services)
and the average price per share (assuming no exercise of the Warrants or any
other outstanding options or warrants):
<TABLE>
<CAPTION>
SHARES PERCENT OF CONSIDERATION PERCENT OF TOTAL AVERAGE PRICE
PURCHASED TOTAL SHARES PAID CONSIDERATION PAID PER SHARE
--------- ------------ ------------- ------------------ -------------
<S> <C> <C> <C> <C> <C>
Insiders....................... 2,000,000 43.4% $ 1,000 * **
Other present
shareholders(1).............. 1,109,286 24.1% 2,797,500 30.7% $2.52
New Investors.................. 1,500,000 32.5% 6,300,000 69.3% $4.20
--------- ----- ---------- ------ -----
Total..................... 4,609,286 100.0% $9,098,500 100.0% $1.97
========= ===== ========== ====== =====
</TABLE>
- ------------------
* Less than one percent.
** Less than $.01.
(1) Includes 94,286 Additional Shares to be issued to investors in the First
Prior Financing. See "Description of Securities -- Prior Financings."
The foregoing assumes no exercise of the 450,000 options (reserved) and
3,970,000 warrants (outstanding) to purchase Common Shares at the closing of
this Offering (see "Description of Securities"). In the event such options and
warrants are exercised, investors in this Offering may experience further
dilution.
DIVIDEND POLICY
The payment of dividends by the Company is within the discretion of its
Board of Directors and depends in part 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. Since its inception, the Company has not
paid any cash dividends on its Common Shares and does not anticipate paying such
dividends in the foreseeable future. The Company intends to retain earnings, if
any, to finance its operations.
18
<PAGE> 20
MANAGEMENT'S DISCUSSIONS AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company was formed for the purpose of acquiring substantially all the
assets of Rockwell Medical Supplies, LLC, and a related entity, Rockwell
Transportation, LLC. The Company acquired the Predecessor Company on February
19, 1997 for a purchase price of approximately $2.4 million. The purchase price
was financed with an initial cash payment to the Predecessor Company of
$150,000, a cash payment of approximately $375,000 to NBD Bank to discharge the
Predecessor Company's obligation under a loan arrangement, and a $1.9 million
note payable to the Predecessor Company. The Company funded the initial cash
payments of $525,000 with a portion of the proceeds of a private placement of
the Company's Common Shares (the "First Prior Financing"). See "Description of
Securities -- Prior Financings." The balance of the $1.2 million in net proceeds
raised in the First Prior Financing was used to fund the Company's net losses
and capital equipment purchases.
In May through July, 1997, the Company sold an aggregate of 26 units, each
unit consisting of 20,000 Common Shares and 20,000 Bridge Warrants for a
purchase price of $60,000 per unit, or an aggregate of $1,560,000 (the "Second
Prior Financing"). The net proceeds of the Second Prior Financing were
approximately $1,248,347, of which $500,000 were used to reduce the obligation
under the note payable to the Predecessor Company. The balance is being used to
fund the Company's net losses and for capital equipment expenditures. The
remaining balance of $1,416,664 under the note payable to the Predecessor
Company was converted into 1,416,664 shares of Series A Preferred Stock.
In July 1997, the Company obtained a 60-day loan from Karen Bagley in the
principal amount of $100,000 to pay employee salaries and other accrued
expenses. The loan bears interest at an annual rate of 36% and is payable in
full, including accrued interest, on the maturity date. Karen Bagley is the wife
of Patrick Bagley, who serves as Mr. Robert Chioini's personal attorney. See
"Certain Transactions -- Related-Party Loan."
The Company is currently negotiating with a lender to obtain a $300,000
line of credit to repay the $100,000 loan made to the Company by Karen Bagley
and to fund the Company's working capital needs during the period prior to
completion of the Offering. The Company expects that the line of credit will
bear interest at the prime rate of interest plus 3%, and that the line of credit
will be secured by substantially all of the Company's assets. The Company
expects that it will pay aggregate origination and closing fees of approximately
$20,000 in connection with the obtaining of such line of credit. Upon completion
of this Offering, the Company will use a portion of the net proceeds of the
Offering to repay the expected outstanding balance owing on the line of credit
plus the accrued interest. See "Use of Proceeds."
RESULTS OF OPERATIONS
During the period from October 25, 1996 (date of inception) through May 31,
1997, sales were approximately $795,000. Sales of hemodialysis solutions,
primarily acid concentrate (56% of sales), and bicarbonate powder (20% of
sales), accounted for the majority of product sales with other ancillary
products accounting for 21% of total sales. Revenue generated from the Company's
trucking subsidiary from trucking services provided to non-affiliated third
parties was approximately $20,000 and accounted for approximately 3% of total
sales. The Company anticipates this product mix may change in the future as new
products are included in the Company's product line and as the Company increases
its revenue from "back-hauling" operations. Export sales represent 15% of total
sales, primarily in the hemodialysis solutions product line.
The Company incurred a gross deficit of $308,000 for the period ended May
31, 1997. Material costs comprised 47% of total costs of sales. Prices of raw
materials have remained stable over the period and management does not believe
that significant changes will occur in the foreseeable future. Management
believes that there is an opportunity to reduce material costs through more
efficient scheduling of production. This will enable the Company to plan
material procurements in a more efficient manner and eliminate low lead time
requirements at potentially reduced prices. Costs required to convert raw
materials to finished goods
19
<PAGE> 21
for sale (principally labor and manufacturing related overhead) comprised 30% of
costs of sales. Scheduling inefficiencies, low production volumes, and one-time
start-up costs contributed to what management believes are higher costs than
management anticipates will be experienced in the future.
Distribution costs were 23% of total costs of sales. These costs are
incurred by the Company's wholly owned subsidiary Rockwell Transportation Inc.
Management has enacted plans to reduce such costs as a percentage of total
revenue by more effectively utilizing its transportation equipment and by
generating additional third party revenue on "back-haul" routes.
Selling, General and Administrative costs of $421,000, or 53% of sales, for
the period include $200,000 of professional fees associated with the purchase of
the Predecessor Company and accounting expenses incurred in connection with the
stock offering activities of the Company and are not indicative of anticipated
future costs. Officer and employee salaries and benefits as well as amortization
of goodwill comprise the majority of the remaining selling, general and
administrative costs, which the Company expects will increase upon completion of
the Offering.
The Company has reported losses for the period ended May 31, 1997 and thus
has not recorded a federal, state or local tax provision.
PLAN OF OPERATION
During the next 12 months the Company plans to continue to manufacture and
distribute hemodialysis concentrates and dialysis kits and distribute other
hemodialysis products to hemodialysis providers. The Company intends to take
advantage of the increasing number of hemodialysis providers and patients (see
"Business -- General") and to implement its strategies of acting as a single
source supplier, increasing revenue by selling new products and obtaining
additional "back-haul" revenue from its trucks and offering a high level of
customer service (see "Business -- Strategy") to attempt to increase its sales
and market share. No assurance can be given, however, that the Company's sales
or market share will increase. See "Risk Factors -- Competition."
If the Company's sales volumes increase, it expects to add additional
production and administrative employees and truck drivers (see "Business --
Employees") and it expects to expand its facilities and acquire additional
laboratory and production equipment. The Company also expects that it will need
cash over the next 12 months (i) to redeem the Series A Preferred Stock, (ii) to
fund operating losses, and (iii) for working capital and other ongoing selling,
general and administrative expenses. The Company believes that cash from
operations together with the net proceeds of this Offering will be sufficient to
sustain the Company's operations at budgeted levels and its needs for liquidity
for at least the next twelve months.
During the period from February 20, 1997 to May 31, 1997, the Company
experienced a negative gross margin of approximately $308,000. Approximately
$125,000 of this amount is attributable to excess costs of transportation which
the Company incurred as a result of its trucking operations over the cost that
the Company estimates it would have incurred had it used common carriers to
deliver its products. Approximately $250,000 of cost of sales was attributable
primarily to overhead costs associated with the Company's manufacturing
operations.
In order to improve the Company's gross margin to a break-even point, the
Company must (i) increase its revenue from manufacturing operations to
approximately twice the amount generated during the period from February 20,
1997 to May 31, 1997, (ii) achieve certain planned operating efficiencies in its
manufacturing operations, (iii) obtain additional revenue from its trucking
operations sufficient to cover the additional costs of such operations by
contracting for its trucks to act as common carriers during their return to the
Company's manufacturing facility after a delivery of the Company's products, and
(iv) improve the operating efficiencies of the Company's trucking operations. If
the Company is not successful in increasing its revenue from the sale of
hemodialysis concentrates and other ancillary products while achieving certain
planned operating efficiencies, the Company's gross margin will likely remain
negative. Also, as the Company expands its trucking operations, its ability to
generate "back-haul" revenue is likely to lag behind the cost increases
associated with such expansion. In addition, if the Company is not successful in
improving the
20
<PAGE> 22
operating efficiencies of its trucking operations or if the Company's strategy
of obtaining additional "back-haul" revenue for its trucks to offset the
additional costs of maintaining its leased trucks versus using common carriers
is not successful, the Company may have to abandon its strategy of using its
leased trucks to deliver its products to customers. The Company does not believe
that this action, including terminating these operating leases, would have a
material effect on its financial condition; however, the Company is unable to
predict what effect, if any, such change would have on the Company's customers
and the ability of the Company to successfully market its products. Even if the
Company were to be successful in generating a positive gross margin, the Company
will require significant additional revenue growth to fund the Company's
existing and anticipated selling, general and administrative expenses and
interest expense. No assurance can be given that the Company will be able to
increase sales in a sufficient amount to cover such expenses, or that such
expenses will not increase in the future. See "Risk Factors -- Continuing
Losses; Accumulated Deficit; Negative Gross Margins."
NEW ACCOUNTING PRONOUNCEMENTS
In March 1997, the FASB issued SFAS No. 128, "Earnings per Share." This
Statement establishes standards for computing and presenting earnings per share
("EPS") and applies to all entities with publicly-held common shares or
potential common shares. This Statement replaces the presentation of primary EPS
and fully-diluted EPS with a presentation of basic EPS and diluted EPS,
respectively. Basic EPS excludes dilution and is computed by dividing earnings
available to common shareholders by the weighted-average number of common shares
outstanding for the period. Similar to fully diluted EPS, diluted EPS reflects
the potential dilution of securities that could share in the earnings. This
Statement is not expected to have a material effect on the Company's reported
EPS amounts. The Statement is effective for the Company's financial statements
for the year ending December 31, 1997.
21
<PAGE> 23
BUSINESS
GENERAL
Rockwell Medical Technologies, Inc. manufactures hemodialysis concentrates
and dialysis kits, and sells, distributes and delivers such concentrates and
dialysis kits, as well as over 120 other hemodialysis products, to hemodialysis
providers in the United States and Venezuela. Hemodialysis is a process which is
able to duplicate kidney function in patients whose kidneys have failed to
function properly. Without properly functioning kidneys, the patient's body
cannot rid itself of excess water and waste products nor regulate the amount of
electrolytes in the patient's blood. Without hemodialysis, these patients would
die.
INDUSTRY BACKGROUND
Hemodialysis patients are classified into three categories: (i) "end stage
renal disease patients," which are those patients who must have hemodialysis
treatments for the remainder of their lives or until they receive a successful
kidney transplant, (ii) "chronic patients," which are those patients who do not
currently require hemodialysis treatments but are suffering a gradual and
progressive loss of kidney function which typically progresses to "end stage
renal disease" requiring hemodialysis treatments, and (iii) "acute patients,"
which are those patients who have suffered a rapid and sudden loss of kidney
function and require only temporary hemodialysis until their kidneys begin to
function properly again. In 1995, there were an estimated 200,000 end stage
renal disease patients and 700,000 chronic patients, according to the DHHS. In
addition, an estimated 250,000 persons in the United States suffer acute renal
failure each year. Most patients undergoing hemodialysis treatment generally
receive three treatments per week or 156 treatments per year, although the
amount of weekly treatments may vary.
A hemodialysis provider such as a hospital or a free standing clinic uses
hemodialysis stations to treat patients. A hemodialysis station contains a
dialysis machine that takes a concentrate solution and certain chemical powders,
such as the Company's solutions and powders, and accurately dilutes them with
purified water. The resulting solution, known as dialysate, is then pumped
through a device known as an artificial kidney (dialyzer), while at the same
time the patient's blood is pumped through a 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 chemicals in the dialysate
penetrate the membrane and enter the patient's blood to maintain proper chemical
levels in the body. Dialysate generally contains dextrose, sodium, calcium,
potassium, magnesium, chloride and acetic acid. The patient's physician
prescribes 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 by each patient), a dialysis station 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 and over 120 other ancillary products, all of which the Company sells.
INDUSTRY TRENDS
Hemodialysis patients generally receive their treatment at hospitals or
independent hemodialysis providers. According to the U.S. Department of Health
and Human Services (the "DHHS"), since 1973 the total number of hemodialysis
providers in the United States has more than quintupled from 606 in 1973 to over
3,082 in December 1996. Independent providers comprised 2,212 of such providers
and hospitals comprised 746 of such providers. The Company currently supplies
over 220 hemodialysis providers in 18 states across the United States, as well
as hemodialysis providers in Venezuela. The number of patients receiving
hemodialysis has also grown substantially in recent years. According to the
DHHS, in 1985, there were approximately 68,390 patients receiving hemodialysis
treatments in the United States. It is estimated by the DHHS that in 1996 over
216,000 patients received hemodialysis treatments. According to the DHHS, from
1985 to 1996, the number of hemodialysis stations, which are areas equipped to
provide adequate and safe dialysis therapy, grew from 17,845 stations to 45,244
stations.
22
<PAGE> 24
STRATEGY
The Company's objective is to increase its market share in the expanding
hemodialysis market and improve profitability by implementing the following
strategies:
- Acting as a Single Source Supplier. By continuing offering over 120
different products used by hemodialysis providers, the Company has
positioned itself as a "one-stop-shop" to its customers for the
concentrates, chemicals and supplies necessary to support a
hemodialysis operation. Some of the Company's competitors for
concentrates 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. The Company has entered into
agreements with ancillary product manufacturers, which allow the
Company to be a "full-line" supplier of hemodialysis products.
- Increasing Revenue through Sales of New Products and Increased
"Back-haul" Revenue. The Company intends to manufacture and/or
distribute additional hemodialysis products not currently offered by
the Company, which products may offer opportunities to earn higher
profit margins than some of the Company's existing products (based
on current selling prices in the marketplace and the Company's
estimated costs to produce such products). For example, the Company
recently obtained a 510(k) approval from the FDA to market liquid
bicarbonate, a product used primarily by acute care hemodialysis
providers and certain chronic care providers. The Company intends to
install a production line to manufacture liquid bicarbonate,
although no assurance can be given that the Company will be
successful in establishing a production line for such product or
that the Company can successfully market such product. In addition,
the Company intends to pursue additional contracts for its trucks to
act as common carriers for third parties during their return to the
Company's manufacturing facility after a delivery of the Company's
products.
- Offering a Higher Level of Customer Service. By using its own
delivery vehicles and drivers, the Company believes that it can
offer a higher level of customer service to hemodialysis providers
than if it relied primarily on the use of common carriers to
distribute its products. However, if the Company is not successful
in improving the operating efficiencies of its trucking operations
or implementing its strategy of obtaining additional "back-haul"
revenue to cover the additional costs associated with maintaining a
fleet of trucks as opposed to using common carriers, the Company may
be forced to abandon this strategy. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Plan of
Operation" and "-- Trucking Operations."
