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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10SB-A
GENERAL FORM FOR REGISTRATION OF SECURITIES
OF SMALL BUSINESS ISSUERS UNDER SECTION 12(b)
OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934
Retractable Technologies, Inc.
(Name of Small Business Issuer in Its Charter)
Texas 75-2599762
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
Thomas J. Shaw
Chairman, President and Chief Executive Officer
511 Lobo Lane
Little Elm, Texas 75068-0009
(Address of Principal Executive Offices) (Zip Code)
(972) 294-1010
(Issuer's Telephone Number)
Securities to be registered pursuant to Section 12(b) of the Act: None
Securities to be registered under Section 12(g) of the Act:
Common Stock
Preferred Stock
(Title of Class)
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TABLE OF CONTENTS
Page No.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS................................................... 3
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION................. 15
ITEM 3. DESCRIPTION OF PROPERTY................................................... 22
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT................................................................ 23
ITEM 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, AND CONTROL PERSONS............. 24
ITEM 6. EXECUTIVE COMPENSATION.................................................... 30
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............................ 33
ITEM 8. DESCRIPTION OF SECURITIES................................................. 34
PART II
ITEM 1. MARKET PRICE OF AND DIVIDENDS ON RTI's COMMON EQUITY
AND OTHER SHAREHOLDER MATTERS............................................. 52
ITEM 2. LEGAL PROCEEDINGS......................................................... 52
ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS............................. 52
ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES................................... 52
ITEM 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS................................. 54
PART F/S FINANCIAL STATEMENTS AS OF DECEMBER 31, 1999 AND 1998, AND
REPORT OF INDEPENDENT ACCOUNTANTS AND UNAUDITED FINANCIAL
STATEMENTS AS OF JUNE 30, 2000 AND 1999................................... 58
PART III
ITEM 1. INDEX TO EXHIBITS......................................................... 84
ITEM 2. DESCRIPTION OF EXHIBITS................................................... 84
Signature Page........................................................................ 86
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PART I - FORM 10SB-A
ITEM 1. DESCRIPTION OF BUSINESS
BUSINESS DEVELOPMENT
General Description
-------------------
Retractable Technologies, Inc., a Texas corporation ("RTI"), designs, develops,
manufactures, and markets innovative patented safety needle devices for the
healthcare industry. RTI's VanishPoint(R) products utilize a unique friction
ring mechanism patented by Thomas J. Shaw, Founder, President, and Chief
Executive Officer of RTI. VanishPoint(R) products are designed specifically to
prevent needlestick injuries and to prevent reuse. The friction ring mechanism
permits the automated retraction of the syringe needle into the barrel of the
syringe, directly from the patient, after delivery of the medication is
completed. The VanishPoint(R) blood collection tube holder utilizes the friction
ring mechanism to retract the needle after blood has been drawn from the
patient. Closure of an attached end cap causes the needle to retract directly
from the patient into the closed tube holder. Advantages of the automated
retraction products include protection from needlestick injuries, prevention of
cross contamination through reuse, and reduction of disposal and other
associated costs. RTI has an exclusive license for the patent rights for all of
its safety needle products.
RTI and Thomas J. Shaw entered into a Technology License Agreement dated
effective as of the 23rd day of June 1995, whereby Mr. Shaw granted RTI a
worldwide exclusive license to manufacture, market, sell and distribute
'Licensed Products' and 'Improvements' without right to sublicense until the
expiration of the last to expire of the last 'Licensed Patents' unless sooner
terminated under certain conditions. In exchange, RTI paid Mr. Shaw a $500,000
initial licensing fee and a 5 percent royalty on gross sales of 'Licensed
Products'. See PART I - ITEM 1 - Patents and Proprietary Rights for a more
detailed discussion. RTI's goal is to become a leading provider of automated
retraction safety devices.
Commercial production of RTI's 3cc VanishPoint(R) syringe began in 1997.
Additional VanishPoint(R) products, which are patented, include 1cc tuberculin,
insulin, and allergy antigen syringes; 5cc and 10cc syringes; a blood collection
tube holder, small tube adapter, a dental syringe, a self retracting IV catheter
introducer and a full displacement syringe. 3cc syringes and blood collection
tube holders are being manufactured using automated assembly. Commercial
production of the blood collection tube holder began in the fourth quarter of
1998. 5cc and 10cc syringes are being manufactured in lesser quantities
utilizing semi-automated equipment. RTI submitted a premarket notification and
received 510(k) clearance from the FDA for the 1cc, 3cc, 5cc, and 10cc syringes
and the blood collection tube holder and small tube holder adapter. After
submitting all requisite documentation, the clearance to market products is
granted. This clearance allows RTI to put products into interstate commerce for
commercial distribution.
