ROCKWELL MEDICAL TECHNOLOGIES INC, 10KSB40, 1999-03-30

ROCKWELL MEDICAL TECHNOLOGIES INC
10KSB40, 1999-03-30
ELECTROMEDICAL & ELECTROTHERAPEUTIC APPARATUS

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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-KSB

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<S> <C>
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934.

FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998 OR

[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934.

FOR THE TRANSITION PERIOD FROM TO

COMMISSION FILE NUMBER: 000-23-661
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ROCKWELL MEDICAL TECHNOLOGIES, INC.
(Name of Small Business Issuer in Its Charter)

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<S> <C>
MICHIGAN 38-3317208
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)

28025 OAKLAND OAKS DRIVE
WIXOM, MICHIGAN 48393
(Address of Principal (Zip Code)
Executive Offices)
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(248) 449-3353
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(Issuer's Telephone Number,
including Area Code)

Securities registered pursuant to Section 12(b) of the Exchange Act: NONE

Securities registered pursuant to Section 12(g) of the Exchange Act:

TITLE OF CLASS:
COMMON SHARES, NO PAR VALUE

TITLE OF CLASS:
COMMON SHARE PURCHASE WARRANTS
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Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. YES [X] NO [
]

Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-K is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]

State issuer's revenues for its most recent fiscal year: $5,272,698.00

State the aggregate market value of the voting and non voting common equity
held by non-affiliates: $12,757,143 as of March 22, 1999.

Indicate the number of shares outstanding of each of the issuer's classes
of common equity as of the latest practicable date: 4,830,450 Common Shares
outstanding and 3,625,000 Common Share Purchase Warrants outstanding as of March
22, 1999.

Documents incorporated by reference: Portions of the Registrant's
definitive Proxy Statement pertaining to the 1999 Annual Meeting of Shareholders
(the "Proxy Statement") filed pursuant to Regulation 14A are herein incorporated
by reference.

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PART I

ITEM 1. DESCRIPTION OF BUSINESS.

GENERAL

Rockwell Medical Technologies, Inc. is a Michigan corporation, incorporated
on October 25, 1996. From October 25, 1996 through February 18, 1997 the Company
had no operations and incurred only legal and consulting expenses. On February
19, 1997, the Company acquired substantially all of the assets of Rockwell
Medical Supplies, L.L.C. and of Rockwell Transportation, L.L.C. (collectively,
the "Predecessor Company") used in connection with the business of manufacturing
hemodialysis concentrates and dialysis kits and distributing and delivering
these and other products to hemodialysis clinics. The Predecessor Company began
operations in January 1996.

Rockwell Medical Technologies, Inc. manufactures hemodialysis concentrates
and dialysis kits, and sells, distributes and delivers such concentrates and
dialysis kits, as well as other ancillary hemodialysis products, to hemodialysis
providers in the United States. 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 nor regulate the amount of electrolytes in the
patient's blood. Long-term dialysis treatments are essential for these patients'
survival.

INDUSTRY BACKGROUND

The company provides products used in the treatment of patients with
end-stage renal disease ("ESRD"). In 1998 there were an estimated 240,000 ESRD
patients in the United States, whose permanent kidney failure requires long-term
dialysis for survival. According to the United States Department of Health and
Human Services ("DHHS"), the ESRD patient population has increased, on average,
7.9% per year for the five years preceding 1998. Incidence of kidney failure is
increasing as a by-product of the aging population, an increasing occurrence of
diabetes and hypertension, and increased use of prescription drugs. ESRD
patients are essentially treated as chronic patients, with repeated dialysis
treatments replacing their nonfunctioning kidneys. Most patients undergoing
hemodialysis treatments generally receive three treatments per week or 156
treatments per year, although the amount of weekly treatments may vary.

Hemodialysis patients generally receive their treatments at hospitals or
independent hemodialysis clinics. A hemodialysis provider, such as a hospital or
a freestanding clinic, uses a dialysis station to treat patients. A dialysis
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 a dialyzer (artificial
kidney), 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 chooses the formula required for each patient based on each
particular patient's needs, although most patients receive one of eight common
formulations.

In addition to using concentrate solutions and chemical powders (which must
be replaced for each use for each patient) a dialysis station requires various
other ancillary products such as 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, most of which the Company sells.

INDUSTRY TRENDS

The dialysis industry has experienced steady patient population growth
based on statistics complied by the DHHS, with the patient population increasing
between 7-11% each year over the last ten years. ESRD is an irreversible
deterioration of kidney function. Population segments with the highest incidence
of ESRD are also the fastest growing within the U.S. population including the
elderly, Hispanic and African-American

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population segments. More than 60% of new ESRD cases are attributed to either
diabetes or hypertension, while glomerulonephritis is the primary factor behind
nearly 11% of treated cases.

Hemodialysis providers are generally either independent clinics or
hospitals. According to the DHHS, since 1973 the total number of hemodialysis
providers in the United States has more than quintupled from 606 in 1973 to over
3,423 in December 1997. Independent providers comprised 2,506 of such providers,
hospitals comprised 673 of such providers and kidney transplant centers
comprised 244 of such providers at the end of 1997 according to the DHHS. The
Company currently supplies over 200 hemodialysis providers in over 20 states
across the United States. 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 and in 1997 more than 228,000 patients were treated in Medicare-approved
renal facilities. According to the DHHS, from 1985 to 1997, the number of
hemodialysis stations, which are areas equipped to provide adequate and safe
dialysis therapy, grew from 17,845 stations to 50,853 stations.

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 to offer ancillary
products used by hemodialysis providers, the Company has positioned
itself as an independent "one-stop-shop" to its customers for the
concentrates, chemicals and supplies necessary to support a hemodialysis
provider's 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. The Company intends to
expand its manufacture and distribution of Dri-Sate(TM) Dry Acid
Concentrate and SteriLyte(TM) Liquid Bicarbonate. Sales of these two
products during the introduction stage in 1998 were minimal as a percent
of annual sales, however, the initial market response has been favorable
and the Company anticipates increased sales in 1999. In addition, the
Company intends to introduce other hemodialysis products not currently
offered by the Company. These 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 and/or distribute such products).

- Offering a Higher Level of Delivery/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. 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. A drum pump-off requires
the driver to pump hemodialysis concentrates from a 55 gallon drum 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 higher level of distribution service to
its customers through the use of its own delivery vehicles and drivers.

- Expanding Market Share in Target Market Segments. Because of the costs
associated with transporting and delivering hemodialysis concentrates,
the Company believes that it has a competitive cost advantage with
certain clinics that are located within a reasonable proximity to the
Company's manufacturing facility over other manufacturers outside of such
proximity. The Company believes it can increase its sales in these target
markets at margins which are higher than those experienced by the Company
in markets outside this radius. The Company intends to intensify its
sales and marketing efforts in those such markets.

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PRODUCTS

The Company manufactures hemodialysis concentrates and dialysis kits, and
sells, distributes and delivers such products, as well as a full line of
ancillary hemodialysis products to hemodialysis providers and distributors
located in more than 20 states.