In addition, the Company employs experienced personnel to operate its
manufacturing plant and has purchased "state-of-the-art" laboratory and
manufacturing equipment.
PRODUCTS
The Company manufactures hemodialysis concentrates and dialysis kits, and
sells, distributes and delivers such products, as well as a full line of over
120 ancillary hemodialysis products to hemodialysis providers located in 18
states in the United States and in Venezuela. Through the Company's wholly-owned
subsidiary, Rockwell Transportation, Inc., the Company leases and operates a
fleet of ten tractor-trailers which it uses to deliver its products to
customers.
On June 16, 1997, the Company obtained 510(k) clearance from the FDA to
market liquid bicarbonate, a product used primarily by acute care hemodialysis
providers and certain chronic care providers. Upon completion of the Offering,
the Company intends to acquire and install equipment necessary to manufacture
and package liquid bicarbonate and to market such product. No assurance can be
given that the Company will be successful in establishing a production line for
liquid bicarbonate or that the Company can successfully market such product on a
profitable basis. See "Use of Proceeds."
23
<PAGE> 25
TRUCKING OPERATIONS
The Company's wholly-owned subsidiary, Rockwell Transportation, Inc.,
directly delivers substantially all of the products the Company sells through a
fleet of ten tractor-trailers that the Company leases from a truck leasing
company pursuant to a two-year lease. The Company currently employs ten drivers
to operate its truck fleet, one dispatcher and one person to manage its trucking
operations. The Company's hemodialysis concentrates are generally packaged in 55
gallon re-usable drums weighing approximately 580 pounds each. The Company's
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, which require the driver to pump hemodialysis concentrates from the
55 gallon drums into larger holding tanks within the hemodialysis clinic. The
Company's main competitors generally use common carriers for delivery of their
products. The Company believes it offers a high level of service to its
customers through the use of its own delivery vehicles and drivers.
As a result of using its own fleet of delivery trucks to deliver its
products, the Company's transportation costs have been approximately twice the
cost of hiring common carriers to deliver products. The Company believes that it
can offset such higher costs by contracting with third parties for its trucks to
act as common carriers during their return to the Company's manufacturing
facility after a delivery of concentrates and other products. In March 1997, the
Company hired an experienced manager to manage its trucking operations and to
develop and implement a plan to improve the operating efficiencies of the
trucking operations and to begin soliciting "back-haul" revenue. Although the
Company has been successful in generating back-haul revenue, to date the Company
has not generated a sufficient volume of such back-haul revenue to cover the
additional costs associated with the Company's trucking operations. If the
Company were unsuccessful in obtaining sufficient revenue to cover the
additional costs associated with using its own trucks for deliveries, the
Company may consider abandoning its strategy of using its own trucks, and hire
common carriers or make other arrangements to deliver its products. The Company
is unable to predict what effect, if any, such change in strategy would have on
the Company's customers, or on its ability to market its products. Additionally,
as the Company's business expands, the Company may expand its fleet of delivery
trucks to accommodate such increased business. If the Company expands its fleet
of trucks, the amount of "back-haul" revenue that will be necessary to cover the
excess costs of maintaining such fleet will also increase.
Under the terms of the Company's leasing arrangement with its truck leasing
company, the leasing company is responsible for the maintenance necessary to
keep the trucks in good operating condition. The Company's trucking operations
are and will continue to be subject to various state and federal regulations,
which if changed or modified, could adversely affect the Company's business,
financial condition and results of operations.
SALES AND MARKETING
The Company sells its products to hemodialysis providers through two
independent sales representative companies, one direct salesperson employed by
the Company and two independent distributors. The independent sales
representative companies are paid on a commission only basis and are responsible
for paying their own expenses. The Company's direct salesperson is an employee
of the Company and is paid a salary plus a commission. In addition, the Company
sells its products to hemodialysis distributors who employ their own sales force
to sell products purchased from the Company.
For the period from February 20, 1997 to May 31, 1997, sales of the
Company's products for use at clinics in Venezuela accounted for approximately
15% of the Company's total sales during such period. Such sales consisted of
acetate concentrate. The Company sells such products primarily to several
Miami-based distributors, who then sell the products to the government of
Venezuela through a competitive bidding process.
COMPETITION
Other than the Company, there are currently three other major suppliers of
concentrates and/or ancillary products used by hemodialysis clinics. The other
major suppliers of hemodialysis products are Gambro Healthcare ("Gambro"), which
supplies concentrates and blood tubing and also owns clinics which treat
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approximately 22,000 hemodialysis patients (assuming completion of the recently
announced acquisition of Vivra Renal Care, Inc. by Gambro), Fresenius Medical
Care, Inc. ("Fresenius"), which supplies concentrates, blood tubing, ancillary
products and also owns clinics which treat approximately 44,000 hemodialysis
patients, and Renal Systems (a division of Minntech Corporation), which supplies
concentrates and renalin, a specialty product used to sterilize dialyzer
machines, but does not carry a wide line of hemodialysis products.
Two of the Company's major competitors, Gambro and Fresenius, own and
operate a substantial number of hemodialysis clinics which compete for patients
in the same markets as the providers and hospitals to which they sell
hemodialysis products. Although the Company believes that its business
strategies provide it with competitive advantages over each of its three major
competitors, each of such competitors is a more established company with
substantially greater financial, technical, manufacturing, marketing, research
and development and management resources than those of the Company and well
established reputations, customer relationships and marketing and distribution
networks. The Company believes that many of the Company's products are
commodities, including its concentrates, and therefore, believes that price,
customer service and convenience are the principal competitive factors in the
hemodialysis products industry. There can be no assurance that the Company will
be able to compete successfully in the future. See "Risk Factors --
Competition."
QUALITY ASSURANCE/CONTROL
To assure quality and consistency of the Company's concentrates, the
Company conducts rigorous testing during the manufacturing process. Once a batch
of product is mixed, the Company's in-house quality control laboratory conducts
tests to verify that the chemical properties of the mix match the specifications
required by the particular customer. Upon verification that the batch meets the
specifications, the Company packages concentrates into either one-gallon
containers or 55-gallon drums. The Company further tests packaged concentrate
samples at the beginning and end of each production run to assure product
consistency during the filling process. Once the packaged product passes the
final tests, the product is released for shipment.
The Company has purchased new testing equipment it believes to be
"state-of-the-art" in order to assure quality and consistency in the manufacture
of its concentrates. The equipment allows the Company 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 the clinics. In addition, the Company's testing equipment allows it to reduce
the costs of performing necessary tests while improving the accuracy of such
tests. The Company also has been able to reduce the amount of labor and
maintenance necessary to perform such tests and maintain the equipment.
The Company's quality assurance department is managed by Ruth E. Homsher,
Ph.D., manager of the Quality Control Laboratory. Dr. Homsher is directly
responsible for all testing procedures, validation techniques and related
customer quality issues. For a description of Dr. Homsher's background, see
"Management."
GOVERNMENT REGULATION
The testing, manufacture and sale of the Company's hemodialysis
concentrates and the ancillary products distributed by the Company are subject
to regulation by numerous governmental authorities, principally the FDA and
corresponding state and foreign agencies. Pursuant to the Federal Food, Drug,
and Cosmetic Act, and the regulations promulgated thereunder, the FDA regulates
the preclinical 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 premarket clearance or premarket approval for devices,
withdrawal of marketing clearances or approvals and criminal prosecution.
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 (general controls) or class II (general and specific controls) and
are eligible
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<PAGE> 27
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
"preamendment" 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 PMA
applications (as defined below). 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. The Company
believes that it now usually takes from one to four months from the date of
submission to obtain 510(k) clearance, but it can take substantially longer. The
Company's 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 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 premarket approval ("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. The Company
believes that is usually takes from one to three years after filing, 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 "nonsignificant 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 the Company pursuant to FDA
clearances or approvals are subject to pervasive and continuing regulation by
the FDA and certain state agencies. Manufacturers of medical devices for
marketing in the United States are required to adhere to applicable regulations
setting forth detailed Good Manufacturing Practices requirements, which
including testing, control and documentation requirements. The FDA has recently
finalized changes to the GMP regulations that will likely increase the cost of
compliance with GMP requirements. Manufacturers and distributors must also
comply with Medical Device Reporting ("MDR") requirements that a firm report to
the FDA any incident in which its product may have caused or contributed to a
death or serious injury, or in which its product 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 and, in certain circumstances, by the Federal Trade Commission.
Current FDA enforcement policy prohibits the marketing of approved medical
devices for unapproved uses.
The Company is subject to routine inspection by the FDA and certain state
agencies for compliance with GMP requirements and other applicable regulations.
The Company also is subject to numerous federal, state and local laws relating
to such matters as safe working conditions, manufacturing practices,
environmental protection, fire hazard control and disposal of hazardous or
potentially hazardous substances.
The Supply Company received 510(k) clearance from the FDA to market
hemodialysis concentrate solutions and powders on March 1, 1996. Such 510(k)
clearance was assigned to the Company on February 19, 1997, in connection with
the purchase of the Predecessor Company. In addition, the Company received
510(k) clearance from the FDA to market liquid bicarbonate on June 16, 1997. The
Company's retention of such 510(k) clearances also is dependent upon its
compliance with the FDA Act and related laws and regulations, including GMP
regulations. There can be no assurance that the Company will maintain its 510(k)
authority from the FDA to manufacture and distribute its products. Failure to do
so could result in the
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need to cease manufacturing and/or distributing Company products, which would
have a material adverse effect on the Company's business, financial condition
and results of operations. If any of the Company's FDA clearances are denied or
rescinded, sales of the Company's product in the United States would be
prohibited during the period the Company does not have such clearances.
PROPERTIES
The Company leases an approximately 32,500 square foot facility located in
Wixom, Michigan, which is comprised of manufacturing, warehouse, office and
laboratory space. The Company is party to a lease (the "Lease") covering such
facility that expires on December 15, 2000 and provides for a monthly rental
payment of $19,770.83, plus a monthly escrow deposit of $2,217.90 to fund real
estate taxes. This facility was formerly leased by the Predecessor Company, and
the Lease was assigned to the Company in connection with the acquisition of the
Predecessor Company's business. In connection with such assignment of the Lease,
the landlord required the Company to deposit into escrow $178,000, which is to
be applied against future lease payments and as additional security deposit in
accordance with the assignment agreement. The Company believes that its
facilities are suitable and adequate for its current operations, but may not be
adequate if the Company expands its operations.
SUPPLIERS
The Company believes that the raw materials for the Company's hemodialysis
concentrates, the components for the Company's hemodialysis kits and the
ancillary hemodialysis products distributed by the Company are generally
available from several potential suppliers.
EMPLOYEES
As of the date of this Prospectus, the Company has 51 employees, of which
one is a direct salesperson, five are laboratory technicians, ten are truck
drivers and eight are engaged in corporate management and administration. The
remaining 27 employees are hourly workers including secretaries and plant
employees. The Company's arrangements with its employees are not governed by any
collective bargaining agreement. All employees, except Mr. Chioini, are employed
on an "at-will" basis. If the Company's sales volumes increase, the Company
expects to add additional production and administrative personnel and truck
drivers.
LEGAL PROCEEDINGS
The Company is not a party to any pending legal proceedings.
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MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES.
The directors, executive officers and key employees of the Company and the
positions held by them are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Robert L. Chioini............................ 32 President, Chief Executive Officer and Director
Gary D. Lewis................................ 46 Chairman of the Board
Michael J. Xirinachs......................... 37 Director
Norman L. McKee.............................. 41 Director
James J. Connor.............................. 45 Vice President of Finance, Chief Financial
Officer, Treasurer and Secretary
Donald A. Danald............................. 53 Vice President of Regulatory Affairs
Ruth E. Homsher, Ph.D........................ 51 Manager, Quality Control Laboratory
</TABLE>
ROBERT L. CHIOINI is a founder of the Company, has served as the President
and Chief Executive Officer of the Company since February 1997, and has been a
director of the Company since its formation in October 1996. From January 1996
to February 1997, Mr. Chioini served as Director of Operations of Rockwell
Medical Supplies, LLC, 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, a
company which manufactures and distributes hemodialysis concentrates and owns
hemodialysis clinics. From 1990 to 1993, Mr. Chioini served as a Regional Sales
Manager for R. Louis Enterprises, Inc., a medical products distributor. Mr.
Chioini is a party to an employment agreement with the Company which expires
February 19, 2000.
GARY D. LEWIS is a founder of the Company and has been Chairman of the
Board of Directors of the Company since its formation in October 1996. Mr. Lewis
also served as Secretary and Treasurer of the Company from October 1996 to July
1997. Mr. Lewis has also served as President of OmniSource, Inc., a medical
device distributor, since December 1994. Mr. Lewis also founded and served as
President and Chief Executive Officer of Somanetics Corporation, a medical
device manufacturer, from its inception in 1982 to February 1995. Mr. Lewis is
also a majority stockholder of, and serves as President and a director of, Wall
Street Partners, Inc. ("Wall Street"), a management consulting firm that
provides business consulting services to the Company. See "Certain Transactions
- -- Consulting Agreement."
MICHAEL J. XIRINACHS is a founder of the Company and has been a director of
the Company since its formation. Mr. Xirinachs also serves as a Senior Vice
President of Investments of D.H. Blair & Co., Inc., an investment banking firm
which Mr. Xirinachs joined in 1988. Mr. Xirinachs is also a stockholder of, and
serves as Vice President and a director of, Wall Street. See "Certain
Transactions -- Consulting Agreement."
NORMAN L. MCKEE joined the Board of Directors of the Company in July 1997.
In July 1997, Mr. McKee founded, and currently serves as the President of,
Strategic Growth Management, Inc., a management consulting firm. Mr. McKee
served as Senior Vice President, Treasurer and Chief Financial Officer of Saga
Communications, Inc. ("Saga"), a company which owns and operates radio stations
and a television station, from 1994 to July 1997. From 1988 to 1994, Mr. McKee
served as Vice President, Treasurer and Chief Financial Officer of Saga. Mr.
McKee also served on the Board of Directors of Saga from 1992 to July 1997.
JAMES J. CONNOR has served as the Vice President of Finance, Chief
Financial Officer, Treasurer and Secretary of the Company since July 1997. From
May 1995 to July 1997, Mr. Connor founded and was a principal of Connor &
Connor, a financial services consulting firm. From January 1992 to May 1995,
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Mr. Connor served as the President of Glacier Vandervell, Inc., an automotive
and diesel engine bearing manufacturer that supplies products to OEM customers
in the automotive industry.
DONALD A. DANALD joined the Predecessor Company in April 1996 as Vice
President of Regulatory Affairs and joined the Company in the same capacity
after the acquisition of the Predecessor Company's business. From 1990 to April
1996, Mr. Danald was a manager of the Laboratory and Quality Control departments
at Dial Medical of Florida, Inc., currently Gambro Healthcare, a competitor of
the Company. See "Business -- Competition."
RUTH E. HOMSHER, PH.D., joined the Predecessor Company in January 1996 as
Manager of the Quality Control Laboratory and joined the Company in the same
capacity after the acquisition of the Predecessor Company's business. From
December 1995 to January 1996, Dr. Homsher worked as an independent clinical
laboratory consultant. From January 1994 to December 1995, Dr. Homsher was the
Director of Quality Assurance and Technical support for Brendan Scientific, a
manufacturer of quality control software for clinical, research and industrial
laboratories. From February 1993 to December 1994, Dr. Homsher was a Senior
Research Scientist at McCann Associates, a manufacturer of diagnostic and
clinical reagents. From January 1990 to January 1993, Dr. Homsher was a clinical
chemist and quality assurance specialist for Roche Biomedical Laboratories,
Inc., a reference laboratory for clinical laboratories.