Development of RTI
------------------
While owning and operating Checkmate Engineering, a sole proprietorship,
Mr. Shaw developed and patented the idea and early prototypes of the syringe
that were to become the VanishPoint(R) safety syringe. On May 9, 1994, RTI was
incorporated in Texas to design, develop, manufacture, and market medical safety
devices for the healthcare industry. In April 1995, Thomas J. Shaw, who owned
all 1,000 issued and outstanding shares of the common stock of RTI, exchanged
all 1,000 shares then outstanding for 14,000,000 shares of common stock. In May
1996, Mr. Shaw transferred 2,800,000 shares of the 14,000,000 then issued and
outstanding common stock to Lillian E. Salerno, a Director of RTI.
In 1996, RTI purchased assets and hired personnel from Checkmate
Engineering. RTI had limited production and no sales in 1996, but focused its
attention on general and administrative activities including implementing
Quality System Regulation, developing a human resource department, and obtaining
an Order of Substantial Equivalence from the FDA allowing RTI to manufacture and
sell the 3cc VanishPoint(R) syringe. In 1997, RTI began selling products to
emergency medical service centers, federal prison systems, homecare facilities,
small hospitals, and VA hospitals. During the second half of 1997, RTI took
delivery of its 3cc automated assembly equipment and began automated assembly.
Production molds for the 5cc and 10cc syringes and the blood collection tube
holder were ordered in 1997. A prototype mold for the 1cc syringe was ordered
and received in 1997. Automated assembly equipment for the blood collection tube
holder was ordered at the end of 1997 and installed in July 1998. Commercial
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production of the blood collection tube holder began in 1998. RTI received its
ISO 9001 Certificate in July 1998, and the VanishPoint(R) syringe received its
CE Mark Certificate on July 31, 1998. ISO 9001 standard is a model created by
International Standard Organization ("ISO"), an international agency consisting
of almost 100 member countries that provides guidance in the development and
implementation of an effective quality management system through a series of
five international standards. This model is used by organizations to certify
their quality system from initial design and development of a desired product or
service through production, installation, and servicing. The CE mark allows RTI
to sell its products in Europe. In 1999, RTI focused its development on
improvement of manufacturing processes, continuation of design and development
of the manufacturing process for the 1cc syringe, and conceptual design of
additional safe needle products utilizing automated retraction technology.
On May 4, 2000, RTI entered into a National Marketing and Distribution
Agreement (the "Abbott Agreement") with Abbott Laboratories ("Abbott") for an
initial five-year term. Furthermore, Abbott and RTI have agreed to the formation
of a New Product Team, consisting of key personnel from both companies, which
will develop new safety products, that incorporate RTI's patented, proprietary
technology.
RTI has not been involved in any bankruptcy or similar proceedings and has
not merged or consolidated a significant amount of assets other than in the
ordinary course of business except as discussed above.
BUSINESS OF ISSUER
Principal Products
------------------
RTI's products with pre-market notification by the FDA include 1cc
tuberculin, insulin, and allergy antigen VanishPoint(R) syringes; 3cc, 5cc, and
10cc VanishPoint(R) syringes; and the VanishPoint(R) blood collection tube
holder and small tube adapter. In October 1999, ECRI (formerly known as the
Emergency Care Research Institute), a recognized authority in evaluating medical
devices, awarded the VanishPoint(R) syringe and blood collection tube holder its
highest possible rating. The VanishPoint(R) blood collection tube holder
received Risk and Insurance magazine's 1997 "Top of the Line" Award for
excellence.
RTI's 1cc VanishPoint(R) tuberculin, insulin, and allergy antigen syringes
will be produced in various needle lengths and gauges and packaging styles. They
are expected to be available in commercial quantities in the first half of 2001.
The 3cc VanishPoint(R) syringe reached the market in the first quarter of 1997.
It is available in various needle lengths and gauges. The 5cc and 10cc
VanishPoint(R) syringes are being produced in various needle lengths and gauges
and are currently being sold in limited quantities. Sales of the VanishPoint(R)
blood collection tube holder and a small tube adapter for use with small sample
collection tubes began in the third quarter of 1998.