Hemodialysis concentrates are comprised of two primary products, which are
referred to as acid and bicarbonate. The acid contains certain additives such as
dextrose, magnesium, potassium, calcium and other components and the Company
manufactures approximately 30 different formulations of acid concentrate. Both
acid and bicarbonate are sold by the Company in either a liquid or a powder
form. In addition to the on-off kits, the Company also acts as a distributor for
a variety of ancillary products used for hemodialysis treatments including
needles, gloves, bandages, transducers, cleaning agents, etc. See "New Products"
below.

NEW PRODUCTS

In June of 1998 and June of 1997, the Company obtained 510(k) clearance
from the FDA to manufacture and market two new products, Dri-Sate(TM) Dry Acid
Concentrate and SteriLyte(TM) Liquid Bicarbonate. These products enhance the
Company's previous product offerings of acid concentrate in a liquid form and
bicarbonate in a powder form. The Company installed the equipment necessary to
manufacture and package both products in 1998 and recorded initial sales in the
last quarter of 1998. Each of these new products is described below.

"Dri-Sate(TM) Dry Acid Concentrate"

The Company's Dri-Sate(TM) Dry Acid Concentrate allows a clinic to mix its
acid concentrate on-site. The clinical technician, using a specially designed
mixer, adds pre-measured packets of the necessary ingredients to 50 or 100
gallons of purified water (AMII standard). Once mixed, the product is similar to
the acid provided to the clinic in liquid form. By using Dri-Sate(TM) Dry Acid
Concentrate numerous advantages are realized by the clinics including lower cost
per treatment, increased storage space, reduced number of deliveries and more
flexibility in scheduling. The Company believes it will attain increased profit
margins due to the reduction in freight cost associated with shipping the dry
product as compared to the liquid form. The Company also believes it will
generate increased back-haul revenue due to the elimination of returning empty
drums to the Company's facility, thus allowing its trucks to obtain increased
back-haul revenue from third parties.

"SteriLyte(TM) Liquid Bicarbonate"

The Company's SteriLyte(TM) Liquid Bicarbonate, which is used primarily in
acute care settings, is currently the only liquid bicarbonate on the market
manufactured utilizing a process called gamma irradiation. Historically, other
manufacturers have been required to recall product due to excess levels of molds
and bacteria in their product. Gamma irradiation is a process that minimizes the
presence of mold and bacteria in the product thereby providing a higher quality
product to the customer. The Company's SteriLyte(TM) Liquid Bicarbonate, by
utilizing gamma irradiation, offers the dialysis community a high-quality
product and provides the clinic a safe and uninterrupted supply source.

TRUCKING OPERATIONS

The majority of the distribution of the Company's products is provided by
the Company's wholly-owned subsidiary, Rockwell Transportation, Inc. Rockwell
Transportation, Inc. leases and operates a fleet of ten trucks which are used to
deliver products to the Company's customers. A portion of the Company's
distribution, primarily to medical products distributors, is provided by common
carriers contracted by the Company on a competitive rate basis.

Rockwell Transportation, Inc. currently employs ten drivers to operate its
truck fleet, one dispatcher, and an individual to manage its trucking
operations. The Company's liquid acid concentrates are generally packaged in
55-gallon re-usable drums weighing approximately 550 pounds each. The Company
performs

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services for customers that are generally not available from common carriers,
such as stock rotation, non-loading-dock delivery and drum pump-offs. The
Company's primary competitors generally use common carriers and/or do not
perform the same services for delivery of their products. The Company believes
it offers a higher level of service to its customers through the use of its own
delivery vehicles and drivers.

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, two direct salespeople 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 salespeople are employees of
the Company and are paid a salary or 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.

COMPETITION

In addition to 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 (i) Gambro Healthcare, Inc.
("Gambro"), which supplies concentrates and other products and also owns clinics
which treat approximately 30,000 U.S. hemodialysis patients, (ii) Fresenius
Medical Care, Inc. ("Fresenius"), which supplies concentrates and other
products, and also owns clinics which treat approximately 55,000 U.S.
hemodialysis patients, and (iii) Renal Systems (a division of Minntech
Corporation), which supplies concentrates and renalin, a specialty product used
for dialyzer reuse, but does not carry a line of ancillary hemodialysis
products.

The Company competes against larger more established competitors with
substantially greater financial, technical, manufacturing, marketing, research
and development and management resources than those of the Company. Fresenius
and Gambro are primarily in the business of operating dialysis clinics and sales
of the Company's types of products do not constitute a significant portion of
the revenue of those companies. However, these companies have a built-in
customer base for those products manufactured by those companies. The Company
believes that its business strategies provide it with competitive advantages
over each of its three major competitors. The Company believes that breadth of
product line, delivery and customer service are the principal factors that
provide it with a competitive advantage in the hemodialysis products industry.

QUALITY ASSURANCE AND CONTROL

To assure quality and consistency of the Company's concentrates, the
Company conducts specific analytical tests 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 industry standards. 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 these tests have
been conducted the product is released for shipment.

In 1997, the Company purchased 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

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has been able to reduce the amount of labor and maintenance necessary to perform
such tests and maintain the equipment.

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 United
States Food and Drug Administration ("FDA") and corresponding state and foreign
agencies. Pursuant to the Federal Food, Drug and Cosmetic Act (the "FDA Act"),
and the regulations promulgated thereunder, the FDA regulates the pre-clinical
and clinical testing, manufacture, labeling, distribution and promotion of
medical devices. Noncompliance with applicable requirements can result in, among
other things, fines, injunctions, civil penalties, recall or seizure of
products, total or partial suspension of production, failure of the government
to grant pre-market clearance or pre-market approval for devices, withdrawal of
marketing clearances or approvals and criminal prosecution.

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 to seek "510(k) clearance." Such clearance generally is granted
when submitted information establishes that a proposed device is "substantially
equivalent" in intended use to a class I or II device already legally on the
market or to a "pre-amendment" class III device (i.e., one that has been in
commercial distribution since before May 28, 1976) for which the FDA has not
called for pre-market approval ("PMA") applications. The FDA in recent years has
been requiring a more rigorous demonstration of substantial equivalence than in
the past, including requiring clinical trial data in some cases. For any devices
that are cleared through the 510(k) process, modifications or enhancements that
could significantly affect safety or effectiveness, or constitute a major change
in the intended use of the device, will require new 510(k) submissions. 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 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 "non-significant
risk" to the patient, a sponsor may begin the clinical trial after obtaining
approval for the study by one or more appropriate IRBs without the need for FDA
approval.

Any devices manufactured or distributed by 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 Practice ("GMP") 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

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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 Predecessor 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 assets of the Predecessor Company. In addition, the Company
received 510(k) clearance from the FDA to manufacture and market liquid
bicarbonate in June 1997 and 510(k) clearance from the FDA to manufacture and
market Dri-Sate(TM) Dry Acid Concentrate in June 1998. The Company's retention
of such 510(k) clearances is also 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
need to cease manufacturing and/or distributing the Company's 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 products in the United States would
be prohibited during the period the Company does not have such clearances.

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 March 22, 1999, the Company had approximately fifty employees, of
which two were direct salespeople, four were laboratory technicians, ten were
truck drivers and eight were engaged in corporate management and administration.
The remaining employees were hourly workers including clerical and plant
employees. The Company's arrangements with its employees are not governed by any
collective bargaining agreement. Employees are employed on an "at-will" basis
with the exception of Mr. Robert L. Chioini, the Company's President and Chief
Executive Officer, and Mr. Thomas E. Klema, the Company's Vice President, Chief
Financial Officer and Secretary. If the Company's sales volumes increase, the
Company expects to add additional production and administrative personnel and
truck drivers.