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 initial terms of each of the classes of directors expires at the
annual meetings of the shareholders to be held in 1998, 1999 and 2000 for the
Class I, Class II and Class III directors, respectively. Thereafter, the term of
each class shall be for three years or until their successors are elected and
qualified or until their earlier 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
(initial term until the 1998 annual meeting) -- Mr. Lewis and Mr. McKee; Class
II (initial term until the 1999 annual meeting) -- Mr. Xirinachs; and Class III
(initial term until the 2000 annual meeting) -- Mr. Chioini. The Company's Board
of Directors has an Audit Committee which is composed of Messrs. Lewis and
McKee. The Audit Committee, among other duties, selects the Company's
independent accountants and is primarily responsible for approving the services
performed by the Company's independent accountants and for reviewing and
evaluating the Company's accounting policies and its system of internal
accounting controls.
Officers serve at the discretion of the Board of Directors. Pursuant to the
Underwriting Agreement, the Company has agreed, for a period of no less than
three years from the Effective Date, to engage a designee, acceptable to the
Underwriter and the Company, to serve as an Advisor to the Company's Board of
Directors. Such Advisor shall be entitled to attend all meetings of the Board of
Directors, to receive all notices and other correspondence and communications
sent by the Company to its directors, and to receive compensation equal to the
compensation paid to nonemployee directors of the Company. The Company has also
agreed that, in lieu of the Underwriter's right to designate an Advisor, the
Underwriter has the right to designate one person for election as a director,
and the Company has agreed to use its best efforts to cause such designee to be
elected to the Board of Directors.
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<PAGE> 31
COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth the compensation awarded to, earned by or
paid to the Company's Chief Executive Officer for the year ended December 31,
1996 by the Predecessor Company. During the year ended December 31, 1996, no
other officers earned in excess of $100,000 in total annual salary and bonus.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
-----------------------------
SALARY OTHER ANNUAL
NAME AND PRINCIPAL POSITION YEAR ($) COMPENSATION ($)
--------------------------- ---- ------ ----------------
<S> <C> <C> <C>
Robert L. Chioini, President and Chief Executive Officer... 1996(1) $59,000 $5,800(2)
</TABLE>
- ------------------
(1) Reflects amounts paid by the Predecessor Company to Mr. Chioini for such
fiscal year. The Company did not commence operations until February 1997. On
February 19, 1997, the Company entered into a three-year employment
agreement with Mr. Chioini pursuant to which Mr. Chioini is being paid an
annual salary of $115,000 plus certain other perquisites. Upon completion of
the Offering, Mr. Chioini's salary will be increased to an annual rate of
$150,000. See " -- Employment Agreements."
(2) Represents reimbursement of expenses incurred by Mr. Chioini relating to the
personal use of a Company automobile.
In July 1997, Mr. Chioini was granted on option to purchase 90,000 Common
Shares at a per share exercise price of $3.00, under the Company's 1997 Stock
Option Plan. Such option vests in 25% cumulative annual installments beginning
on the date of grant.
COMPENSATION OF DIRECTORS
The Company's directors who are not officers or employees of the Company
(collectively, the "Outside Directors") receive $1,000 for each Board meeting
attended in person and $250 for each telephonic Board meeting attended. The
Company also reimburses Outside Directors for their reasonable expenses of
attending Board and Board committee meetings.
In July 1997, the Board of Directors and shareholders of the Company
adopted the Rockwell Medical Technologies, Inc. 1997 Stock Option Plan (the
"Stock Option Plan"). The Stock Option Plan permits the Board of Directors,
among other things, to grant options to purchase Common Shares to directors of
the Company, including Outside Directors. In July 1997, the Board of Directors
granted to each of the three existing Outside Directors options to purchase
20,000 Common Shares at a per share exercise price of $3.00. Upon the election
of any new member to the Board of Directors who is an Outside Director, the
Board of Directors intends to grant to such member an option to purchase 20,000
Common Shares at a per share exercise price equal to the fair market value of a
Common Share at the date of grant. Beginning with the first annual meeting of
the shareholders of the Company after July 1997, provided that a sufficient
number of Common Shares remain available under the Stock Option Plan, on each
date on which an annual meeting of the shareholders of the Company is held, the
Board of Directors intends to grant to each Outside Director who is then serving
on the Board of Directors, an option to purchase 5,000 Common Shares. The
exercise price of the options will be the fair market value of the Common Shares
on the date of grant. The options granted to Outside Directors under the Stock
Option Plan will 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 an officer or employee of the Company and continues to
serve as a member of the Board of Directors, options granted under the Stock
Option Plan will remain exercisable in full.
For a description of the Company's consulting agreement with Wall Street, a
consulting company owned by Mr. Lewis and Mr. Xirinachs, each of whom is a
director of the Company, see "Certain Transactions--Consulting Agreement."
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<PAGE> 32
EMPLOYMENT AGREEMENT
The Company entered into an employment agreement with Robert L. Chioini in
February 1997, pursuant to which Mr. Chioini is employed as the President and
Chief Executive Officer of the Company for a period ending February 19, 2000.
Mr. Chioini's base salary is $115,000, which may be increased by the Board of
Directors. The Board has increased his salary to $150,000 effective on the
closing date of this Offering. Mr. Chioini's employment agreement contains a
three year non-compete provision and provides for him to devote his full-time
and attention to the Company's business.
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 $1,000,000 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.
CERTAIN TRANSACTIONS
FORMATION OF THE COMPANY
In October 1996, Messrs. Chioini, Lewis and Xirinachs founded the Company.
In connection with the formation of the Company Messrs. Chioini, Lewis and
Xirinachs received 500,000, 750,000 and 750,000 shares, respectively, of the
Company's Common Shares for an aggregate purchase price of $1,000.
ACQUISITION OF BUSINESS OF PREDECESSOR COMPANY
On February 19, 1997, the Company acquired the business of the Predecessor
Company for total consideration of $2,441,664.47 pursuant to an Asset Purchase
Agreement dated as of November 1, 1996, as
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<PAGE> 33
amended (the "Asset Purchase Agreement"). Mr. Robert L. Chioini, the President,
Chief Executive Officer and a director of the Company, owns a 20% equity
interest in the Supply Company. The purchase price consisted of: (i) $150,000
paid to the Sellers in cash; (ii) a cash payment to NBD Bank of approximately
$375,000 to retire an outstanding debt owed by the Predecessor Company to NBD
Bank; and (iii) an 8.5% promissory note in the principal amount of $1,916,664.47
made by the Company in favor of the Supply Company (the "Note"). Under the terms
of the Note and the Asset Purchase Agreement, a prepayment of $500,000 on the
Note was due on May 19, 1997, which date was extended by the Supply Company to
May 31, 1997. Pursuant to a letter agreement dated April 4, 1997, the Supply
Company agreed that, upon receipt of the $500,000 prepayment on the Note, the
remaining principal balance under the Note would be converted into shares of
Series A Preferred Stock at a conversion ratio of one share of Series A
Preferred Stock for each $1.00 of outstanding principal due under the Note. The
Company made the required $500,000 prepayment under the Note and the Note was
converted into 1,416,664 shares of Series A Preferred Stock.
Under the terms of the Series A Preferred Stock, the Company is obligated
to redeem such Series A Preferred Stock on or before January 31, 1998 (the
"Mandatory Redemption Date"), at a redemption price of $1.00 per share, plus any
accrued and unpaid dividends from June 1, 1997. The Company's obligation to
redeem the Series A Preferred Stock has been guaranteed (the "Guaranty") by each
of Messrs. Chioini, Lewis and Xirinachs, and such Guaranty is secured by the
pledge of 1,478,260 Common Shares (the "Pledged Shares") owned by such Principal
Shareholders pursuant to an Escrow Agreement dated as of July 22, 1997 (the
"Escrow Agreement"). If the Company fails to redeem the outstanding shares of
Series A Preferred Stock on or before the Mandatory Redemption Date, the Supply
Company has a period of 45 days following such date to elect either to: (i)
exercise its rights under the Guaranty and the Escrow Agreement to retain the
Pledged Shares which remain held in escrow, in full satisfaction and discharge
of the Guaranty and the Company's obligation to redeem the Series A Preferred
Stock; or (ii) terminate its rights under the Guaranty, relinquish and terminate
its interest in the Pledged Shares and proceed against the Company to collect
the outstanding redemption payment. In addition to the mandatory redemption
discussed above, the Company has the right to redeem shares of Series A
Preferred Stock at any time prior to the Mandatory Redemption Date. The Company
intends to use a portion of the net proceeds of this Offering to fund the
payment of the redemption price necessary to redeem the Series A Preferred
Stock. See "Use of Proceeds."
In addition, in connection with the purchase of the business from the
Predecessor Company, the Company paid $178,000 to the landlord under the Lease,
as a prepayment of future rents and as an additional security deposit in order
to induce such landlord to consent to the assignment of the Lease and to release
the Predecessor Company and its shareholders, including Mr. Chioini, from their
obligations under the Lease. See "Business -- Properties."
CONSULTING AGREEMENT
The Company is party to a consulting agreement with Wall Street dated as of
February 19, 1997 pursuant to which Wall Street provides management and
financial consulting services to the Company. The Company has agreed to pay Wall
Street a consulting fee of $25,000 per month from the date of the agreement
through December 1997, subject to renewal upon the mutual agreement of the
Company and Wall Street. Prior to February 19, 1997, Wall Street rendered
consulting services to the Company beginning in November 1996, for a consulting
fee of $25,000 per month. Wall Street is owned by Gary D. Lewis and by Michael
J. Xirinachs, each of whom are founders of the Company and serve as Directors of
the Company. The Company has paid or accrued an aggregate of $175,000 in
consulting fees to Wall Street under these arrangements through May 31, 1997.
SHAREHOLDER LOANS
On April 29, 1997, Messrs. Chioini, Lewis and Xirinachs loaned $50,000,
$25,000 and $50,000, respectively, to the Company. The loans were evidenced by
8.5% promissory notes in the amounts of $50,000, $25,000 and $50,000,
respectively. The Company repaid such loans, including accrued interest, in
June, 1997.
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RELATED-PARTY LOAN
In July 1997, the Company obtained a 60-day loan from Karen Bagley in the
principal amount of $100,000 to pay employee salaries and other accrued
expenses. The loan bears interest at an annual rate of 36% and is payable in
full, including accrued interest, on the maturity date. Karen Bagley is the wife
of Patrick Bagley, who serves as Mr. Robert Chioini's personal attorney. Mr.
Chioini is the President, Chief Executive Officer and a director of the Company.
The Company intends to repay such loan on or before its maturity date with a
portion of the proceeds of a $300,000 line of credit loan that the Company is
currently negotiating to obtain. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Overview".
33
<PAGE> 35
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of July 21, 1997, certain information
concerning the Common Shares beneficially owned by each director and the chief
executive 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:
<TABLE>
<CAPTION>
Percentage
Amount and Beneficially Owned
Nature of Beneficial --------------------------------------------------
Name Ownership(1) Before the Offering(2) After the Offering(3)
- ----------------------------------- -------------------- ---------------------- ---------------------
<S> <C> <C> <C>
Gary D. Lewis(4)(5)(6)............. 750,000 24.9% 16.3%
Michael J. Xirinachs(4)(6)......... 750,000 24.9% 16.3%
Robert L. Chioini(4)(6)(7)......... 522,500 17.2% 11.3%
Norman L. McKee.................... 0 -- --
All directors and executive
officers as a group (6
persons)(8)...................... 2,043,750 66.8% 43.9%
</TABLE>
- ------------------
(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 it not deemed to be outstanding for the purpose of computing
the percentage ownership of any other person.
(2) Based on 3,015,000 Common Shares outstanding as of July 21, 1997.
(3) Based on 4,609,286 Common Shares outstanding, assuming all 1,500,000 Units
offered hereby are sold to third parties and assuming the issuance of 94,286
Additional Shares to investors in the First Prior Financing. See
"Description of Securities -- Prior Financings."
(4) Address is c/o the Company, 28025 Oakland Oaks Drive, Wixom, Michigan 48393.
(5) Includes 675,000 Common Shares owned jointly with Mr. Lewis's wife and
75,000 Common Shares held in custodial accounts for the benefit of Mr.
Lewis's three minor children.
(6) 554,347, 554,347, and 369,566 of Common Shares owned by Mr. Lewis, Mr.
Xirinachs and Mr. Chioini, respectively, have been pledged to secure their
obligations under the Guaranty to the Supply Company of the Company's
obligation to redeem the Series A Preferred Stock on the Mandatory
Redemption Date. The Principal Shareholders retain voting and dispositive
power with respect to the Pledged Shares until the occurrence of a default
in the Company's obligation to redeem the Series A Preferred Stock. Any such
default could result in a change in control of the Company. See "Certain
Transactions -- Acquisition of Business of Predecessor Company." The Company
intends to use a portion of the proceeds of this Offering to redeem the
Series A Preferred Stock. See "Use of Proceeds."
(7) Includes 22,500 Common Shares that Mr. Chioini has the right to acquire
within 60 days.
(8) Includes 43,750 Common Shares which all executive officers and directors as
a group have the right to acquire within 60 days.
34
<PAGE> 36
DESCRIPTION OF SECURITIES
UNITS
Each Unit consists of one Common Share and two Warrants, each Warrant
entitling the holder to purchase one Common Share. The Common Shares and
Warrants are immediately transferable separately.
GENERAL
The authorized capital shares of the Company consist of an aggregate of
20,000,000 Common Shares, no par value per share ("Common Shares"), 1,416,664
shares of 8.5% non-voting cumulative Series A Preferred Stock, $1.00 par value
per share (the "Series A Preferred Stock"), and 2,000,000 shares of Preferred
Stock, no par value per share (the "Preferred Stock"). 3,015,000 Common Shares,
1,416,664 shares of Series A Preferred Stock and no shares of Preferred Stock
are currently issued and outstanding. 94,286 Additional Shares will be issued to
investors in the First Prior Financing on the closing date of this Offering.
COMMON SHARES
Holders of 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 therefor. See "Risk Factors -- Absence
of Dividends on Common Shares." 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 are not redeemable. The Common Shares
presently outstanding are, and the Common Shares to be issued in connection with
this Offering 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. The Company has agreed with the Underwriter that it
will not issue any securities, including but not limited to Common Shares, for a
period of 24 months following the Effective Date, except as disclosed in or
contemplated by this Prospectus, without the prior written consent of the
Underwriter.
The directors of the Company serve staggered three-year terms. The
directors of the Company will hold office until the Annual Meeting of
Shareholders to be held in 1998 for Gary D. Lewis and Norman L. McKee, the
Annual Meeting of Shareholders to be held in 1999 for Michael J. Xirinachs, and
the Annual Meeting of Shareholders to be held in 2000 for Robert L. Chioini, and
until their successors are elected and qualified. Directors may not be removed
without cause. The 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.