The manufacture and sale of medical devices entails an inherent risk of
liability in the event of product failure or claim of harm caused by the
product's operation. RTI believes that it has adequate product liability
insurance against any such claims. In March, 1998, the Journal of Healthcare
Safety, Compliance and Infection Control published a survey of 26 medical
facilities having used a total of 86,000 3cc syringes, during which no
needlestick injuries from using the VanishPoint(R) syringes were reported.
Industry Overview
-----------------
Based on the most recent (1998) report from Theta Corporation ("Theta"), a
publisher of comprehensive market research reports on the medical device,
diagnostic, biotech, and pharmaceutical industries, the number of unit sales of
disposable hypodermic needles and syringes for 1997 was 6.6 billion in the
United States alone, with $1 billion in projected sales. According to Theta
estimates, 94 percent of the 1997 United States syringe market was made up of
standard syringes--at an average price of $.11 per unit, and 6 percent was
safety syringes--at an average price of $.30 per unit. Of the 6.6 billion
syringes sold in 1997, 4.3 billion were purchased by hospitals and 2.3 billion
were purchased by alternate
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care facilities. The alternate care market includes 1 billion units for retail
customers--who use primarily 1cc allergy antigen and insulin syringes, 600
million units for physicians' offices--which use a mixture of all types of
syringes, and 700 million units for extended care facilities. According to
market leader Becton Dickinson and Company ("B-D"), approximately 20 percent of
the United States market has converted to safety-engineered products and,
according to their projections, 85 percent of the market will be converted
within the next few years. Theta projections indicate that by 2001, 75 percent
of syringes sold in the United States will be safety syringes and 25 percent
will be standard with estimated pricing resulting in revenues of $1.35 billion.
Blood collection devices are used, most often by phlebotomists and
laboratory technicians, to collect samples of blood from patients for diagnostic
procedures. An evacuated vacuum tube used to contain the drawn blood is inserted
into the tube holder, which is a plastic device with a needle attached that is
designed for that purpose. Because the hollow-bore needles used for blood
collection are filled with patients' blood, and because insertion of the needle
into a patient's vein often requires several attempts, the ratio of needlestick
injuries to number of units used is higher for blood collection tube holders
than for syringes, and the risk of infection is greater. Consequently, some
blood collection tube holders now incorporate safety features similar to those
used in syringes. Industry resources indicate that annually there are 800
million medical procedures conducted to collect blood specimens. Based on
Theta's 1998 report, the number of unit sales of blood collection tubes for
1997 was 1.3 billion in the United States alone, with $170 million in projected
sales.
The syringe and needle device market is a market in transition. The nature
of the products comprising the market is changing from standard to safety
devices. The impetus for the change to safety devices is the risk that is
carried with each needlestick injury which includes the transmission of over 20
bloodborne pathogens, including the human immunodeficiency virus (HIV, which
causes AIDS), hepatitis B, and hepatitis C. Because of the occupational and
public health hazards posed by conventional disposable syringes, public health
policy makers and the following domestic organizations and government agencies
are involved, or are becoming involved, in the current effort to get more
effective safety needle products to healthcare workers:
The National Institute for Occupational Safety and Health ("NIOSH") issued
a safety alert calling on employers to adopt safer needles to reduce
needlestick injuries. The federal agency is a division of the Centers for
Disease Control and Prevention ("CDC"). In its alert, "Preventing
Needlestick Injuries in Health Care Settings," NIOSH provides the latest
scientific information available about the risk of needlestick injuries.
This alert adds momentum to the growing safety movement and supports the
rules issued by the Federal Occupational Safety and Health Administration
("OSHA"), on November 5, 1999.
OSHA issued a Compliance Directive which instructs OSHA inspectors to cite
employers who fail to evaluate and buy the safety needle devices available
on the market. The directive states that where engineering controls will
reduce employee exposure either by removing, eliminating, or isolating the
hazard, they must be used.
The Service Employees International Union ("SEIU") has taken a proactive
stance with regard to promoting the use of automated retraction needle
devices in member hospitals. Events, including introduction of state and
federal legislation protests by SEIU members at San Francisco General
Hospital, attest to the type of support from the community that the safety
products and VanishPoint(R) product line, in particular, attract. Members
of the SEIU have specifically requested VanishPoint(R) products in order to
make their members aware of the availability of VanishPoint(R) technology
and the need for it at other facilities with union membership. Unionized
healthcare workers provide healthcare staffing for 12.5 percent of United
States hospital facilities.