ITEM 2. DESCRIPTION OF PROPERTY.

The Company leases a 34,500 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
$19,771, plus a monthly escrow deposit of $2,718 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. At December 31, 1998 $178,000 remained
in the escrow account to be used against future payments. 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.

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ITEM 3. LEGAL PROCEEDINGS.

The Company is not a party to any material pending legal proceedings.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

Not Applicable.

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PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.

The Company's Common Shares and Common Share Purchase Warrants are traded
on the Nasdaq SmallCap Market under the symbols RMTI and RMTIW, respectively.
The Common Shares and Common Share Purchase Warrants began trading on the Nasdaq
SmallCap Market on January 26, 1998 at an initial public offering price of $4.00
per Common Share and $0.10 per Common Share Purchase Warrant.

The prices below are the high and low bid prices as reported in each
quarter since the Company's securities began trading on January 26,1998.

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<CAPTION>
BID PRICE
INFORMATION
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QUARTER ENDED HIGH LOW
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<S> <C> <C>
March 31,1998............................................... $5.375 $1.375
June 30, 1998............................................... 3.000 1.063
September 30, 1998.......................................... 3.875 2.188
December 31, 1998........................................... 2.750 1.375
</TABLE>

As of March 22, 1999 there were 72 record holders of the Common Shares and
56 record holders of the Common Share Purchase Warrants.

DIVIDENDS

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 the development and expansion of its operations.

ITEM 6. 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, L.L.C., and a related entity, Rockwell
Transportation, L.L.C (collectively the "Predecessor Company"). The Company
acquired the Predecessor Company on February 19, 1997 for an adjusted purchase
price of approximately $2.1 million. The Company funded the initial payment of
$525,000 related to the purchase from the proceeds of a private placement of
495,000 of the Company's Common Shares (the "First Prior Financing"). 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 520,000 Common Shares and 520,000
Common Share Purchase Warrants (the "Second Prior Financing") for net proceeds
of approximately $1.3 million of which $500,000 was used to further reduce the
obligation related to the purchase of the Predecessor Company. The balance of
the funds raised in the Second Prior Financing was used to fund the Company's
continued net losses and for capital equipment expenditures. The remaining
purchase obligation related to the Predecessor Company was converted into
1,095,915 Series A Preferred Shares.

On January 26, 1998 the Company sold 1,800,000 Common Shares and 3,105,000
Common Share Purchase Warrants pursuant to a registration statement filed with
the Securities and Exchange Commission (the "IPO") for net proceeds of $5.8
million. The proceeds were used to redeem all of the Series A Preferred Shares
and reduce other liabilities as stated in the prospectus. The remaining cash of
approximately

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$3.3 million was available to fund the future growth of the Company including
working capital and capital expansion.

RESULTS OF OPERATIONS

For the year ended December 31, 1998 compared to the year ended December 31,
1997

Results of operations for the year ended December 31, 1997 include the
transactions of the business from the purchase date of February 19, 1997 through
December 31, 1997 or approximately a ten and one-half month period. Because of
this short period of operations in 1997 the period is not directly comparable to
the year ended December 31, 1998. The one and one-half months of operation of
the Predecessor Company from January 1, 1997 through February 19, 1997 must be
considered to make appropriate comparisons.

For the year ended December 31, 1998, sales were approximately $5.3 million
as compared to sales of $3.3 million for the short period of 1997 or $3.7
million after adjusting for the Predecessor Company. The 1998 sales represent an
increase of 44% over the pro forma 1997 sales levels. The net increase of $ 1.6
million on a pro forma basis is attributable to new business of $1.7 million,
price increases realized in 1998 of approximately $300,000, and was partially
offset by a decrease in export sales of $400,000.

For the year ended December 31, 1998, sales of acid concentrate accounted
for 54% of sales and bicarbonate accounted for 30% of sales as compared to 54%
and 23% of sales, respectively, in 1997. These two product lines, which are the
critical components of dialysate used by the Company's customers, comprised the
majority of the Company's sales in both 1998 and 1997. Ancillary products
accounted for 11% of total sales in 1998 compared to 14% of sales in 1997.
Revenue generated from the Company's trucking subsidiary for trucking services
provided to non-affiliated third parties accounted for approximately 5% of total
sales in 1998 as compared to 9% of sales in 1997.

The Company incurred a gross margin deficit of ($171,000) for the period
ended December 31, 1998 as compared to a deficit of ($448,000) for the short
period of 1997 and ($613,000) for the year ended December 31, 1997 after
considering the results of the Predecessor Company. The improvement in the gross
deficit of $442,000 in 1998 as compared to the adjusted 1997 deficit is
partially attributable to the increased selling prices achieved in 1998 totaling
$300,000 for the period. In addition, reduced vendor prices on material, use of
less expensive alternative production materials, labor productivity
improvements, and more efficient routings of company trucks comprised total cost
reductions of $223,000 in 1998 as compared to the adjusted 1997 period. Lower
gross profit from reduced export sales partially offset these improvements by
$81,000. These factors occurred principally during the last six months of 1998
and the Company ended the year with a positive gross margin of 5% in the fourth
quarter of 1998.

Selling, general and administrative expense was $1.9 million in the year
ended December 31, 1998 as compared to $1.4 million for the short period of 1997
or $1.6 million after adjusting to include the Predecessor Company's expenses to
reflect the full year of 1997. Approximately one half of this increase is due to
expenses associated with public company matters including investor relations
consulting, publications and communications. The balance of the increased
selling, general and administrative expense is due to higher administrative
salaries including the non-cash expense related to employee stock options.

Interest income in the year ended 1998 was $113,000 as compared to $66,000
of expense in the short period of 1997. The difference is directly attributable
to using the proceeds from the IPO to reduce interest bearing obligations and
the investment of the remaining cash on hand in short term securities.

The Company has reported losses for the period ended December 31, 1998 of
($1.9) million which was approximately the same as the short period in 1997 and
representing a $300,000 improvement over 1997 on a proforma basis after adding
the Predecessor Company's results to reflect a full year of operations. The
Company has not recorded a federal income tax benefit given the continued losses
and the lack of assurance of realization of the loss carried forward.

The loss per share was ($.41) in the year ended December 31, 1998 as
compared to ($.64) in the period since the purchase through December 31, 1997 or
a loss of ($.76) per share after adjustment for the full year.

9
<PAGE> 11

The improvement of $.35 cents per share from the adjusted 1997 results to the
actual 1998 results is primarily attributable to the increased shares
outstanding from the IPO. The additional shares accounted for $.29 cents per
share of the improvement. The lower net loss in 1998 as compared to the 1997
adjusted net loss resulted in a $.06 per share improvement.

YEAR 2000 ISSUES AND CONSEQUENCES

The Company has completed a review of its systems, both information
technology based and non-information technology based. The Company has installed
software to ensure that its information technology systems are Year 2000
compliant. The Company does not believe that Year 2000 issues will have a
material impact on the Company's business.