SERIES A PREFERRED STOCK
The Board of Directors has authorized and issued 1,416,664 shares of Series
A Preferred Stock. The terms of the Series A Preferred Stock are as follows:
Dividend Rights. Holders of Series A Preferred Stock are entitled to
receive, out of funds legally available for the payment of dividends, cumulative
cash dividends in the amount of $0.085 per share per year (pro rated for partial
years) accruing from June 1, 1997, as and when directed by the Board of
Directors of the Company. As long as any shares of Series A Preferred Stock are
outstanding, the Company may not (i) declare, pay, or set money, securities or
other property apart for the payment of, any dividend on any other shares of the
Company, including all classes of common stock and any other series of preferred
stock (all of such shares of the Company referred to as the "Junior Shares"), or
(ii) make any payment on account of, or set money, securities or other property
apart for the payment into, a sinking or other similar fund for the purchase,
redemption or other retirement of, any of the Junior Shares or any warrants,
rights, calls or options
35
<PAGE> 37
exercisable for or exchangeable into any of the Junior Shares (collectively, the
"Junior Securities"), or (iii) make any distribution in respect of any Junior
Securities, either directly or indirectly, and whether in cash, obligations or
shares of the Company or other property (other than distributions or dividends
in Junior Shares to the holders of Junior Shares), and shall not permit any
corporation or other entity directly or indirectly controlled by the Company to
purchase or redeem any of the Junior Securities, unless prior to or concurrently
with such declaration, payment, setting apart for payment, purchase, redemption
or distribution, as the case may be, all accrued and unpaid dividends on the
Series A Preferred Stock shall have been paid.
Redemption. The Company is required to redeem all outstanding shares of
Series A Preferred Stock on January 31, 1998 (the "Mandatory Redemption Date"),
at a purchase price equal to $1.00 per share plus accumulated and unpaid
dividends on the Mandatory Redemption Date. The purchase price must be paid in
cash. From and after the Mandatory Redemption Date, the holders of Series A
Preferred Stock will not have any rights as shareholders of the Company except
the right to receive from the Company the redemption price of such Series A
Preferred Stock, without interest, upon the surrender of such Series A Preferred
Stock to the Company. In addition, the Company has the right and option at any
time prior to the Mandatory Redemption Date to purchase, redeem or otherwise
acquire any or all of the Series A Preferred Stock for a purchase price equal to
$1.00 per share plus accumulated and unpaid dividends on such share through the
date of repurchase or redemption. Upon consummation of this Offering, the
Company intends to repurchase and redeem all of the Series A Preferred Stock for
a purchase price of approximately $1,453,000 (assuming such redemption is
effected on September 19, 1997). See "Use of Proceeds."
Liquidation Rights. Subject to the prior rights of the Company's creditors,
the holders of the Series A Preferred Stock are entitled to receive, upon any
voluntary or involuntary liquidation, dissolution or winding-up of the Company,
$1.00 per share, plus accrued and unpaid dividends, before any payment to
holders of Junior Shares. If, in any such case, the assets of the Company are
insufficient to make such payment in full, then the available assets will be
distributed among the holders of the Series A Preferred Stock ratably in
proportion to the full amount to which each holder would be entitled.
Conversion Rights. Holders of Series A Preferred Stock have no conversion
rights; however, the obligation of the Company to effect the mandatory
redemption of the Series A Preferred Stock by the Mandatory Redemption Date is
guaranteed by the Principal Shareholders pursuant to the Guaranty, which
Guaranty is secured by a pledge of the Pledged Stock. See "Certain Transactions
- -- Acquisition of Business of Predecessor Company."
Voting Rights. Holders of Series A Preferred Stock have no voting rights,
except as may be required by law.
WARRANTS
The Warrants offered hereby will be issued in registered form under a
Warrant Agreement (the "Warrant Agreement") between the Company and American
Stock Transfer & Trust Company as warrant agent (the "Warrant Agent").
Each Warrant will be separately transferable and will entitle the
registered holder thereof to purchase one Common Share at $4.50 per share
(subject to adjustment as described below) for a period of three years
commencing one year after the Effective Date and ending on the fourth
anniversary of the Effective Date (the "Exercise Period"). The exercise price of
the Warrants was determined by negotiation between the Company and the
Underwriter and should not be construed to be predictive of, or to imply that,
any price increases will occur in the Company's securities. The exercise price
and the number and kind of Common Shares issuable upon the exercise of each
Warrant are subject to adjustment in the event of a stock split, stock dividend,
recapitalization, merger, consolidation or certain other events. No adjustment
for previously paid cash dividends, if any, will be made upon exercise of the
Warrants. A holder of Warrants may exercise such Warrants by surrendering the
certificate evidencing such Warrants before the earlier of the expiration or
redemption date to the Warrant Agent at its offices, together with the form of
election to purchase on the reverse side of such certificate properly completed
and executed and the payment of the exercise price and any
36
<PAGE> 38
transfer tax. If less than all of the Warrants evidenced by a Warrant
certificate are exercised, a new certificate will be issued for the remaining
number of Warrants.
The Company has authorized and reserved for issuance a number of Common
Shares sufficient to provide for the exercise of the Warrants. When issued, upon
proper exercise of the Warrants and payment of the exercise price specified in
the Warrants, each Common Share will be fully paid and nonassessable. Holders of
Warrants will not have any voting or other rights as shareholders of the Company
unless and until Warrants are exercised and shares issued pursuant thereto.
The Warrants may be redeemed by the Company at a price of $.10 per Warrant,
upon not less than 30 days prior written notice to registered holders of the
Warrants at any time during the Exercise Period, with the prior written consent
of the Underwriter, if the average of the closing bid quotations of the Common
Shares, during the period of 20 consecutive trading days ending on the third day
prior to the date upon which notice of redemption is given, as reported on The
Nasdaq SmallCap Market (or if the Common Shares are not quoted thereon, the
closing sale price of the Common Shares on the Nasdaq National Market or other
principal securities exchange upon which the Common Shares are then quoted or
listed, or such other reporting system that provides closing sale prices for the
Common Shares), is greater than $8.50 per share (regardless of the illiquidity
of the market for the Company's Common Shares), subject to adjustment in the
event of stock splits and similar events. The Warrants will be exercisable until
the close of business on the day immediately preceding the date fixed for the
redemption of the Warrants in the notice of redemption. The Company may redeem
the Warrants at a time when it is disadvantageous for the holders of the
Warrants. The holders of the Warrants may, therefore, be forced to exercise the
Warrants and pay the exercise price or sell the Warrants at the current market
price for the Warrants when they otherwise might wish to hold the Warrants, or
accept the redemption price, which is likely to be substantially less than the
market price of the Warrants at the time of redemption.
The Company will pay the Underwriter a fee of 5% of the exercise price of
each Warrant exercised, provided (i) the market price of Common Shares on the
date the Warrant was exercised was equal to or greater than the Warrant exercise
price on that date, (ii) the exercise of the Warrant was solicited by a member
of the National Association of Securities Dealers, Inc. ("NASD"), (iii) the
Warrant was not held in a discretionary account, (iv) the disclosure of
compensation arrangements was made in documents provided to the holders of the
Warrants, (v) the solicitation of the exercise of the Warrant was not a
violation of Rule 101 of Regulation M under the Exchange Act and (vi) the
Underwriter is designated in writing as the soliciting NASD member. The
Underwriter and any other soliciting broker/dealers will be prohibited from
engaging in any market making activities or solicited brokerage activities with
regard to the Company's securities during the periods prescribed by Rule 101 of
Regulation M before the solicitation of the exercise of any Warrant until the
later of the termination of such solicitation activity or the termination of any
right the Underwriter and any other soliciting broker/dealer may have to receive
a fee for the solicitation of the exercise of the Warrants.
For a description of the requirements with respect to the maintenance of an
effective registration statement in order to permit holders to exercise
Warrants, see "Risk Factors -- Non-registration in Certain Jurisdictions of
Common Shares Underlying the Warrants; Exercise of Warrants."
PREFERRED STOCK
The Company is authorized to issue up to 2,000,000 shares of Preferred
Stock 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 Stock 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 Stock 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 Stock
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
37
<PAGE> 39
Company has no present intention to issue any shares of Preferred Stock. The
Company has agreed with the Underwriter that, except for issuances disclosed in
or contemplated by this Prospectus, it will not issue any securities, including
but not limited to any shares of Preferred Stock, for a period of 24 months
following the Effective Date, without the prior written consent of the
Underwriter. See "Underwriting."
PRIOR FINANCINGS
In February 1997, the Company sold an aggregate of 495,000 Common Shares
for a purchase price of $2.50 per Common Share (the "First Prior Financing").
The aggregate net proceeds to the Company from the First Prior Financing were
$1,212,500, plus the discharge of a $25,000 debt owed to one of the investors.
In connection with the First Prior Financing, purchasers of Common Shares
offered thereby were granted a right to receive additional Common Shares if the
Company engaged in an initial public offering of its Common Shares at a public
offering price per share that was less than twice the per share purchase price
paid by the investors in the First Prior Financing. In such event, the Company
must issue additional Common Shares to the investors that participated in the
First Prior Financing such that the effective purchase price paid by such
investors for Common Shares (including the Additional Shares) equals one-half of
the initial public offering price. Accordingly, assuming the Company completes
this Offering at an initial public offering price of $4.20 per Unit, the Company
will issue an aggregate of 94,286 Additional Shares to the investors that
participated in the First Prior Financing.
The Company also granted "piggyback" registration rights to investors that
purchased Common Shares in the First Prior Financing. See "-- Registration
Rights."
In May through July 1997, the Company sold an aggregate of 26 units, each
unit consisting of 20,000 Common Shares and 20,000 Bridge Warrants for a
purchase price of $60,000 per unit, or an aggregate of $1,560,000 (the "Second
Prior Financing"). Each Bridge Warrant entitles the registered holder thereof to
purchase one Common Share at an exercise price of $4.50 per share, subject to
adjustment in certain events, at any time commencing one year from the Effective
Date and ending on the fourth anniversary of the Effective Date. On the
Effective Date, the Bridge Warrants will convert automatically into warrants
having terms identical to the Warrants being offered in the Offering.
In connection with the Second Prior Financing, the Company paid aggregate
fees of $156,000 to Maidstone Financial, Inc., the Underwriter in this Offering,
which acted as placement agent. In addition, the Company paid the Underwriter a
$46,800 non-accountable expense allowance and other expenses of such financing.
The net proceeds of the Second Prior Financing (approximately $1,248,348) were
used in part to reduce the obligation under the note payable to the Predecessor
Company ($500,000) and to fund the Company's operating losses and provide
working capital.
REGISTRATION RIGHTS
Investors in the First Prior Financing have the right to request
registration of the Common Shares issued in connection with the First Prior
Financing in any registration statement filed by the Company with the Commission
under the Securities Act (with certain exceptions) for the issuance and sale of
its securities. Pursuant to lock-up agreements signed by each of the investors
in the First Prior Financing, such investors have waived their registration
rights with respect to this Offering and have agreed not to sell or otherwise
dispose of securities of the Company, including Common Shares, for a period of
13 months following the Effective Date, without the prior written consent of the
Underwriter, which may be granted or withheld in the sole and absolute
discretion of the Underwriter.
Investors who acquired Common Shares and Bridge Warrants in the Second
Prior Financing have the right to request registration of the Common Shares
and/or Bridge Warrants (or securities issued therefor) and the Common Shares
issued or issuable upon exercise therefor in any registration statement filed by
the Company with the Commission under the Securities Act (with certain
exceptions) for the issuance and sale of its securities. Pursuant to lock-up
agreements signed by each of the investors in the Second Prior Financing, such
investors have waived their registration rights with respect to this Offering
and have agreed not to sell or otherwise dispose of securities of the Company,
including Common Shares and the Bridge Warrants, for a
38
<PAGE> 40
period of 13 months following the Effective Date, without the prior written
consent of the Underwriter, which may be granted or withheld in the sole and
absolute discretion of the Underwriter.
The holders of the Underwriter Warrants (including the securities issuable
upon exercise thereof) have demand and piggyback registration rights with
respect to the Common Shares issuable upon exercise of the Underwriter Warrants
and the underlying Warrants, which Common Shares have been registered by the
Company on the Registration Statement on Form SB-2 of which this Prospectus is a
part.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have outstanding
4,609,286 Common Shares (assuming no exercise of the Over-Allotment Option, the
Warrants, the Bridge Warrants, the Underwriter Warrants and other outstanding
options and warrants) and 1,416,664 shares of Series A Preferred Stock, which
Series A Preferred Stock will be redeemed using a portion of the proceeds of
this Offering. Of these shares, the 1,500,000 Common Shares sold in this
Offering (in addition to the 3,000,000 Common Shares issuable upon exercise of
the Warrants) will be freely tradeable 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. The
remaining 3,109,286 Common Shares are "restricted securities" (as that term is
defined in Rule 144) which may be publicly sold only if registered under the
Securities Act or if sold in accordance with an applicable exemption from
registration, such as Rule 144. Of the outstanding restricted Common Shares,
2,000,000 shares will be owned by Messrs. Lewis, Xirinachs and Chioini, who may
be deemed "affiliates" of the Company, as that term is defined in Rule 144. An
additional 520,000 Common Shares underlying the Bridge Warrants will, upon
issuance, be "restricted securities."
In general, under Rule 144 as currently in effect, subject to the
satisfaction of certain other conditions, a person, including an affiliate of
the Company, whose restricted securities have satisfied a one-year holding
period, is entitled to sell (together with any person with whom such individual
is required to aggregate sales), within any three month period, a number of
restricted shares that does not exceed the greater of 1% of the total number of
outstanding shares of the same class, or, if the shares are quoted on The Nasdaq
Stock Market or a national securities exchange, the average weekly trading
volume during the four calendar weeks preceding the filing of Form 144 with
respect to the sale. A person who has not been an affiliate of the Company for
at least three months, and whose restricted securities have satisfied a two-year
holding period, is entitled to sell such restricted securities under Rule 144
without regard to any of the limitations described above. Affiliates, however,
continue to be subject to such limitations even after such two-year holding
period, and they are subject to such limitations with respect to their sales of
non-restricted securities.
The restricted Common Shares will be eligible for sale pursuant to Rule 144
commencing 90 days after the Effective Date. However, officers, directors and
other security holders of the Company owning and/or having rights to acquire in
the aggregate Common Shares have entered into agreements with the
Underwriter not to sell or otherwise dispose of any securities of the Company,
including Common Shares, for a period of 13 months following the Effective Date,
without the prior written consent of the Underwriter, which may be granted or
withheld in the sole and absolute discretion of the Underwriter; provided,
however, that if prior to the expiration of the lock-up period, the Company's
Common Shares are subject to a tender offer and holders of the Company's Common
Shares (other than the existing shareholders) agree to tender a majority of the
outstanding Common Shares to the offeror, then the Underwriter shall release all
shareholders subject to the Lock-Up Agreements from the restrictions imposed
thereby solely for the purpose of tendering their Common Shares to the offeror
pursuant to the terms of the tender offer. Following expiration of the term of
the Lock-Up Agreements, 3,109,286 shares will become eligible for resale
pursuant to Rule 144, subject to the volume limitations and compliance with the
other provisions of Rule 144. Furthermore, the holders of the Underwriter
Warrants (including the securities issuable upon exercise thereof) have demand
and piggyback registration rights with respect to the Common Shares issuable
upon exercise of the Underwriter Warrants and the underlying Warrants, which
Common Shares have been registered by the Company on the Registration Statement
on Form SB-2 of which this Prospectus is a part. The Company also intends to
register the 450,000
39
<PAGE> 41
Common Shares issuable upon the exercise of options available under the
Company's 1997 Stock Option Plan. In addition, the investors in the First Prior
Financing and the investors in the Second Prior Financing have piggy-back
registration rights with respect to their Common Share, Bridge Warrants and the
520,000 underlying Common Shares. These rights have been waived in connection
with this Offering.
The Company is unable to predict the effect that sales under Rule 144,
pursuant to a registered public offering or otherwise may have on the then
prevailing market price of the Units, Common Shares or Warrants, but such sales
may have a substantial depressive effect on such market price. The above is a
summary of Rule 144 and is not intended to be a complete description of the
Rule. See "-- Registration Rights," "--Warrants," "Certain Transactions" and
"Underwriting".
As a result of the Offering, an additional 3,000,000 Common Shares
(3,450,000 if the Over-Allotment Option is fully exercised) will be subject to
issuance upon the exercise of the Warrants offered hereby, and an additional
450,000 Common Shares will be subject to issuance upon the exercise of the
Underwriter Warrants and the underlying Warrants.
As of July 21, 1997, there were 39 record holders of the Common Shares.
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. The
Board of Directors has the power to elect 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 AND WARRANT AGENT
The Company has engaged American Stock Transfer & Trust Company to act as
Transfer Agent for the Company's Units and Common Shares and Warrant Agent for
the Warrants.
40
<PAGE> 42
UNDERWRITING
Subject to the terms and conditions of the underwriting agreement (the
"Underwriting Agreement"), the Company has agreed to sell to the Underwriter,
and the Underwriter has agreed to purchase, the number of Units set forth
opposite its name below at the public offering price less the underwriting
discounts and commissions set forth on the cover page of this Prospectus:
<TABLE>
<CAPTION>
UNDERWRITER UNITS
----------- -----
<S> <C>
Maidstone Financial, Inc. .................................. 1,500,000
---------
Total.................................................. 1,500,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriter are
subject to certain conditions precedent. The Underwriter is committed to
purchase all of the Units offered hereby, on a firm commitment basis, if any are
purchased.
The Underwriter has advised the Company that it proposes initially to offer
the 1,500,000 Units to the public at the public offering price set forth on the
cover page of this Prospectus and that it may allow to selected dealers who are
members of the NASD concessions not in excess of $ per Unit, of which not
more than $ per Unit may be re-allowed to certain other dealers who are NASD
members. After the initial public offering, the public offering price,
concession and reallowance may be changed by the Underwriter.
The Underwriting Agreement also provides that the Underwriter will receive
a non-accountable expense allowance of 3% of the gross proceeds of the Offering.
The Company also has agreed to pay all expenses in connection with qualifying
the Units, Common Shares and the Warrants offered hereby for sale under the laws
of such states as the Underwriter may designate, including expenses of counsel
retained for such purpose by the Underwriter.
Pursuant to the Over-Allotment Option, which is exercisable for a period of
45 days after the Effective Date, the Underwriter may purchase up to 225,000
Units, solely to cover over-allotments, at the offering price, less the
underwriting discounts and commissions.
The Company has agreed to sell to the Underwriter on the closing date of
this Offering, for $10, the Underwriter Warrants to purchase 150,000 Units. The
Underwriter Warrants shall be exercisable for a period of three years commencing
, 1998 (one year after the Effective Date) at an exercise price
equal to $5.04 (120% of the offering price of the Units sold to the public in
the Offering). The Underwriter Warrants are not transferable prior to
, 1998, except to officers of the Underwriter, members of the
selling group and their officers and partners.
The Company has agreed that, upon written request of the then holder(s) of
a majority of the Warrants and the Common Shares issued and/or issuable upon
exercise of the Underwriter Warrants (the "Underwriter Warrant Shares") which
were originally issued to the Underwriter or to its designees, made at any time
within the period commencing one year and ending five years after the Effective
Date, the Company will file, at its sole expense, no more than once, a
registration statement under the Securities Act registering the Underwriter
Warrant Shares. The Company has agreed to use its best efforts to cause the
registration statement to become effective. The holders of the Underwriter
Warrants may demand registration without exercising the Underwriter Warrants
and, in fact, are never required to exercise such Underwriter Warrants. The
Company has registered the Underwriter Warrant Shares pursuant to the
Registration Statement on Form SB-2 of which this Prospectus is a part.
The Company has also agreed that if, at any time within the period
commencing one year and ending five years after the Effective Date, it should
file a registration statement with the Commission pursuant to the Securities
Act, regardless of whether some of the holders of the Underwriter Warrants and
the Underwriter Warrant Shares shall have therefore availed themselves of any of
the registration rights above, the Company, at its own expense, will offer to
said holders (with certain exceptions) the opportunity to register the
41
<PAGE> 43
Underwriter Warrant Shares. The objection of a subsequent underwriter to the
above "piggyback" registration rights would preclude such inclusion.
In addition to the demand and "piggyback" registration rights described
above, the Company has agreed to cooperate with the then holders of the
Underwriter Warrants and Underwriter Warrant Shares in the preparation and
execution of any registration statement required in order to sell or transfer
the Underwriter Warrant Shares and will supply all information required
therefor, but the expenses of such registration statement will be pro-rated
between the Company and the holders of the Underwriter Warrants and Underwriter
Warrant Shares in proportion to the aggregate sales price of the securities
being issued by each of them.
For the life of the Underwriter Warrants, the holders thereof are given, at
nominal cost, the opportunity to profit from a rise in the market price of the
Common Shares with a resulting dilution in the interest of other shareholders of
the Company. Further, such holders may be expected to exercise the Underwriter
Warrants at a time when the Company would in all likelihood be able to obtain
equity capital on terms more favorable than those provided in the Underwriter
Warrants. In addition, the Company may find it more difficult to raise
additional capital while the Underwriter Warrants are outstanding.
In connection with this Offering, the Underwriter and selling group members
and their respective affiliates may engage in stabilizing, syndicate short
covering transactions, or other transactions during the offering that may
stabilize, maintain or otherwise affect the market price of the Units, Common
Shares and Warrants. Stabilization transactions, effected in accordance with
Rule 104 of Regulation M, are bids for or purchases of Units, Common Shares or
Warrants for the purpose of preventing or retarding a decline in the market
price of the Units, Common Shares or Warrants or all of them to facilitate the
Offering. The Underwriter also may create a short position for its account by
selling more Units in connection with the Offering than it is committed to
purchase from the Company, and in such case may purchase Units, Common Shares or
Warrants in the open market to cover all or a portion of such short position.
The Underwriter may also cover all or a portion of such short position by
exercising the Over-Allotment Option. Any of the transactions described in this
paragraph may result in the maintenance of the price of the Units, Common Shares
and Warrants at a level above that which might otherwise prevail in the open
market. None of the transactions described in this paragraph is required, and,
if they are undertaken they may be discontinued at any time.
The Company has agreed not to issue any Common Shares, preferred stock or
any warrants, options or other rights to purchase Common Shares or preferred
stock prior to , 1999, without the prior written consent of the
Underwriter, except as contemplated by or as disclosed in this Prospectus.
Officers, directors and other security holders of the Company owning and/or
having rights to acquire in the aggregate Common Shares, have entered into
agreements not to sell or otherwise dispose of any securities of the Company,
including Common Shares (except under certain circumstances in connection with a
third party tender offer for the Common Shares), prior to , 1998,
without the prior written consent of the Underwriter, which may be granted or
withheld in the sole and absolute discretion of the Underwriter. See "Shares
Eligible for Future Sale."
The Company has granted to the Underwriter, effective upon completion of
this Offering, a right of first refusal for a period of three years after the
Effective Date for any public or private offering of securities by the Company,
its affiliates or any present or future subsidiaries to raise capital.
The Underwriting Agreement provides for reciprocal indemnification between
the Company and the Underwriter against liabilities in connection with the
Offering, including liabilities under the Securities Act.
The Underwriter has informed the Company that it does not expect to make
sales of the Units to discretionary accounts.
The Underwriter has served as the sole or managing underwriter of only four
firm commitment public offerings and participated in two other underwritten
public offerings as a member of the underwriting syndicate. Since the
Underwriter's experience in underwriting firm commitment public offerings is
limited, there can be no assurance that its lack of experience may not adversely
affect the public offering of the
42
<PAGE> 44
Company's securities and the subsequent development, if any, of a trading market
for the Company's securities. See "Risk Factors -- Underwriter's Influence on
the Market; Possible Limitations on Market Making Activities."
The Company has been advised that the Underwriter is subject to an informal
investigation commenced in March 1996 by the Securities and Exchange Commission.
To date, the Commission has only requested certain documents from the
Underwriter, and the Underwriter has not been advised of the status of the
investigation. There can be no assurance that a formal order of investigation
will not be issued, or if issued, that sanctions will not be imposed against the
Underwriter. In October 1996, the NASD commenced an examination of certain of
the Underwriter's previous underwritings and has requested documents and
information in connection with those underwritings. The NASD examination is
ongoing and no findings have been made to date. There can be no assurance that
such investigation or examination may not affect the Underwriter's ability to
maintain a market in the Units, Common Shares and Warrants.
The Company has agreed that upon the Effective Date of the Offering it
will, for a period of not less than three years, engage a designee, acceptable
to the Company and the Underwriter, as an advisor to the Board. In lieu of the
Underwriter's right to designate an advisor, the Company has agreed, if
requested by the Underwriter during such three year period, to nominate and use
its best efforts to cause the election of a designee of the Underwriter as a
director of the Company. The Underwriter has not yet designated any such person.
The Underwriter intends to act as a market maker for the Units, Common
Shares and Warrants after the closing of the Offering.
The Company will pay the Underwriter a fee of 5% of the exercise price of
each Warrant exercised, provided (i) the market price of the Common Shares on
the date the Warrant was exercised was equal to or greater than the Warrant
exercise price on that date, (ii) the exercise of the Warrant was solicited by a
member of the NASD, (iii) the Warrant was not held in a discretionary account,
(iv) the disclosure of compensation arrangements was made in documents provided
to the holders of the Warrants, (v) the solicitation of the exercise of the
Warrant was not a violation of Rule 101 of Regulation M under the Exchange Act
and (vi) the Underwriter is designated in writing as the soliciting NASD member.
The Underwriter and any other soliciting broker/dealers will be prohibited from
engaging in any market making activities or solicited brokerage activities with
regard to the Company's securities during the periods prescribed by Rule 101 of
Regulation M before the solicitation of the exercise of any Warrant until the
later of the termination of such solicitation activity or the termination of any
right the Underwriter and any other soliciting broker/dealer may have to receive
a fee for the solicitation of the exercise of the Warrants.
The Underwriter acted as placement agent for the Second Prior Financing,
for which it received selling commissions of $156,000 and a non-accountable
expense allowance of $46,800 and other expenses of the offering.
The Company has agreed to retain the Underwriter as a management and
financial advisor for a period of 24 months commencing on the Effective Date at
a fee equal to $4,166 per month. The entire fee ($99,984) is payable at the
closing of the Offering. In its capacity as an advisor to the Company, the
Underwriter will be obligated to provide general financial advisory services to
the Company on an as-needed basis with respect to possible future financings or
acquisitions by the Company and related matters. The Underwriter is not
obligated to provide any minimum number of hours of advisory services to the
Company.
In addition, the Company has agreed to engage a financial public relations
firm reasonably satisfactory to the Underwriter. The public relations firm will
not be associated with the Underwriter or any of its affiliates. Such firm, or
an acceptable substitute firm, shall be continuously engaged until a date 24
months from the closing of the Offering.
The initial public offering price of the Units offered hereby and the
initial exercise price and other terms of the Warrants have been determined by
negotiation between the Company and the Underwriter and do not necessarily bear
any direct relationship to the Company's assets, earnings, book value per share
or other generally accepted criteria of value. Factors considered in determining
the offering price of the Units and the
43
<PAGE> 45
exercise price of the Warrants included the business in which the Company is
engaged, the Company's financial condition, an assessment of the Company's
management, the general condition of the securities markets, the demand for
similar securities of comparable companies, and other factors deemed relevant.
LEGAL MATTERS
The validity of the securities offered hereby will be passed upon for the
Company by Honigman Miller Schwartz and Cohn, 2290 First National Building,
Detroit, Michigan 48226-3583. Certain legal matters in connection with the
Offering will be passed upon for the Underwriter by Gersten, Savage, Kaplowitz,
Fredericks & Curtin, LLP, 101 East 52nd Street, New York, New York 10022-6018.
EXPERTS
The combined balance sheet of the Predecessor Company as of February 19,
1997 and December 31, 1996 and the combined statements of operations,
shareholders' deficiency and cash flows for the period from January 1, 1997
through February 19, 1997 and the year ended December 31, 1996 included in this
Prospectus, the consolidated balance sheet of the Company as of May 31, 1997 and
the consolidated statements of operations, shareholders' equity and cash flows
for the period from inception to May 31, 1997 included in this Prospectus, have
been audited by Coopers & Lybrand LLP, independent auditors, 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
include an explanatory paragraph referring to an uncertainty concerning the
Company's ability to continue as a going concern), and have been included herein
in reliance on the reports of Coopers & Lybrand L.L.P., independent accountants,
given on the authority of said firm as experts in accounting and auditing.
44
<PAGE> 46
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
I. Consolidated Financial Statements for Rockwell
Medical Technologies, Inc. and Subsidiary
Report of Independent Accountants............ F-2
Consolidated Balance Sheet at May 31, 1997... F-3
Consolidated Income Statement for the period
from inception to May 31, 1997.................. F-4
Consolidated Statement of Changes in
Shareholders' Equity for the period from
inception to May 31, 1997..................... F-5
Consolidated Statement of Cash Flows for the
period from inception to May 31, 1997......... F-6
Notes to the Consolidated Financial
Statements...................................... F-7
II. Combined Financial Statements for Rockwell Medical
Supplies, L.L.C. and Rockwell Transportation, L.L.C.
Report of Independent Accountants............ F-14
Combined Balance Sheet at February 19, 1997
and December 31, 1996........................... F-15
Combined Income Statement for the period from
January 1 to February 19, 1997 and the year
ended December 31, 1996....................... F-16
Combined Statement of Changes in Members'
Deficit for the period from January 1 to
February 19, 1997 and the year ended December
31, 1996...................................... F-17
Combined Statement of Cash Flows for the
period from January 1 to February 19, 1997 and
the year ended December 31, 1996.............. F-18
Notes to the Combined Financial Statements... F-19
</TABLE>
F-1
<PAGE> 47
<TABLE>
<S> <C> <C>
COOPERS & LYBRAND LOGO Coopers & Lybrand L.L.P. 400 Renaissance Center telephone (313) 446-7100
a professional services firm Detroit, Michigan facsimile (313) 446-7117
48243-1507
</TABLE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Rockwell Medical Technologies, Inc. and Subsidiary:
We have audited the consolidated balance sheet of Rockwell Medical
Technologies, Inc. and Subsidiary at May 31, 1997 and the related consolidated
statements of income, stockholders' equity, and cash flows for the period ended
May 31, 1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Rockwell Medical Technologies, Inc. and Subsidiary at May 31, 1997 and the
results of their operations and their cash flows for the period ended May 31,
1997 in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
3 to the consolidated financial statements, the Company has incurred losses from
operations and requires additional cash flow to fund operations and the
redemption of the Series A Preferred Stock due January 31, 1998 that raise
substantial doubt about its ability to continue as a going concern. Management's
plans in regard to these matters are also described in Note 3. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
COOPERS & LYBRAND LLP
Detroit, Michigan
July 11, 1997, except for Note 11 as to
which the date is July 22, 1997
Coopers & Lybrand L.L.P. is a member of Coopers & Lybrand International, a
limited liability association incorporated in Switzerland.