LIQUIDITY AND CAPITAL RESOURCES

In January 1998, the Company issued securities in an IPO for net proceeds
of $5.8 million. After the reduction of debt obligations associated with the
purchase of the Predecessor Company and certain other obligations incurred prior
to the IPO, the Company had $3.3 million of proceeds remaining. During the year
ended December 31, 1998 the Company used $2.3 million to fund the cash deficit
from operations, which included $1.1 million to fund accounts payable and
accrued liabilities incurred prior to the Company's IPO. The Company spent
$468,000 for capital improvements and $164,000 for the repurchase of Common
Shares in 1998. Cash on hand at December 31, 1998 was $1.9 million.

During 1998 the Company's quarterly cash requirements continued to improve
as profit margins increased. The Company, however, will continue to experience
negative cash flow for the foreseeable future. The Company believes that
sufficient cash on hand is available until the benefits of its business
strategies are fully realized. The ability of the Company to raise additional
funds, if required, through either equity or debt financing arrangements will be
dependent on the Company's success regarding these strategies. There can be no
assurance that the Company will be successful in the implementation of the
stated strategy, and if additional funds become required, the Company may be
required to conserve cash and abandon or alter its growth strategy.

The Company attempts to prudently manage its working capital to support its
growth strategy in a measured manner in order to conserve cash. The Company has
no long-term debt obligations with the exception of lease arrangements on the
facility and vehicles used in the distribution operations.

Capital expenditures of $468,000 were made in the year ended December 31,
1998 to upgrade existing equipment, enhance production efficiencies and install
equipment to manufacture new products. The Company does not plan to make any
additional significant capital improvements during 1999.

ITEM 7. FINANCIAL STATEMENTS

The Consolidated Financial Statements of the Registrant and the Combined
Financial Statements of the Predecessor Company required by this item are set
forth on pages F-1 through F-15.

ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

On November 25, 1998, Rockwell Medical Technologies, Inc. and
PricewaterhouseCoopers L.L.P., the Company's independent accountants for the
current fiscal year, agreed to cease their client-auditor relationship. In
connection with its audit for fiscal year 1997, and during the interim period
preceding such mutually-agreed cessation, there were no disagreements between
the Company and PricewaterhouseCoopers L.L.P. on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure, which disagreements if not resolved to the satisfaction of
PricewaterhouseCoopers L.L.P., would have caused them to make reference thereto
in their report on the financial statements. PricewaterhouseCoopers L.L.P.'s
report with respect to the Company's financial statements for 1997 contained no
adverse opinion or disclaimer of opinion and was not qualified or modified as to
audit scope or accounting principles; however, such report was modified as to
uncertainty regarding the Company's ability to continue as a going concern. The
Company has made such disclosure on form 8-K filed with the Securities and
Exchange Commission.

On December 24, 1998, the Company announced that it had retained the firm
of Plante & Moran, L.L.P. as the Company's accountants.

10
<PAGE> 12

PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.

Incorporated herein by reference to Rockwell Medical Technologies, Inc.
definitive proxy statement to be filed with the Securities and Exchange
Commission within 120 days after the year covered by this Form 10-KSB with
respect to its Annual Meeting of Shareholders to be held on May 10, 1999.

ITEM 10. EXECUTIVE COMPENSATION.

ITEM 11. SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

11
<PAGE> 13

ITEMS 13. EXHIBITS AND REPORTS ON FORM 8-K.

(a) Exhibits

<TABLE>
<S> <C>
3(i).1 Articles of Incorporation of the Company, incorporated by
reference to Exhibit 3(i).1 to the Company's Registration
Statement on Form SB-2, File No. 333-31991.

3(i).2 Certificate of Amendment to Articles of Incorporation of the
Company, incorporated by reference to Exhibit 3(i).2 to the
Company's Registration Statement on Form SB-2, File No.
333-31991.

3(i).3 Certificate of Correction to Articles of Incorporation of
the Company, incorporated by reference to Exhibit 3(i).3 to
the Company's Registration Statement on Form SB-2, File No.
333-31991.

3(i).4 Certificate of Amendment to Articles of Incorporation of the
Company, incorporated by reference to Exhibit 3(i).4 to the
Company's Registration Statement on Form SB-2, File No.
333-31991.

3(ii) Bylaws of the Company, incorporated by reference to Exhibit
3(ii) to the Company's Registration Statement on Form SB-2,
File No. 333-31991.

4.1 Form of Warrant Agreement, incorporated by reference to
Exhibit 4.1 to the Company's Registration Statement on Form
SB-2, File No. 333-31991.

4.2 Form of Underwriters Warrant Agreement, incorporated by
reference to Exhibit 4.2 to the Company's Registration
Statement on Form SB-2, File No. 333-31991.

4.3 Registration Rights Agreement among the Company and the
holders of certain of the Company's Common Share Purchase
Warrants, incorporated by reference to Exhibit 4.6 to the
Company's Registration Statement on Form SB-2, File No.
333-31991.

4.4 Form of Lock-up Agreement, incorporated by reference to
Exhibit 4.7 to the Company's Registration Statement on Form
SB-2, File No. 333-31991.

10.1 Rockwell Medical Technologies, Inc. 1997 Stock Option Plan,
incorporated by reference to Exhibit 10.1 to the Company's
Registration Statement on Form SB-2, File No. 333-31991.

10.2 Employment Agreement dated as of February 19, 1997 between
the Company and Robert L. Chioini, incorporated by reference
to Exhibit 10.2 to the Company's Registration Statement on
Form SB-2, File No. 333-31991.

10.3 Consulting and Financial Advisory Services Agreement dated
as of February 19, 1997 between the Company and Wall Street
Partners, Inc., incorporated by reference to Exhibit 10.3 to
the Company's Registration Statement on Form SB-2, File No.
333-31991.

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.),
incorporated by reference to Exhibit 10.4 to the Company's
Registration Statement on Form SB-2, File No. 333-31991.

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.), incorporated by
reference to Exhibit 10.5 to the Company's Registration
Statement on Form SB-2, File No. 333-31991.

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.), incorporated by
reference to Exhibit 10.6 to the Company's Registration
Statement on Form SB-2, File No. 333-31991.

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,
incorporated by reference to Exhibit 10.7 to the Company's
Registration Statement on Form SB-2, File No. 333-31991.
</TABLE>

12
<PAGE> 14

<TABLE>
<S> <C>
10.8 Lease Agreement dated as of September 5, 1995 between the Supply Company, as tenant, and Oakland Oaks,
L.L.C., as landlord, incorporated by reference to Exhibit 10.9 to the Company's Registration Statement on
Form SB-2, File No. 333-31991.
10.9 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, incorporated by
reference to Exhibit 10.10 to the Company's Registration Statement on Form SB-2, File No. 333-31991.
10.10 Letter Agreement dated November 21, 1997 among the parties to the Asset Purchase Agreement to confirm the
reduction of the purchase price of the Asset Purchase Agreement, incorporated by reference to Exhibit
10.12 to the Company's Registration Statement on Form SB-2, File No. 333-31991.
10.11 Employment Agreement dated as of January 12, 1999 between the Company and Thomas E. Klema.
21.1 List of Subsidiaries.
27.1 Financial Data Schedule for the Company
</TABLE>

(b) Reports on Form 8-K

The Registrant has filed the following reports on Form 8-K during the year
ended December 31, 1998:

1.) November 25, 1998 -- Change in Accounting Firms disclosing that
PricewaterhouseCoopers, L.L.P. resigned as the Company's accountants.