F-2
<PAGE> 48
ROCKWELL MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
(WHOLE DOLLARS)
<TABLE>
<CAPTION>
MAY 31,
1997
-------
<S> <C>
Certificate of Deposit...................................... $ 25,000
Accounts Receivable, net of allowance for doubtful accounts
of $10,000................................................ 299,544
Inventory................................................... 311,878
Other Current Assets........................................ 123,374
----------
Total Current Assets 759,796
Property and Equipment, net................................. 658,857
Other Noncurrent Assets..................................... 138,397
Excess of Purchase Price over Fair Value of Net Assets
Acquired, net............................................. 1,910,207
----------
Total Assets........................................... $3,467,257
==========
Notes Payable to Shareholders............................... $ 125,000
Accounts Payable............................................ 500,027
Accrued Liabilities......................................... 91,605
----------
Total Current Liabilities.............................. 716,632
Redeemable Preferred Stock -- Series A...................... 1,416,664
Shareholders' Equity:
Common Stock.............................................. 2,106,350
Deficit................................................... (772,389)
----------
1,333,961
----------
Total Liabilities and Shareholders' Equity............. $3,467,257
==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
<PAGE> 49
ROCKWELL MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED INCOME STATEMENT
FOR THE PERIOD FROM OCTOBER 25, 1996 (THE DATE OF INCEPTION) TO MAY 31, 1997
(WHOLE DOLLARS)
<TABLE>
<S> <C>
Sales....................................................... $ 795,271
Cost of Sales............................................... 1,103,088
----------
Gross Deficit............................................. (307,817)
Selling, General and Administrative......................... 421,060
Interest Expense, net....................................... 43,512
----------
Net loss.................................................. $ (772,389)
==========
Net Loss per share.......................................... $ (0.30)
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE> 50
ROCKWELL MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE PERIOD FROM OCTOBER 25, 1996 (THE DATE OF INCEPTION) TO MAY 31, 1997
(WHOLE DOLLARS)
<TABLE>
<CAPTION>
TOTAL
COMMON COMMON RETAINED SHAREHOLDERS'
SHARES STOCK DEFICIT EQUITY
------ ------ -------- -------------
<S> <C> <C> <C> <C>
Issuance of Common Stock, no par value
-- Initial Capitalization............ 2,000,000 $ 1,000 $ 1,000
Issuance of Common Stock, no par value
-- First Prior Financing............. 495,000 1,212,500 1,212,500
Issuance of Common Stock, no par value
-- Second Prior Financing............ 351,667 892,850 892,850
Net loss............................... (772,389) (772,389)
--------- ---------- --------- ----------
Total............................. 2,846,667 $2,106,350 $(772,389) $1,333,961
========= ========== ========= ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
<PAGE> 51
ROCKWELL MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM OCTOBER 25, 1996 (THE DATE OF INCEPTION) TO MAY 31, 1997
(WHOLE DOLLARS)
<TABLE>
<S> <C>
Cash flows from operating activities:
Net loss.................................................. $ (772,389)
Adjustments to reconcile net loss to net cash used for
operating activities:
Depreciation and Amortization.......................... 90,107
-----------
(682,282)
Changes in Working Capital:
Increase in Accounts Receivable...................... (110,270)
Increase in Inventory................................ (67,231)
Increase in Other current Assets..................... (74,476)
Decrease in Accounts Payable......................... (179,914)
Increase in Other Liabilities........................ 61,728
-----------
Net change in Working Capital..................... (370,163)
Net cash used in operations............................... (1,052,445)
Cash flows from investing activities:
Purchase of Business, net of cash acquired................ (508,887)
Purchase of Equipment..................................... (6,621)
Purchase of Certificate of Deposit........................ (25,000)
-----------
Cash used in Investing Activities......................... (540,508)
Cash flows from financing activities:
Issuance of Common Stock -- initial capitalization........ 1,000
Issuance of Common Stock -- First Prior Financing......... 1,212,500
Issuance of Common Stock -- Second Prior Financing........ 892,850
Proceeds from notes payable-shareholders.................. 125,000
Payment on promissory note................................ (500,000)
Deposits paid on leases................................... (138,397)
-----------
Cash provided by financing activities..................... 1,592,953
Increase in cash............................................ --
Cash at beginning of period................................. 0
-----------
Cash at end of period....................................... $ 0
===========
</TABLE>
Supplemental non cash disclosures related to Purchase of Business and
conversion of Promissory Note to Series A Redeemable Preferred Stock. See Note
4.
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
<PAGE> 52
ROCKWELL MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND CAPITALIZATION
Rockwell Medical Technologies, Inc. (the "Company") was incorporated on
October 25, 1996 for the purpose of purchasing and operating the business of
Rockwell Medical Supplies, L.L.C. and its sister company, Rockwell
Transportation, L.L.C. (collectively, the "Predecessor Companies" or the
"Seller"). The Company is, and the Predecessor Companies were, in the business
of manufacturing and distributing hemodialysis concentrates and dialysis kits to
hemodialysis clinics throughout the United States and Venezuela. Sales to
Venezuela accounted for approximately 15% of total sales. The Company also
packages, sells and distributes ancillary products related to the hemodialysis
process, as did the Predecessor Companies.
The Company received $1,212,500 in net proceeds from the issuance of Common
Stock in the First Prior Financing. Approximately $500,000 of which was used to
partially fund the acquisition of the Predecessor Companies. The remaining
purchase price was financed through the issuance of a $1,916,664 promissory note
(see Note 4).
The Company is 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. In March 1996 the Predecessor Companies received 510(k) approval from
the FDA to market hemodialysis solutions and powders, which commenced in May
1996. The 510(k) approval was assigned to the Company in connection with the
purchase of the Predecessor Companies.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements of the Company include the accounts
of Rockwell Medical Technologies, Inc. and its wholly-owned subsidiary, Rockwell
Transportation, Inc. All intercompany balances and transactions have been
eliminated. The results of operations, cash flows and changes in stockholders'
equity are presented from October 25, 1996 (the date of inception) through May
31, 1997. The Company's fiscal year ends on December 31.
REVENUE RECOGNITION
The Company recognizes revenue at the date of shipment.
INVENTORY
Inventory is stated at net realizable value, which includes only raw
material costs and excludes the conversion costs required to produce finished
goods, due to continuing negative gross margins.
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 eight years.
EXCESS OF PURCHASE PRICE OVER FAIR VALUE OF NET ASSETS ACQUIRED
The excess of the price paid by the Company over the fair value of the net
assets of the Predecessor Companies has been recorded as an intangible asset and
is being amortized on the straight line basis over an estimated useful life of
10 years. The Company assesses the recoverability of the asset based on
estimated future undiscounted cash flows of the business. Based upon the
Company's analysis no impairment of the asset exists at May 31, 1997.
F-7
<PAGE> 53
ROCKWELL MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INCOME TAXES
The Company has recorded a deferred tax asset of approximately $257,000
related to the net operating loss carry forward. This deferred asset has been
fully offset by a valuation allowance due to the uncertainty of realization.
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 the financial
statements and reported amounts of revenues and expenses during the period.
Actual results could differ from those estimates.
NET LOSS PER SHARE
Net loss per share is calculated based on the weighted average shares
outstanding of 2,617,553 including 94,286 of additional shares estimated to be
issuable to the shareholders in the First Prior Financing who were entitled to
receive additional shares for no additional consideration if the public offering
price of the shares to be issued in an initial public offering of the Company's
securities was less than $5.00 per share.
3. MANAGEMENT'S PLAN OF OPERATION
Since February 20, 1997 the Company had been engaged in the business of
manufacturing, selling, and distributing hemodialysis concentrates and kits to
various clinics throughout the United States and Venezuela. The Company paid
approximately $2.4 million for the operating assets and liabilities of the
Predecessor Companies. Since inception through May 31, 1997 the Company has
recorded losses of $772,389 and used approximately $1,052,000 to fund operating
needs since the purchase of the business (see Note 4). Those needs were funded,
from inception through May 31, 1997, through proceeds from the issuance of
Common Stock and warrants.
A significant portion of the working capital requirements, approximately
$375,000, was due to an initial funding of an escrow account for future facility
lease payments, and the immediate payment to trade creditors to ensure continued
uninterrupted delivery of raw materials and services. After considering these
one-time cash requirements, the Company estimates its cash flows from operations
will be deficient by approximately $100,000 per month for the next three to six
months for working capital purposes. To fund these working capital requirements,
the Company anticipates using a three phased approach as follows 1.) negotiating
with its trade creditors to extend terms of payment, 2.) securing a line of
credit with a commercial banking institution to be drawn on as funds are
required, and 3.) using the proceeds from the issuance of 1,500,000 shares of
the Company's Common Stock in a registration to be filed with the Securities and
Exchange Commission (the "Offering"). Anticipated net proceeds associated with
this Offering are estimated at approximately $5 million. Without the successful
completion of the Offering the future viability of the Company cannot be
assured.
In addition to working capital requirements, the Company is required to
redeem the 8.5% Series A Preferred Stock on January 31, 1998. (See note 8).
Without the successful completion of the Offering, the Company will be unable to
meet the mandatory redemption obligation of the Series A Preferred Stock. In the
event the Company fails to meet these redemption requirements a change in
control of the Company may result.
The Company has developed cost reduction plans to improve efficiencies and
reduce costs. In particular the distribution costs associated with the Company's
wholly owned subsidiary, Rockwell Transportation, Inc. are substantial. Cost
reduction plans are being developed to reduce inefficiencies in the Company's
transportation operations and in the production process. Plans to maximize
production capacity through both
F-8
<PAGE> 54
ROCKWELL MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
increased production hours and equipment utilization are in process. The Company
feels that the market demand is greater than current production quantities and
that increasing capacity through fundamental management techniques can be
effected with minimum variable labor and manufacturing costs. Further, these
actions will require minimum capital investment.
Future Company plans have been developed to increase sales with new product
offerings and increased market penetration of existing product lines; however
these actions will require capital investment estimated at $1.8 million. The
effective implementation of these plans will not be possible without the
successful completion of the Offering.
There can be no assurance that even if the Company receives additional
capital it will be able to achieve the planned efficiencies and increased sales
levels to sustain its operations. There can be no assurance that the Company
will obtain any funds on terms acceptable to the Company and at times required
by the Company. These factors, among others, raise substantial doubt about the
Company's ability to continue as a going concern. The consolidated financial
statements do not include any adjustments relating to the recoverability and
classification of asset carrying amounts or the amount or classification of
liabilities that might be necessary should the Company be unable to continue as
a going concern.
4. PURCHASE OF THE BUSINESS
Effective February 19, 1997 the Company purchased the assets and assumed
certain liabilities of the Predecessor Companies for a purchase price of
approximately $2.4 million, excluding liabilities assumed. The transaction was
accounted for using the purchase method of accounting. The purchase price has
been allocated to assets acquired and liabilities assumed based on the estimated
fair market value at the date of acquisition, as follows:
<TABLE>
<S> <C>
Working capital, less cash acquired......................... $ (226,999)
Property and Equipment...................................... 688,534
Excess of purchase price over fair value of net assets...... 1,964,016
-----------
2,425,551
Promissory Note at 8.5%..................................... (1,916,664)
-----------
Net cash paid for business acquired.................... $ 508,887
===========
</TABLE>
The purchase price consisted of : (i) $150,000 cash payment to the Sellers
; (ii) a cash payment to NBD Bank of approximately $375,000 to retire related
outstanding debt; and (iii) the remainder of the purchase price was satisfied by
an 8.5% promissory note (the "Note") in the principal amount of approximately
$1.9 million. Under the terms of the Note and the Asset Purchase Agreement, a
prepayment of $500,000 on the Note was due in May 1997. Pursuant to a letter
agreement, the Sellers agreed that upon receipt of the prepayment, the remaining
Note balance would be converted into shares of Series A Redeemable Preferred
Stock at a conversion ratio of one share of Series A Preferred Stock to one
dollar of outstanding principal due under the Note. The Company made the
required prepayment and the Note was converted to 1,416,664 shares of Series A
Preferred Stock.
5. INVENTORY
Components of inventory are as follows:
<TABLE>
<CAPTION>
<S> <C>
Raw Materials............................................... $229,962
Finished Goods.............................................. 81,916
--------
Total $311,878
========
</TABLE>
F-9
<PAGE> 55
ROCKWELL MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. PROPERTY AND EQUIPMENT
Major classes of Property and Equipment, stated at cost, are as follows:
<TABLE>
<CAPTION>
<S> <C>
Leasehold Improvements...................................... $ 57,400
Machinery and Equipment..................................... 428,867
Office Furniture and Equipment.............................. 85,141
Laboratory Equipment........................................ 77,056
Vehicles including trailers................................. 46,691
--------
$695,155
Accumulated Depreciation.................................. (36,298)
--------
Net Property, and Equipment................................. $658,857
========
</TABLE>
7. NOTES PAYABLE TO SHAREHOLDERS
On May 31, 1997 shareholders notes payable were $125,000 at an interest
rate of 8.5%. All notes and accrued interest were paid in full in June 1997.
8. LEASES
The Company leases a facility for production and administrative offices as
well as transportation equipment used by the Company's subsidiary, Rockwell
Transportation, Inc. The lease terms are five years and two years, respectively.
These leases have been accounted for as operating leases. Lease payments were
$166,647 for the period ended May 31, 1997. Future minimum rental payment under
lease agreements are as follows:
<TABLE>
<CAPTION>
<S> <C>
Period from June 1, 1997 to December 31, 1997............... $254,931
Year ending December 31, 1998............................... 437,025
Year ending December 31, 1999............................... 348,475
Year ending December 31, 2000............................... 192,510
Year ending December 31, 2001............................... 12,600
</TABLE>
In accordance with the assignment of the facility lease from the
Predecessor Companies, the landlord required a deposit in escrow of $178,000
which is to be applied against future lease payments of $39,542 in each of the
years ending December 31, 1998 and 1999, $59,313 in the year ending December 31,
2000, with the balance held as additional security deposit until the expiration
of the facility lease. In the instance of early termination, the transportation
equipment leases require the Company to pay the excess of the purchase price for
such vehicles (determined in accordance with the terms of the lease) over the
equipment's fair market value.
A $25,000 letter of credit has been established for the benefit of certain
lessors. The letter of credit is collateralized by a short term certificate of
deposit.
9. CAPITAL STOCK
The authorized capital stock of the Company consists of 4,000,000 shares of
Common Stock, no par value per share, of which 2,846,667 shares were outstanding
at May 31, 1997; and 8.5% non-voting cumulative redeemable Series A Preferred
Stock, $1.00 par value (the "Series A Preferred Stock"), of which 1,416,664
shares were issued effective May 31, 1997.
F-10
<PAGE> 56
ROCKWELL MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
COMMON STOCK
Holders of the shares of Common Stock are entitled to one vote per share on
all matters submitted to a vote of shareholders of the Company and are to
receive dividends when and if declared by the Board of Directors. Dividends may
not be paid to the common shareholders until the redeemable Series A preferred
stock is redeemed. The Board is authorized to issue additional shares of Common
Stock within the limits of the Company's Articles of Incorporation without
further shareholder action. Holders of 495,000 shares of Common Stock are
entitled to receive an additional 94,286 shares of Common Stock at the effective
date of the offering for no additional consideration per the terms of the First
Prior Financing Agreement. These shares have been included in the net loss per
share calculation.