2.) December 24, 1998 -- Change in Accounting Firms indicating that the
Company had retained the firm of Plante & Moran, L.L.P. as the Company's
accountants.

13
<PAGE> 15

SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereto duly
authorized.

ROCKWELL MEDICAL TECHNOLOGIES, INC.
(Registrant)

By: /s/ ROBERT L. CHIOINI
-------------------------------------
Robert L. Chioini
President and Chief Executive Officer

In accordance with Section 13 or 15(d) of the Exchange Act, this report has
been signed by the following persons in the capacities and on the dates
indicated.

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>

/s/ ROBERT L. CHIOINI President, Chief Executive Officer March 30, 1999
- --------------------------------------------- and Director (Principal Executive
Robert L. Chioini Officer)

/s/ THOMAS E. KLEMA Vice President of Finance, Chief March 30, 1999
- --------------------------------------------- Financial Officer, Treasurer and
Thomas E. Klema Secretary (Principal Financial
Officer and Principal Accounting
Officer)

/s/ GARY D. LEWIS Director March 30, 1999
- ---------------------------------------------
Gary D. Lewis

/s/ NORMAN L. MCKEE Director March 30, 1999
- ---------------------------------------------
Norman L. McKee
</TABLE>

14
<PAGE> 16

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Consolidated Financial Statements for Rockwell Medical
Technologies, Inc. and Subsidiary
Report of Independent Accountants for the year ended
December 31, 1998......................................... F-1
Report of Independent Accountants for the year ended
December 31, 1997......................................... F-2
Consolidated Balance Sheet at December 31, 1998............ F-3
Consolidated Income Statement for the years ended December
31, 1998 and 1997......................................... F-4
Consolidated Statement of Changes in Shareholders' Equity
for the years ended
December 31, 1998 and 1997.............................. F-5
Consolidated Statements of Cash Flow for the year ended
December 31, 1998 and 1997.............................. F-6
Notes to the Consolidated Financial Statements............. F-7 - F-14
</TABLE>

15
<PAGE> 17

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Shareholders
Rockwell Medical Technologies, Inc. and Subsidiary:

We have audited the consolidated balance sheet of Rockwell Medical
Technologies, Inc. and Subsidiary as of December 31, 1998 and the related
consolidated statements of income, shareholders' equity, and cash flows for the
year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit. The consolidated financial statements
of Rockwell Medical Technologies, Inc. and Subsidiary as of December 31, 1997
and for the year then ended, were audited by other auditors whose report dated
March 13, 1998, included an explanatory paragraph that expressed substantial
doubt about the Company's ability to continue as a going concern as a result of
substantial losses incurred since its inception and stated that those statements
did not include any adjustments that might result from the outcome of that
uncertainty.

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 as of December 31, 1998 and
the results of their operations and their cash flows for the year then ended, 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 substantial
losses from operations since inception 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.

Plante & Moran L.L.P.

Southfield, Michigan
January 25, 1999

F-1
<PAGE> 18

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Shareholders of
Rockwell Medical Technologies, Inc. and Subsidiary:

We have audited the consolidated balance sheet of Rockwell Medical
Technologies, Inc. and Subsidiary at December 31, 1997 and the related
consolidated statements of income, shareholders' equity, and cash flows for the
year ended December 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.

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 December 31, 1997 and the
results of their operations and their cash flows for the year ended December 31,
1997 in conformity with generally accepted accounting principles.

Coopers & Lybrand L.L.P.

Detroit, Michigan
March 13, 1998

F-2
<PAGE> 19

ROCKWELL MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEET
(WHOLE DOLLARS)

<TABLE>
<CAPTION>
DECEMBER 31,
1998
------------
<S> <C>
ASSETS
Cash and Cash Equivalents................................... $ 1,933,197
Accounts Receivable, net of allowance for doubtful accounts
of $55,745................................................ 708,688
Inventory................................................... 222,095
Other Current Assets........................................ 25,476
-----------
TOTAL CURRENT ASSETS................................... 2,889,456
Property and Equipment, net................................. 925,614
Other Noncurrent Assets..................................... 177,937
Excess of Purchase Price over Fair Value of Net Assets
Acquired, net............................................. 1,275,147
-----------
TOTAL ASSETS........................................... $ 5,268,154
===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts Payable............................................ $ 528,708
Accrued Liabilities......................................... 173,348
-----------
TOTAL CURRENT LIABILITIES.............................. 702,056
SHAREHOLDERS' EQUITY:
Common Share, no par value, 4,830,450 shares issued and
outstanding............................................... 8,652,175
Common Share Purchase Warrants, 3,625,000 shares issued and
outstanding............................................... 251,150
Accumulated Deficit......................................... (4,337,227)
-----------
4,566,098
-----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY............. $ 5,268,154
===========
</TABLE>

The accompanying notes are an integral part of the consolidated financial
statements.

F-3
<PAGE> 20

ROCKWELL MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARY

CONSOLIDATED INCOME STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
(WHOLE DOLLARS)

<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
SALES....................................................... $ 5,272,698 $ 3,318,826
Cost of Sales............................................... 5,443,790 3,766,761
----------- -----------
GROSS DEFICIT.......................................... (171,092) (447,935)
Selling, General and Administrative......................... 1,871,104 1,399,170
----------- -----------
OPERATING LOSS......................................... (2,042,196) (1,847,105)
Interest Income (Expense), net.............................. 113,613 (66,539)
----------- -----------
NET LOSS............................................... $(1,928,583) $(1,913,644)
=========== ===========
Basic and Diluted Loss Per Share............................ $ (.41) $ (.64)
</TABLE>

The accompanying notes are an integral part of the consolidated financial
statements.

F-4
<PAGE> 21

ROCKWELL MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
(WHOLE DOLLARS)

<TABLE>
<CAPTION>
COMMON SHARES PURCHASE WARRANTS TOTAL
----------------------- --------------------- ACCUMULATED SHAREHOLDERS'
SHARES AMOUNT WARRANTS AMOUNT DEFICIT EQUITY
------ ------ -------- ------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Issuance of Common
Shares, no par value,
Initial
Capitalization......... 2,000,000 $ 1,000 $ 1,000
Issuance of Common
Shares, no par value
First Prior
Financing.............. 495,000 1,212,500 1,212,500
Issuance of Common
Shares, no par value,
and Warrants, Second
Prior Financing........ 520,000 1,311,347 520,000 -- 1,311,347
Compensation related to
Stock Options.......... 98,527 98,527
Net loss................. $(1,913,644) (1,913,644)
--------- ---------- --------- -------- ----------- -----------
Balance as of December
31, 1997............... 3,015,000 2,623,764 520,000 (1,913,644) 709,730
Issuance of Common
Shares, no par value
and Warrants, Initial
Public Offering........ 1,800,000 5,543,764 3,105,000 $251,150 5,794,914
Issuance of Additional
Common Shares, no par
value to Shareholders
in First Prior
Financing.............. 123,750 495,000 (495,000) --
Repurchase of Common
Shares................. (108,300) (164,359) (164,359)
Compensation related to
Stock Options.......... -- 154,396 154,396
Net Loss................. (1,928,583) (1,928,583)
--------- ---------- --------- -------- ----------- -----------
Balance as of December
31, 1998............... 4,830,450 $8,652,175 3,625,000 $251,150 $(4,337,227) $ 4,566,098
========= ========== ========= ======== =========== ===========
</TABLE>

The accompanying notes are an integral part of the consolidated financial
statements.

F-5
<PAGE> 22

ROCKWELL MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
(WHOLE DOLLARS)

<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $(1,928,583) $(1,913,644)
Adjustments to reconcile net loss to net cash used for
operating activities:
Depreciation and Amortization.......................... 403,890 257,316
Compensation recognized from stock options............. 154,396 98,527
----------- -----------
(1,370,297) (1,557,801)
Changes in Working Capital:
Increase in Accounts Receivable........................ (321,424) (197,990)
Decrease (Increase) in Inventory....................... 71,624 (26,701)
Decrease (Increase) in Other Assets.................... 30,958 (47,076)
(Decrease) Increase in Accounts Payable................ (509,127) 238,794
(Decrease) Increase in Other Liabilities............... (210,682) 354,153
----------- -----------
Net change in Working Capital........................ (938,651) 321,180
----------- -----------
NET CASH USED IN OPERATIONS....................... (2,308,948) (1,236,621)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of Business, net of cash acquired................ -- (508,887)
Purchase of Equipment..................................... (467,566) (78,028)
Redemption (Purchase) of Certificate of Deposit........... 25,000 (25,000)
----------- -----------
CASH USED IN INVESTING ACTIVITIES.................... (442,566) (611,915)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of Common Shares -- Initial Capitalization....... -- 1,000
Issuance of Common Shares -- First Prior Financing........ -- 1,212,500
Issuance of Common Shares and Purchase Warrants -- Second
Prior Financing........................................ -- 1,311,347
Issuance of Common Shares and Purchase Warrants- Initial
Public Offering........................................ 5,794,914 --
Repurchase of Common Shares............................... (164,359) --
Redemption of Series A Preferred Shares................... (1,095,915) --
Proceeds from notes payable............................... -- 325,000
Repayment of notes payable................................ (200,000) (125,000)
Payment on promissory note................................ -- (500,000)
Deposits paid on leases................................... -- (138,397)
Costs of initial public offering.......................... 286,729 (174,572)
----------- -----------
CASH PROVIDED BY FINANCING ACTIVITIES................ 4,621,369 1,911,878
INCREASE IN CASH............................................ 1,869,855 63,342
CASH AT BEGINNING OF PERIOD................................. 63,342 --
----------- -----------
CASH AT END OF PERIOD....................................... $ 1,933,197 $ 63,342
=========== ===========
</TABLE>

Supplemental non cash disclosures: See Note 4 to the consolidated financial
statements related to Purchase of Business and conversion of Promissory Note to
redeemable Series A Preferred Shares.

Interest paid was $82,225 and $46,763 in the years ended December 31, 1998
and 1997, respectively.

The accompanying notes are an integral part of the consolidated financial
statements.

F-6
<PAGE> 23

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 Company"). The Company
is, and the Predecessor Company was, in the business of manufacturing and
distributing hemodialysis concentrates and dialysis kits to hemodialysis clinics
throughout the United States. The Company also packages, sells and distributes
ancillary products related to the hemodialysis process, as did the Predecessor
Company.

In February 1997, the Company received $1.2 million in net proceeds from
the issuance of 495,000 Common Shares in the First Prior Financing,
approximately $525,000 of which was used to partially fund the acquisition of
the Predecessor Company. The remaining purchase price was financed through the
issuance of a promissory note for approximately $1.9 million.

In May 1997, the Company received $1.3 million in net proceeds from the
issuance of 520,000 Common Shares and 520,000 Common Share Purchase Warrants in
the Second Prior Financing, approximately $500,000 of which was used to reduce
the promissory note related to the purchase of the Predecessor Company. The
balance of the promissory note, $1.4 million, was subsequently converted to
redeemable Series A Preferred Shares (see Note 4).

On January 26, 1998 the Company issued 1,800,000 Common Shares and
3,105,000 Common Share Purchase Warrants pursuant to a Registration Statement
filed with the Securities and Exchange Commission in an Initial Public Offering
(the "IPO"). Net proceeds from the IPO were $5.8 million of which approximately
$1.2 million was used to redeem the Series A Preferred Shares, $1.1 million was
used to reduce Accounts Payable and Accrued Expenses, and $200,000 was used to
pay other indebtedness. The balance of the proceeds was available for capital
equipment purchases and to fund working capital requirements.

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 Company 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 Company.

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 Company's results of operations for the year ended December 31,
1997 includes incurred and accrued expenses of approximately $49,000, primarily
consulting fees, in conjunction with the initial organization of the Company
from October 25, 1996 (date of inception) through December 31, 1996.

REVENUE RECOGNITION

The Company recognizes revenue at the date of shipment.

CASH AND CASH EQUIVALENTS

The Company considers cash on hand, certificates of deposit and short term
marketable securities as cash and cash equivalents. Such cash equivalents have
maturities of less than 90 days.

F-7
<PAGE> 24
ROCKWELL MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

INVENTORY

Inventory is stated at the lower of cost or net realizable value. Cost is
determined on the first-in first-out (FIFO) method.

PROPERTY AND EQUIPMENT

Property and Equipment are recorded at cost. Expenditures for normal
maintenance and repairs are charged to expense as incurred. Property and
equipment are depreciated using the straight-line method over their useful
lives, which range from three to eight years.

EXCESS OF PURCHASE PRICE OVER FAIR VALUE OF ASSETS ACQUIRED

The excess of the price paid by the Company over the fair value of the net
assets of the Predecessor Company has been recorded as an intangible asset and
is being amortized on the straight line basis over an estimated useful life of
10 years. Accumulated amortization of this asset was $291,952 and $131,415 at
December 31, 1998 and 1997, respectively. The Company assesses the
recoverability of the asset based on estimated future discounted cash flows of
the business. Based upon the Company's analysis no impairment of the asset
exists at December 31, 1998.

INCOME TAXES

The Company has recorded a deferred tax asset of approximately $1.4 million
related to its net operating loss carryforward. This deferred asset has been
fully offset by a valuation allowance due to the uncertainty of realization. The
Company has net operating loss carryforwards of $1.9 million and $1.9 million
which expire in the years ended December 31, 2012 and 2018, respectively.

STOCK OPTIONS

Options granted to employees are accounted for using the intrinsic value
method, under which compensation expense is recorded at the amount by which the
market price of the underlying stock at the date of the grant exceeds the
exercise price of the option. Stock options granted to non-employees are
recorded at the fair value of the awards at the date of the grant.

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

Basic and Diluted net loss per share for the year ended December 31, 1998
is calculated based on the weighted average shares outstanding of 4,734,312.

Basic and Diluted net loss per share for the year ended December 31, 1997
is calculated based on the weighted average shares outstanding of 2,971,501
including 123,750 of additional shares issued 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. The additional shares were calculated using the initial public offering
price of $4.00 per share and issued upon the completion of the IPO.