SERIES A PREFERRED STOCK
Holders of Series A Preferred Stock are entitled to receive, out of funds
legally available for the payment of dividends, cumulative cash dividends in the
amount of $.085 per share per year accruing from June 1, 1997, as and when
directed by the Board of Directors of the Company. As long as any shares of
Series A Preferred Stock are outstanding, the Company may not (i) declare, pay,
or set money, securities or other property apart for the payment of, any
dividend on any shares of the Company, including all classes of common stock and
any other series of preferred stock (all of such shares of the Company referred
to as "Junior Shares"), or (ii) make any payment on account of, or set money,
securities or other property apart for, the payment into a sinking or other
similar fund for the purchase, redemption or other retirement of, any of the
Junior Shares or any warrants, rights, calls or other options exercisable for or
exchangeable into any of the Junior Shares (collectively the "Junior
Securities"), or (iii) make any distribution in respect of any Junior
Securities, either directly or indirectly, and whether in cash, obligations or
shares of the Company or other property (other than distributions or dividends
in Junior Shares to the holders of Junior Shares), and shall not permit any
corporation or other entity directly or indirectly controlled by the Company to
purchase or redeem any of the Junior Securities, unless prior to or currently
with such declaration, payment, setting apart for payment, purchase, redemption
or distribution, as the case may be, all accrued and unpaid dividends on the
Series A Preferred Stock shall have been paid.
The Company is required to redeem all outstanding shares of Series A
Preferred Stock on January 31, 1998 (the "Mandatory Redemption Date"), at a
redemption price equal to $1.00 per share plus accumulated and unpaid dividends
accrued through the Mandatory Redemption Date. The purchase price must be paid
in cash. From and after the Mandatory Redemption Date, the holders of Series A
Preferred Stock will not have any rights as shareholders of the Company except
the right to receive from the Company the redemption price of such Series A
Preferred Stock, without interest, upon the surrender of such Series A Preferred
Stock to the Company. In addition, the Company has the right and option at any
time prior to the Mandatory Redemption Date to purchase, redeem or otherwise
acquire any or all of the Series A Preferred Stock for a purchase price equal to
$1.00 per share plus accumulated and unpaid dividends on such share through the
date of repurchase or redemption.
Subject to the prior rights of the Company's creditors, the holders of the
Series A Preferred Stock are entitled to receive, upon any voluntary or
involuntary liquidation, dissolution or winding-up of the Company, $1.00 per
share, plus accrued and unpaid dividends. If, in any such case, the assets of
the Company are insufficient to make such payment in full, then the available
assets will be distributed among the holders of the Series A Preferred Stock
ratably in proportion to the full amount to which each holder would be entitled.
Holders of Series A Preferred Stock have no conversion rights, however, the
obligation of the Company to effect the mandatory redemption of the Series A
Preferred Stock by the Mandatory Redemption Date is guaranteed by certain of the
Company's principal shareholders (the "Guaranty"). Such Guaranty is secured by
the pledge of 1,478,260 shares of Common Stock (the "Pledged Shares") pursuant
to an Escrow Agreement dated as of July 22, 1997 (the "Escrow Agreement"). In
the event the Company fails to redeem
F-11
<PAGE> 57
ROCKWELL MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the outstanding shares of Series A Preferred Stock on or before the Mandatory
Redemption Date, the Predecessor Companies have a period of 45 days following
such date to elect either to: (i) exercise their rights under the Guaranty and
the Escrow Agreement to retain the shares of Common Stock which remain held in
escrow, in full satisfaction and discharge of the Guaranty and the Company's
obligation to redeem the Series A Preferred Stock; or (ii) terminate their
rights under the Guaranty and to relinquish and terminate their interest in the
Pledged Shares and to proceed against the Company to collect the outstanding
redemption payment.
Holders of Series A Preferred Stock have no voting rights except as may be
required by law.
WARRANTS
Holders of the Warrants are entitled to purchase at the stated exercise
price of the Warrant one share of Common Stock of the Company subject to certain
adjustments and provisions. At May 31, 1997 there were 351,667 warrants issued
and outstanding. These Warrants do not become effective until after the
completion of the Offering (see Note 2 in these Notes to Consolidated Financial
statements).
Each Warrant will be separately transferable and will entitle the
registered holder to purchase one share of Common Stock at the exercise price of
$4.50 per share for a period of three years commencing one year after the
effective date of the Offering and ending on the fourth anniversary of the
effective date of the Offering (the "Exercise Period"). The exercise price and
the number of shares of Common Stock to be issued upon the exercise of each
Warrant are subject to adjustment in the event of stock split, stock dividend,
recapitalization, merger, consolidation or certain other events.
Under certain conditions, the Warrants may be redeemed by the Company at a
redemption price of $.10 per Warrant upon not less than 30 days prior written
notice to the holders of such Warrants, provided the closing bid price of the
Common Stock has been at least $8.50 for 20 consecutive trading days ending on
the third day prior to the date the notice of redemption is given.
10. RELATED PARTIES TRANSACTIONS
During the period ended May 31, 1997 the Company paid or accrued fees to
the consulting firm of Wall Street Partners, Inc. for financial and management
services of $175,000. Under a current agreement, the Company is obligated to pay
additional consulting fees of $175,000 over the next year. The principals of the
consulting firm are shareholders of the Company and members of the Board of
Directors.
In addition, the Company settled a certain obligation in the amount of
$25,000 to a related party through the issuance of 10,000 shares of Common
Stock.
11. SUBSEQUENT EVENTS
From May through July 15, 1997, the Company sold an aggregate of 26 Units,
each Unit consisting of 20,000 shares of Common Stock and 20,000 Common Stock
Purchase Warrants for net proceeds of $1,248,347.
On July 22, 1997, the Company amended its Articles of Incorporation to:
increase the authorized Common Stock to 20,000,000 shares; and to provide for
the issuance of the 1,416,664 shares of Series A Preferred Stock. On July 22,
1997 the Company issued 1,416,664 shares of Series A Preferred Stock, effective
May 31, 1997, to the Sellers in accordance with the Asset Purchase Agreement
(see Note 4).
The Amendment to the Articles of Incorporation also authorizes the Company
to issue up to 2,000,000 shares of "blank check" Preferred Stock (the "Blank
Check Preferred Stock") with such designations, rights and preferences as may be
determined from time to time by the Board of Directors. Accordingly, the Board
is empowered without further shareholder approval, to issue the Blank Check
Preferred Stock with dividend
F-12
<PAGE> 58
ROCKWELL MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
liquidation, conversion, voting or other rights that could decrease the amount
of earnings and assets available for distribution to holders of Common Stock or
adversely affect the voting power or other rights of the holders of the
Company's Common stock. In the event of issuance, the Blank Check Preferred
Stock could be utilized, under certain circumstances, as a method of
discouraging, delaying or preventing change in control of the Company.
On July 15, 1997 the Board of Directors and shareholders of the Company
adopted the Rockwell Medical Technologies, Inc. 1997 Stock Option Plan. The plan
provides for the issuance of 450,000 options with an exercise price equal to
fair value at the date of grant. Also effective July 15, 1997, the Company
granted 295,500 Stock options to officers and directors of the Company at an
exercise price of $3.00.
F-13
<PAGE> 59
<TABLE>
<S> <C> <C>
COOPERS & LYBRAND LOGO Coopers & Lybrand L.L.P. 400 Renaissance Center telephone (313) 446-7100
a professional services firm Detroit, Michigan facsimile (313) 446-7117
48243-1507
</TABLE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Members of
Rockwell Medical Supplies, L.L.C and
Rockwell Transportation, L.L.C:
We have audited the combined balance sheets of Rockwell Medical Supplies,
L.L.C and Rockwell Transportation, L.L.C (the "Company") at February 19, 1997
and December 31, 1996 and the related combined statements of income, members'
deficit, and cash flows for the period ended February 19, 1997 and the year
ended December 31, 1996. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of Rockwell
Medical Supplies, L.L.C and Rockwell Transportation, L.L.C at February 19, 1997
and December 31, 1996 and the results of their operations and their cash flows
for the period ended February 19, 1997 and the year ended December 31, 1996 in
conformity with generally accepted accounting principles.
COOPERS & LYBRAND LLP
Detroit, Michigan
July 11, 1997
Coopers & Lybrand L.L.P. is a member of Coopers & Lybrand International, a
limited liability association incorporated in Switzerland.
F-14
<PAGE> 60
ROCKWELL MEDICAL SUPPLIES, L.L.C.
AND ROCKWELL TRANSPORTATION, L.L.C.
COMBINED BALANCE SHEETS
(WHOLE DOLLARS)
<TABLE>
<CAPTION>
FEBRUARY 19, DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
Cash........................................................ $ 44,270 $ 65,978
Accounts Receivable, net of allowance for doubtful accounts
of $10,000 and $5,000 at February 19, 1997 and December
31, 1996, respectively.................................... 189,274 205,168
Inventory................................................... 244,647 343,539
Other Current Assets........................................ 48,898 48,417
----------- -----------
Total Current Assets...................................... 527,089 663,102
Property and Equipment, net................................. 670,885 728,557
----------- -----------
Total Assets.............................................. $ 1,197,974 $ 1,391,659
=========== ===========
Notes Payable, Bank......................................... 375,000 375,000
Payable to Members.......................................... $ 1,868,149 $ 1,868,149
Accounts Payable............................................ 679,941 512,074
Accrued Liabilities......................................... 33,315 28,848
----------- -----------
Total Current Liabilities................................. 2,956,405 2,784,071
Members' Deficit:
Contributed Capital......................................... 50,000 50,000
Deficit..................................................... (1,808,431) (1,442,412)
----------- -----------
Total Liabilities and Members' Deficit.................... $ 1,197,974 $ 1,391,659
=========== ===========
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.
F-15
<PAGE> 61
ROCKWELL MEDICAL SUPPLIES, L.L.C.
AND ROCKWELL TRANSPORTATION, L.L.C.
COMBINED INCOME STATEMENTS
(WHOLE DOLLARS)
<TABLE>
<CAPTION>
JANUARY 1 TO YEAR ENDED
FEBRUARY 19, DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
Sales....................................................... $ 343,555 $ 1,019,856
Cost of Sales............................................... 529,121 1,617,363
--------- -----------
Gross Margin.............................................. (185,566) (597,507)
Selling, General and Administrative Expenses................ 177,015 773,344
Interest Expense............................................ 3,438 12,634
--------- -----------
Net Loss.................................................. $(366,019) $(1,383,485)
========= ===========
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.
F-16
<PAGE> 62
ROCKWELL MEDICAL SUPPLIES, L.L.C.
AND ROCKWELL TRANSPORTATION, L.L.C.
COMBINED STATEMENT OF CHANGES IN MEMBERS' DEFICIT
(WHOLE DOLLARS)
<TABLE>
<CAPTION>
CONTRIBUTED TOTAL MEMBERS
CAPITAL DEFICIT DEFICIT
----------- ------- -------------
<S> <C> <C> <C>
Balances at January 1, 1996.......................... $50,000 $ (58,927) $ (8,927)
------- ----------- -----------
Net loss........................................... -- (1,383,485) (1,383,485)
------- ----------- -----------
Balances at December 31, 1996........................ 50,000 (1,442,412) (1,392,412)
Net loss for the period January 1, 1997 to
February 19, 1997............................. -- (366,019) (366,019)
------- ----------- -----------
Balances at February 19, 1997........................ $50,000 $(1,808,431) $(1,758,431)
======= =========== ===========
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.
F-17
<PAGE> 63
ROCKWELL MEDICAL SUPPLIES, L.L.C.
AND ROCKWELL TRANSPORTATION, L.L.C.
COMBINED STATEMENT OF CASH FLOWS
(WHOLE DOLLARS)
<TABLE>
<CAPTION>
JANUARY 1 TO YEAR ENDED
FEBRUARY 19, 1997 DECEMBER 31, 1996
----------------- -----------------
<S> <C> <C>
Cash flows from Operating Activities:
Net loss................................................. $(366,019) $(1,383,485)
Adjustments to reconcile net loss to net cash used for
operating activities:
Depreciation.......................................... 17,649 133,659
Changes in working capital:
Accounts Receivable................................. 15,894 (205,168)
Inventory........................................... 98,892 (343,539)
Other Current Assets................................ (481) (8,876)
Accounts Payable.................................... 207,890 512,074
Accrued Liabilities................................. 4,467 28,848
--------- -----------
Net cash used in operating activities............ (21,708) (1,266,487)
Cash flows from Investing Activities:
Purchases of Equipment................................... (549,713)
-----------
Net cash used in investing activities............ -- (549,713)
Cash flows from Financing Activities:
Members' capital contributions........................... -- 50,000
Proceeds of Bank loans................................... -- 375,000
From Members............................................. -- 1,457,178
--------- -----------
Net cash provided by financing activities........ -- 1,882,178
Net (decrease) increase in cash.................. (21,708) 65,978
Cash at beginning of the period.................. 65,978 --
--------- -----------
Cash at end of the period........................ $ 44,270 $ 65,978
========= ===========
Supplemental cash flow information
Interest expense paid.................................... 3,438 12,634
========= ===========
Supplemental non-cash disclosure:
$40,023 of equipment was exchanged for payment of an
account payable.
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.
F-18
<PAGE> 64
ROCKWELL MEDICAL SUPPLIES, L.L.C.
AND ROCKWELL TRANSPORTATION, L.L.C.
NOTES TO COMBINED FINANCIAL STATEMENTS
1. ORGANIZATION AND CAPITALIZATION
Rockwell Medical Supplies, L.L.C. was established in October 1995 for the
purpose of manufacturing hemodialysis concentrates and dialysis kits for sale
and distribution to hemodialysis clinics throughout the United States. It also
packages, sells and distributes ancillary products related to the hemodialysis
process.
There was limited activity during 1995, consisting primarily of the
purchase of certain equipment, the payment of a facility lease security deposit
and the payment of $58,927 for certain start up expenses.
Rockwell Transportation, L.L.C. was established in March 1996 for the
purpose of distributing products produced by Rockwell Medical Supplies, L.L.C.
The combined entity of Rockwell Medical Supplies, L.L.C. and Rockwell
Transportation, L.L.C. is referred to as the "Company".
The Company is 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. In March 1996 the Company received 510(k) approval from the FDA to
market hemodialysis solutions and powders. The Company began manufacturing,
distributing and selling hemodialysis solutions in May 1996.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The combined financial statements of the Company include the accounts of
Rockwell Medical Supplies, L.L.C. and it's sister company Rockwell
Transportation, L.L.C. which are entities under common control. All intercompany
balances and transactions have been eliminated.
REVENUE RECOGNITION
The Company recognizes revenue at the date of shipment.
INVENTORY
Inventory is stated at net realizable value, including raw material costs
and excluding the conversion cost required to produce finished goods. Cost of
sales for the period ended February 19, 1997 is calculated based on the material
gross margin for the preceding twelve month period.
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 life,
which ranges from three to eight years.
INCOME TAXES
As a limited liability company, it was intended that the Company be
classified as a partnership for federal income tax purposes and, as such, it was
treated as a "pass-through" entity that was not subject to federal income tax.
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.
F-19
<PAGE> 65
ROCKWELL MEDICAL SUPPLIES, L.L.C.
AND ROCKWELL TRANSPORTATION, L.L.C.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
LOSS PER SHARE
The Company is a Limited Liability Corporation; accordingly loss per share
information is not relevant.