F-8
<PAGE> 25
ROCKWELL MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The dilutive effect of stock options have not been included in the average
shares outstanding for the calculation of diluted loss per share as the effect,
considering the Company's net loss, would be antidilutive. At December 31, 1998
potentially dilutive securities comprised 407,450 stock options exercisable at
prices from $1.44 to $3.00 per share; 3,625,000 Common Share Purchase Warrants
exercisable at $4.50 per Common Share; and Underwriter's Warrants which are
comprised of an option to purchase 95,000 Common Shares at a price of $6.60 per
share and 142,500 warrants to purchase shares at $7.43 per share.

3. MANAGEMENT'S PLAN OF OPERATION

Since February 20, 1997, the Company has been engaged in the business of
manufacturing, selling, and distributing hemodialysis concentrates and kits to
various clinics throughout the United States. The Company paid approximately
$2.1 million for the operating assets and liabilities of the Predecessor
Company. Since inception through December 31, 1998 the Company has recorded
losses of approximately $3.8 million and used cash of approximately $3.6 million
to fund its operations. Those needs were funded, from inception through December
31, 1998, from proceeds generated through the issuance of common shares and
common share purchase warrants pursuant to two private equity financings and an
initial public offering in January of 1998. The Company has cash on hand at
December 31, 1998 of approximately $1.9 million.

The operating losses and cash requirements will continue into 1999 but at
lower levels than those experienced in 1998. The Company has reduced its net
losses in each consecutive quarter of 1998. In the three months ended December
31, 1998 the Company realized a positive gross margin of $84,400 or 5% of sales
compared to a gross deficit of ($56,800) in the comparable period of 1997. The
net loss for the fourth quarter of 1998 was ($371,500), slightly favorable to
the ($388,700) loss in the comparable period in 1997. The reduced net loss
occurred considering the Company recorded $64,800 of additional non-cash
compensation expense related to stock options in the fourth quarter of 1998 vs.
1997. Net cash requirements for the fourth quarter of 1998 were approximately
$180,000.

The Company's plan of operation anticipates continued growth in market
share as it has experienced throughout 1998. Sales for the year ended December
31, 1998 have increased by approximately 40% over the comparable period in 1997.
This growth is expected to continue for 1999, particularly if sales expectations
on the Company's new product, Dri-Sate(TM) Dry Acid Concentrate are realized
(See "Increasing Revenue through Sales of New Products" below). This expected
growth, while requiring continued cash for working capital, should not require
substantial capital expansion or significant increases in administrative costs.
The benefit of the increased volume should be favorable on the gross margin and
thus net losses should be further reduced.

The increased market share penetration, which the Company anticipates for
1999, will be realized based on the further refinement of the business
strategies established at inception. 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 to offer ancillary
products used by hemodialysis providers, the Company has positioned
itself as a non-competing, independent "one-stop-shop" to its customers
for the concentrates, chemicals and supplies necessary to support a
hemodialysis provider's 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.

F-9
<PAGE> 26
ROCKWELL MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

perform services for customers that are generally not available from
common carriers, such as stock rotation, non-loading-dock delivery and
drum pump-off. A drum pump-off requires 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 higher level of service to its customers through the use of its
own delivery vehicles and drivers.

- Increasing Revenue Through Sales of New Products. The Company intends to
expand its manufacture and distribution of Dri-Sate(TM) Dry Acid
Concentrate and SteriLyte(TM) Liquid Bicarbonate. Sales of these two
products during the introduction stage in 1998 has been minimal as a
percent of annual sales, however, the initial market response has been
favorable and the Company anticipates increased sales in 1999. In
addition, the Company intends to introduce other hemodialysis products
not currently offered by the Company. These 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 and/or distribute such
products).

There can be no assurance that the Company will be able to achieve the
planned efficiencies and increase its sales levels and market share to sustain
its operations. There can be no assurance that the Company has sufficient funds
should the business plans not yield the expected results. 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 Company for an initial purchase price of
approximately $2.4 million, excluding liabilities assumed. The transaction was
accounted for using the purchase method of accounting. The initial purchase
price was 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......................... $ (147,937)
Property and Equipment...................................... 688,534
Excess of purchase price over fair value of net assets...... 1,884,954
-----------
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

F-10
<PAGE> 27
ROCKWELL MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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 redeemable Series A Preferred Shares at a conversion ratio of one
Series A Preferred Share 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 Series A Preferred Shares.

In accordance with the terms of the Asset Purchase Agreement, the Company
and the Predecessor Company and its owners agreed to a reduction in the purchase
price for the Predecessor Company's business by $320,749. In payment of such
purchase price reduction, the parties canceled 320,749 Series A Preferred
Shares. Goodwill was reduced by the same amount.

In January 1998 all of the outstanding redeemable Series A Preferred Shares
were redeemed by the Company using a portion of the net proceeds received from
the IPO.

5. SIGNIFICANT MARKET SEGMENTS

The Company operates in one market segment which involves the manufacture
and distribution of hemodialysis concentrates, dialysis kits and ancillary
products used in the dialysis process to hemodialysis clinics. For the year
ended December 31, 1998 one customer in the United States accounted for
approximately 15% of total revenue, and for the year ended December 31, 1997
sales to one customer located in Venezuela accounted for approximately 13% of
total revenue.

6. INVENTORY

Components of inventory are as follows:

<TABLE>
<S> <C>
Raw Materials............................................... $ 142,598
Finished Goods.............................................. 79,497
---------
Total..................................................... $ 222,095
=========
</TABLE>

7. PROPERTY AND EQUIPMENT

Major classes of Property and Equipment, stated at cost, are as follows:

<TABLE>
<S> <C>
Leasehold Improvements...................................... $ 30,130
Machinery and Equipment..................................... 898,623
Office Furniture and Equipment.............................. 126,876
Laboratory Equipment........................................ 135,893
Vehicles, including trailers................................ 103,136
----------
$1,294,658
Accumulated Depreciation.................................. (369,044)
----------
Net Property and Equipment.................................. $ 925,614
==========
</TABLE>

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 three to five years. These leases have
been accounted for as operating leases. Lease payments under all operating
leases

F-11
<PAGE> 28
ROCKWELL MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

were $552,147 for the year ended December 31, 1998. Future minimum rental
payments under lease agreements are as follows:

<TABLE>
<S> <C>
Year ending December 31, 1999............................... 396,298
Year ending December 31, 2000............................... 394,613
Year ending December 31, 2001............................... 155,088
Year ending December 31, 2002............................... 148,888
Year ending December 31, 2003............................... 158,191
</TABLE>

In accordance with the assignment of the facility lease from the
Predecessor Company, the landlord required a deposit in escrow. The escrow
deposit is to be applied against future lease payments of $39,542 in the year
ending December 31, 1999, $59,313 in the year ending December 31, 2000 and the
balance to be held as a security deposit refundable at lease termination subject
to certain conditions.

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.

9. CAPITAL STOCK

The authorized capital stock of the Company consists of 20,000,000 Common
Shares, no par value per share, of which 4,830,450 shares were outstanding at
December 31, 1998; and 2,000,000 Preferred Shares, none issued nor outstanding,
and 1,416,664 of 8.5% non-voting cumulative redeemable Series A Preferred
Shares, $1.00 par value (the "Series A Preferred Shares"), of which none were
outstanding as of December 31, 1998.

Effective January 26, 1998, the Company issued 123,750 Common Shares to
shareholders pursuant to certain share price conditions in the First Prior
Financing. These incremental shares to participants of the First Prior Financing
have been accounted for as a stock dividend valued at the IPO offering price of
$4.00 per share.