3. SALE OF THE BUSINESS
Effective February 19, 1997 the assets of the Company were sold to Rockwell
Medical Technologies, Inc. (the "Successor Company"). Total purchase price for
essentially all the operating assets was approximately $2.4 million excluding
the assumption of certain liabilities. The Asset Purchase Agreement provided a
cash payment at closing of $150,000 to the Sellers; payoff of the Notes Payable
to Bank of $375,000; and the balance in the form of a promissory note of
approximately $1.9 million payable to certain members of the Company. In May
1997, as provided in the Asset Purchase Agreement, a $500,000 cash payment was
received on the promissory note. The remaining unpaid principal was converted to
8.5% Non-Voting Redeemable Series A Preferred Stock of the Successor Company,
redeemable on or before January 31, 1998.
One of the Members of the Company is a minority shareholder of the
Successor Company and is employed as an Officer and Director of the Successor
Company.
4. INVENTORY
Components of inventory are as follows:
<TABLE>
<CAPTION>
FEBRUARY 19, DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
Raw Material........................................ $121,829 $282,235
Finished Goods...................................... 122,818 61,304
-------- --------
Total.......................................... $244,647 $343,539
======== ========
</TABLE>
5. PROPERTY AND EQUIPMENT
Major classes of Property and Equipment, stated at cost, are as follows:
<TABLE>
<CAPTION>
FEBRUARY 19, DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
Machinery and Equipment............................. $ 580,875 $ 580,875
Office furniture and equipment...................... 109,562 109,562
Laboratory Equipment................................ 95,326 95,326
Vehicles, including trailers........................ 36,170 76,453
--------- ---------
Total Cost..................................... 821,933 862,216
Accumulated Depreciation............................ (151,048) (133,659)
--------- ---------
Net Property and Equipment.......................... $ 670,885 $ 728,557
========= =========
</TABLE>
6. PAYABLE TO MEMBERS
Payable to Members is comprised of obligations of the Company to certain
Members of the Company who advanced operating funds to the Company during 1996
and 1995.
F-20
<PAGE> 66
ROCKWELL MEDICAL SUPPLIES, L.L.C.
AND ROCKWELL TRANSPORTATION, L.L.C.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
7. NOTES PAYABLE TO BANK
The Company had a Master Demand Business Loan Note with National Bank of
Detroit in the amount of $400,000, at the current prime rate, of which $375,000
was outstanding at December 31, 1996 and February 19, 1997. At December 31, 1996
and February 19, 1997 the bank's prime rate was 8.5%. The principal and interest
amounts of the Note were paid in full in accordance with the Asset Purchase
Agreement (See Note 3). This note was collateralized by the assets of the
Company.
8. LEASES
The Company leases a facility and certain equipment under operating leases.
Lease payments were $339,790 and $50,439 for the year ended December 31, 1996
and the period ended February 19, 1997, respectively. Effective February 19,
1997 all leases relating to the operations of the Company were assigned to the
Successor Company.
F-21
<PAGE> 67
======================================================
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT. WE HAVE
NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT. 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. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE OF COMMON SHARES IMPLIES UNDER ANY
CIRCUMSTANCES THAT THERE HAS BEEN NO CHANGE IN THE CIRCUMSTANCES OF THE COMPANY
OR THE FACTS DESCRIBED IN THIS PROSPECTUS SINCE THE DATE OF THIS PROSPECTUS.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Additional Information................ 3
Prospectus Summary.................... 4
Risk Factors.......................... 8
Use of Proceeds....................... 16
Capitalization........................ 17
Dilution.............................. 17
Dividend Policy....................... 18
Management's Discussions and Analysis
of Financial Condition and Results
of Operations....................... 19
Business.............................. 22
Management............................ 28
Certain Transactions.................. 31
Security Ownership of Certain
Beneficial Owners and Management.... 34
Description of Securities............. 35
Shares Eligible for Future Sale....... 39
Underwriting.......................... 41
Legal Matters......................... 44
Experts............................... 44
Index to Financial Statements......... F-1
</TABLE>
------------------------
UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS) ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
======================================================
======================================================
1,500,000 UNITS
ROCKWELL MEDICAL
TECHNOLOGIES, INC.
CONSISTING OF
1,500,000 COMMON SHARES AND
3,000,000 COMMON SHARE
PURCHASE WARRANTS
---------------------------
PROSPECTUS
---------------------------
MAIDSTONE FINANCIAL, INC.
MAIDSTONE FINANCIAL, INC. LOGO
, 1997
======================================================
<PAGE> 68
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Under Sections 561-571 of the Michigan Business Corporation Act, as
amended, directors and officers of a Michigan corporation may be entitled to
indemnification by the corporation against judgments, expenses, fines and
amounts paid by the director or officer in settlement of claims brought against
them by third persons or by or in the right of the corporation if those
directors and officers acted in good faith and in a manner reasonably believed
to be in, or not opposed to, the best interest of the corporation or its
shareholders.
The Registrant is obligated under its bylaws and an employment agreement
with its chief executive officer to indemnify a present or former director or
executive officer of the Registrant, and may indemnify any other person, to the
fullest extent now or hereafter permitted by law in connection with any actual
or threatened civil, criminal, administrative or investigative action, suit or
proceeding arising out of their past or future service to the Registrant or a
subsidiary, or to another organization at the request of the Registrant or a
subsidiary. In addition, the Articles of Incorporation of the Company, as
amended, limit certain personal liabilities of directors of the Company.
Reference is also made to Section of the Underwriting Agreement (a form
of which is attached to this Registration Statement as Exhibit 1.1) with respect
to undertakings to indemnify the Registrant, its directors and officers and each
person who controls the Registrant within the meaning of the Securities Act of
1933, as amended (the "Securities Act"), against certain civil liabilities,
including certain liabilities under the Securities Act.
The Registrant has obtained Directors' and Officers' liability insurance.
The policy provided for $1,000,000 in coverage including prior acts dating to
the Company's inception and liabilities under the Securities Act in connection
with this Offering.
ITEM 25. 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.
With the exception of the SE registration fee and the NASD filing fee, all
amounts indicated are estimates.
<TABLE>
<S> <C>
SE Registration fee......................................... $ 7,538
NASD filing fee............................................. 2,988
Nasdaq listing fee.......................................... 10,000
Underwriter non-accountable expense allowance............... 189,000
Underwriter advisory fee.................................... 99,984
Directors' and Officers' liability insurance................ 80,000
Printing expenses (other than stock certificates)........... 60,000
Printing and engraving of stock and warrant certificates.... 4,000
Legal fees and expenses (other than blue sky)............... 100,000
Accounting fees and expenses................................ 100,000
Blue sky fees and expenses (including legal and filing
fees)..................................................... 35,000
Transfer Agent and Warrant Agent fees and expenses.......... 5,000
Miscellaneous............................................... 6,490
--------
Total.................................................. $700,000
========
</TABLE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
Since inception (October 25, 1996), the Company has sold securities to a
limited number of persons, as described below. Except as indicated, there were
no underwriters involved in the transactions and there were
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<PAGE> 69
no underwriting discounts or commissions paid in connection therewith. The
purchasers of securities in each such transaction represented their intention to
acquire the securities for investment only and not with a view to, or for sale
in connection with, any distribution thereof and appropriate legends were
affixed to the certificates for the securities issued in such transactions. All
purchasers of securities in each such transaction had adequate access to
information about the Company, and in the case of transactions exempt from
registration under Section 4(2) of the Securities Act, were sophisticated
investors.
1. In October 1996, in connection with the formation of the Company,
the Company sold to Gary D. Lewis, Michael J. Xirinachs and Robert L.
Chioini an aggregate of 2,000,000 Common Shares for an aggregate purchase
price of $1,000. The Common Shares were sold in reliance of the exemptions
from registration contained in Section 4(2) of the Securities Act.
2. In February 1997, the Company sold to 17 accredited investors an
aggregate of 495,000 Common Shares at a price of $2.50 per share. The gross
proceeds to the Company from such sales were $1,237,500 (including the
discharge of a $25,000 debt owed to one of the investors). The Common
Shares were sold in reliance upon the exemption from registration contained
in Sections 4(2) and 4(6) of the Securities Act and Rule 506 of Regulation
D promulgated under Section 4(2) of the Securities Act ("Regulation D").
3. In May through July 1997, the Company sold to 19 accredited
investors an aggregate of 26 units, each unit consisting of 20,000 Common
Shares and 20,000 Common Shares Purchase Warrants, at a price of $60,000
per unit (the "Second Prior Financing"), for gross proceeds of $1,560,000.
The warrants are exercisable to purchase one Common Share each at any time
during the three year period beginning one year after the Effective Date at
$4.50 per share. In connection with the Second Prior Financing, the Company
paid Maidstone Financial, Inc., as placement agent, selling commissions of
$156,000, and a non-accountable expense allowance of $46,800. Each of the
investors in the Second Prior Financing represented to the Company that
such investor was an "accredited investor" (as defined in Rule 501(a) of
Regulation D). The securities sold in the Second Prior Financing were sold
in reliance upon the exemptions from registration contained in Section 4(2)
and 4(6) of the Securities Act and Rule 506 of Regulation D.
4. In July 1997, the Company issued and sold to RMS of Michigan,
L.L.C. (formerly known as Rockwell Medical Supplies, LLC, "Supply Company")
1,416,664 shares of Series A Preferred Stock at a purchase price of $1.00
per share, in consideration for the cancellation of a promissory note,
issued by the Company in favor of Supply Company, which had an outstanding
principal balance of $1,416,664. Such Series A Preferred Stock was issued
and sold in reliance upon the exemption from registration contained in
Section 4(2) of the Act.
ITEM 27. EXHIBITS
See Exhibit Index immediately preceding the exhibits.
ITEM 28. UNDERTAKINGS
(a) The undersigned small business issuer 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 set forth in the registrant 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,
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<PAGE> 70
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
(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) The undersigned small business issuer hereby undertakes that it will
provide the Underwriter at the closing specified in the Underwriting
Agreement certificates in such denominations and registered in such
names as required by the Underwriter to permit prompt delivery to each
purchaser.
(c) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Securities 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.
(d) The undersigned small business issuer will:
(1) For determining any liability under the Securities Act, treat the
information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the small business
issuer under Rule 424(b)(1) or (4) or 497(h) under the Securities
Act as part of this registration statement as of the time the
Commission declared it effective.
(2) For determining any liability under the Securities Act, treat each
post-effect amendment that contains a form of prospectus as a new
registration statement for the securities offered in the
registration statement, and that offering of the securities at
that time as the initial bona fide offering of those securities.
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<PAGE> 71
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 Registration Statement to be signed on its behalf by the undersigned, in the
City of Wixom, State of Michigan, on September 8, 1997.
ROCKWELL MEDICAL TECHNOLOGIES, INC.
(Registrant)
By: /s/ ROBERT L. CHIOINI
------------------------------------
Robert L. Chioini
President and Chief Executive
Officer
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<PAGE> 72
In accordance with the requirements of the Securities Act of 1933, this
Amendment No. 1 to Registration Statement has been signed by the following
persons in the capacities and on the dates stated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ ROBERT L. CHIOINI President, Chief Executive September 8, 1997
- --------------------------------------------- Officer and Director (Principal
Robert L. Chioini Executive Officer)
/s/ JAMES J. CONNOR Vice President of Finance, Chief September 8, 1997
- --------------------------------------------- Financial Officer, Treasurer and
James J. Connor Secretary (Principal Financial
Officer and Principal Accounting
Officer)
/s/ GARY D. LEWIS Director September 8, 1997
- ---------------------------------------------
Gary D. Lewis
* Director September 8, 1997
- ---------------------------------------------
Michael J. Xirinachs
* Director September 8, 1997
- ---------------------------------------------
Norman L. McKee
* By: /s/ ROBERT L. CHIOINI
- ---------------------------------------------
Robert L. Chioini
Attorney-in-fact
</TABLE>
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<PAGE> 73
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
------- -----------
<S> <C>
1.1** Form of Underwriting Agreement
1.2** Form of Advisory and Investment Banking Agreement between
the Registrant and Maidstone Financial, Inc.
3(i).1** Articles of Incorporation of the Registrant
3(i).2** Certificate of Amendment to Articles of Incorporation of the
Registrant
3(i).3** Certificate of Correction to Articles of Incorporation of
the Registrant
3(i).4** Certificate of Amendment to Articles of Incorporation of the
Registrant
3(ii)** Bylaws of the Registrant
4.1* Form of Warrant Agreement
4.2** Form of Underwriter's Unit Purchase Option
4.3* Specimen Common Share Certificate
4.4** Specimen Warrant Certificate (included as Exhibit A to
Exhibit 4.1)
4.5* Form of Bridge Warrant
4.6* Registration Rights Agreement among the Registrant and the
holders of the Bridge Warrants
4.7* Form of Lock-up Agreement
5.1* Opinion of Honigman Miller Schwartz and Cohn concerning the
legality of the securities being offered
10.1** Rockwell Medical Technologies, Inc. 1997 Stock Option Plan
10.2** Employment Agreement dated as of February 19, 1997 between
the Company and Robert L. Chioini
10.3** Consulting and Financial Advisory Services Agreement dated
February 19, 1997 between the Company and Wall Street
10.4** Asset Purchase Agreement dated as of November 1, 1996 by and
among the Predecessor Company, the Family Partnerships (as
defined therein), the Members (as defined therein) and the
Company (formerly known as Acquisition Partners, Inc.)
10.5** First Amendment to Asset Purchase Agreement dated as of
January 31, 1997 by and among the Predecessor Company, the
Family Partnerships, the Members and the Company (formerly
known as Acquisition Partners, Inc.)
10.6** Second Amendment to Asset Purchase Agreement dated as of
February 19, 1997 by and among the Predecessor Company, the
Family Partnerships, the Members and the Company (formerly
known as Acquisition Partners, Inc.)
10.7** Letter Agreement dated April 4, 1997 among the parties to
the Asset Purchase Agreement concerning the conversion of
the promissory note payable to the Supply Company
10.8** Share Pledge and Escrow Agreement dated as of July 22, 1997
among the Principal Shareholders, the Supply Company, the
Company and Honigman Miller Schwartz and Cohn, as Escrow
Agent.
10.9** Lease Agreement dated as of September 5, 1995 between the
Supply Company, as tenant, and Oakland Oaks, L.L.C., as
landlord
10.10** Assignment and First Amendment to Wixom Building Lease dated
as of February 19, 1997 among the Supply Company, as
assignor, the Company, as assignee, and Oakland Oaks,
L.L.C., as landlord
21.1** List of Subsidiaries
23.1 Consent of Coopers & Lybrand LLP
23.2* Consent of Honigman Miller Schwartz and Cohn (to be included
in Exhibit 5.1 to this Registration Statement)
24.1** Power of Attorney
27.1** Financial Data Schedule for the Company
27.2** Financial Data Schedule for the Predecessor Companies
27.3** Financial Data Schedule for the Predecessor Companies
</TABLE>
- ------------------
* To be filed by amendment.
** Previously filed.
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<PAGE> 1
EXHIBIT 23.1
[COOPERS & LYBRAND LETTERHEAD]
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form SB-2, as
amended, of our report dated July 11, 1997 on our audits of the combined
financial statements of Rockwell Medical Supplies, L.L.C. and Rockwell
Transportation, L.L.C. and our report which includes an explanatory paragraph
related to the uncertainty of the Company's ability to continue as a going
concern, dated July 11, 1997, except for Note 11, as to which the date is July
22, 1997 on our audit of the consolidated financial statements of Rockwell
Medical Technologies, Inc. We also consent to the reference to our Firm under
the caption "Experts".
/s/ Coopers & Lybrand LLP
Detroit, Michigan
September 8, 1997