On March 19, 1998, the Company's Board of Directors approved the repurchase
of up to 250,000 Common Shares at prices deemed to represent a favorable return
on investment. During 1998 the Company repurchased 108,300 shares at a cost of
$164,359 including transaction fees.

COMMON SHARES

Holders of the Common Shares 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. The Board is
authorized to issue additional Common Shares within the limits of the Company's
Articles of Incorporation without further shareholder action.

WARRANTS

Holders of the Common Share Purchase Warrants ("Warrants"), are entitled to
purchase one Common Share at the exercise price of $4.50 per share for a period
of three years commencing January 26, 1999 and expiring January 26, 2002. The
exercise price and the number of Common Shares to be issued upon the exercise of
each Warrant are subject to adjustment in the event of share split, share
dividend, recapitalization, merger, consolidation or certain other events.

At December 31, 1998, there were 3,625,000 Warrants issued and outstanding.

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

F-12
<PAGE> 29
ROCKWELL MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

closing bid price of the Common Shares has been at least $7.00 for 20
consecutive trading days ending on the third day prior to the date the notice of
redemption is given.

UNDERWRITERS' WARRANTS

In conjunction with the IPO, the Underwriters of the offering were entitled
to warrants ("the Underwriters Warrants") which provided them the option to
purchase 180,000 Common Shares for a purchase price of $6.60 per share and
270,000 warrants for a purchase price of $.165 per warrant. Each underlying
warrant entitled the Underwriter to purchase a Common share at a purchase price
of $7.43 per share, exercisable at any time during the period commencing one
year from January 26, 1998 and expiring six years thereafter.

At December 31, 1998, 95,000 of the options to purchase Common Shares and
142,500 underlying warrants remained outstanding of the Underwriters Warrants.

10. STOCK OPTIONS

The Board of Directors approved the Rockwell Medical Technologies, Inc.,
1997 Stock Option Plan on July 15, 1997 (the "Plan"). The Stock Option Committee
as appointed by the Board of Directors administers the Plan, which provides for
grants of nonqualified or incentive stock options to key employees, officers,
directors, consultants and advisors to the Company. Under the Plan the Company
may grant up to 450,000 options to purchase Common Shares. Exercise prices,
subject to certain plan limitations, are at the discretion of the Committee.
Options granted normally expire 10 years from the date of grant or upon
termination of employment. The Committee determines vesting rights on the date
of grant. Options awarded in 1998 and 1997 generally vest over a three year
period from the date of grant.

Employee stock options awarded in July and November of 1997 had an exercise
price of $3.00, which is less than the deemed fair market value of the stock at
the date of grant as determined by the Company as $4.00. On April 13, 1998 these
option holders, excluding the President -- CEO and members of the Board of
Directors, were offered the alternative of receiving new stock options in the
same quantity as previously awarded but at an exercise price of $1.4375, the
closing price on the Nasdaq SmallCap Market on the date of the offer. Vesting
rights on the new options began to accrue on the date of the offer. Under the
provisions of APB No. 25, compensation expense on these employee stock options
is recognized over the vesting period and is determined as the difference
between the IPO price of $4.00 per share (the deemed fair value of the shares on
the date of the award), and the exercise price, as adjusted on April 13, 1998.

Compensation expense related to stock options for the years ended December
31, 1998 and 1997 was $154,396 and $98,527 respectively.

A summary of the status of the Company's Employee Stock Option Plan is as
follows:

<TABLE>
<CAPTION>
SHARES PRICE
------ -----
<S> <C> <C>
Outstanding at Beginning of Period.......................... -- --
Granted................................................... 311,650 $3.00
Exercised................................................. -- --
Cancelled................................................. 16,150 $3.00
-------
Outstanding at December 31, 1997............................ 295,500
Granted................................................... 136,000 $1.75
Exercised................................................. -- --
Cancelled................................................. 24,050 $1.44
-------
Outstanding at December 31, 1998............................ 407,450 $2.14
=======
</TABLE>

F-13
<PAGE> 30
ROCKWELL MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

<TABLE>
<CAPTION>
OPTIONS EXERCISABLE
OPTIONS OUTSTANDING --------------------
--------------------- WEIGHTED
NUMBER REMAINING WEIGHTED NUMBER AVERAGE
RANGE OF OF CONTRACTUAL EXERCISE OF EXERCISE
EXERCISE PRICES OPTIONS LIFE PRICE OPTIONS PRICE
- --------------- ------- ----------- -------- ------- --------
<S> <C> <C> <C> <C> <C>
$1.44 to $2.12 223,450 9.6 yrs $1.49 53,250 $1.56
$2.25 to $3.00 184,000 8.7 yrs $2.92 116,433 $3.00
------- -------
Total 407,450 9.2 yrs $2.14 169,683 $2.55
</TABLE>

Had compensation expense for the employee stock options been determined
based on the fair value of the option at the grant dates of the awards,
consistent with the provisions of SFAS No. 123, the Company's net loss and loss
per share would have been increased to the pro forma amounts as follows:

<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Net loss
As reported....................................... $(1,928,583) $(1,913,644)
Pro forma......................................... $(2,106,015) $(1,994,436)
Basic and Diluted loss per share
As reported....................................... $ (.41) $ (.64)
Pro forma......................................... $ (.44) $ (.67)
</TABLE>

The per share weighted average fair values at the date of grant for the
options granted during the years ended December 31, 1998 and 1997 were $1.51 and
$1.00 respectively. For the period ending December 31, 1998 the fair value was
determined using the Black Scholes option pricing model using the following
assumptions: dividend yield of 0.0 percent, risk free interest rate of 5.50
percent, volatility of 120% and expected lives of 6.0 years. For the year ended
December 31, 1997 the fair value was estimated using the minimum value method
with the same assumptions as in 1998 except for volatility which was not
considered given the lack of a market for the Company's Common Shares.

11. RELATED PARTY TRANSACTIONS

During the years ended December 31, 1998 and 1997 the Company paid or
accrued fees to the consulting firm of Wall Street Partners, Inc. for financial
and management services of $290,000 and $350,000 respectively. The Company is
obligated to pay additional consulting fees of $120,000 through June 30, 1999.
For the period January 1, 1997 through October 31, 1998 the two principals of
the consulting firm were shareholders of the Company and members of the Board of
Directors. On October 31, 1998 the remaining sole principal of the firm is a
shareholder and the Chairman of the Board of Directors of the Company.

In July 1997, the Company obtained a demand loan from Karen Bagley in the
amount of $100,000 and in November 1997 the Company obtained a loan from Michael
J. Xirinachs in the amount of $100,000 due February 11, 1998. The loans bore
interest at an annual rate of 24% and were repaid by the Company in February
1998. Karen Bagley is the wife of Patrick Bagley, whose firm serves as legal
counsel to the Company on certain matters and also to Mr. Robert L. Chioini,
President and Chief Executive Officer of the Company, in a personal capacity.
Michael J. Xirinachs was a founder and a Director of the Company.

F-14
<PAGE> 31

EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<S> <C>
3(i).1 Articles of Incorporation of the Company, incorporated by
reference to Exhibit 3(i).1 to the Company's Registration
Statement on Form SB-2, File No. 333-31991.