Under California's groundbreaking legislation, the California Occupational
Safety and Health Administration ("Cal OSHA") mandates healthcare employers
to provide their workers with safe needle devices. This action was taken in
response to events that transpired at San Francisco General Hospital and
pressure from the SEIU and various federal, state, and local elected
officials in California who demanded change. Representatives of RTI served
on the Advisory Committee for developing the amendments. California was
the first state to successfully pass legislation mandating the use of
safety needle products. The bill, signed into law by Governor Pete Wilson
on September 30, 1998, directed Cal OSHA to amend California's bloodborne
pathogens standard. Beginning July 1, 1999, this regulation requires the
use of needle products that
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effectively eliminate or reduce injury rates. Employers are also required
to create and maintain a log of all needlestick injuries by the type of
device and the manufacturer's brand. Noncompliance with this Cal OSHA
standard can result in misdemeanor and/or felony charges that carry
penalties of up to three years in prison and fines up to $250,000.
Sixteen states have now enacted safety needle laws. California, Tennessee,
Maryland, Texas, New Jersey, Ohio, West Virginia, Minnesota, Maine,
Georgia, New Hampshire, Iowa, Alaska, Connecticut, Oklahoma, and
Massachusetts have all enacted safety needle laws. In addition, numerous
states have introduced legislation containing language similar to that
passed in California. Federal legislation (Senate Bill 3067) has bipartisan
support as well as support from OSHA and the Secretary of Labor. The
related House Bill passed on October 3, 2000 and the Senate Bill is
pending.
Marketing and Distribution
--------------------------
The vast majority of decisions relating to the purchase of medical supplies
are made by the purchaser representatives of the various healthcare
organizations rather than the end-users of the product (nurses, doctors, and
testing personnel). Furthermore, many of these organizations have entered into
agreements with group purchasing organizations ("GPOs") which contract for the
purchase of supplies on behalf of their member organizations in order to obtain
the lowest possible prices. The GPOs individually negotiate prices with
manufacturers of medical devices and supplies and thus their healthcare provider
members are only able to select their medical supplies and equipment from a list
of pre-negotiated suppliers. According to "The Role of Group Purchasing
Organizations in the US Health Care System," a report prepared by Muse &
Associates for the Health Industry Group Purchasing Association ("HIGPA"), the
potential hospital marketplace for medical/surgical equipment and supplies in
1998 and 1999 was $32.8 billion and $34.1 billion, respectively. HIGPA and
other industry representatives estimate that 80 percent of these hospital
expenditures were channeled through GPOs. There can be no assurance that future
GPO contracts will not continue to limit RTI's share of the market and have a
material adverse effect on RTI's long-term financial condition. The reluctance
to purchase products outside the GPO is due in part to the exclusivity of the
contract and the hospital administrators' concern about losing manufacturers'
rebates.
Accordingly, RTI attempts to market its products directly to the individual
end-users (nurses, doctors, and testing personnel) and their purchaser
representatives so that they request their GPOs add RTI's products to their list
of available products and also markets its products directly to the GPOs
themselves. RTI's products are available through contracts with the following:
Abbott, Scripps; McKessonHBOC; Health Services Corporation of America ("HSCA");
Premier Health Systems, Inc.; AmeriNet, Inc.; InSource Health Services; and
Managed Healthcare Associates ("MHA")/MedEcon. RTI also pursues General
Services Administration ("GSA"), VA, Federal Supply Schedule (FSS), and other
federal government contracts for the purchase of VanishPoint(R) products.
RTI distributes its products in the United States and its territories
through 7 general line and 20 specialty distributors. RTI utilizes 12
international distributors. RTI entered into an agreement with Abbott whereby
Abbott agreed to act as a nonexclusive marketer and distributor of RTI's 1cc,
3cc, 5cc, and 10cc syringes, blood collection tube holders, and small tube
adapters to acute care facilities. The Abbott Agreement is for an initial five
year term. RTI will continue to utilize its current general line and specialty
distributors in other market segments, such as primary care and alternate care
facilities.
RTI has developed a national direct marketing network in order to market
its products to end-users and their purchaser representatives of approximately
15 employees located in Texas, Georgia, California, Missouri, Tennessee, New
Jersey, and Arizona. RTI employs this marketing force of product specialists and
nurses strategically placed in order to take full advantage of emerging
legislation concerning safety products in healthcare. RTI's marketers make
calls on target markets and segments that are high volume users of syringes and
blood collection tube holders. RTI's marketers penetrate all of the departments
that affect the decision-making process for safety products, including the
purchasing agents. They also call on alternate care sites and talk directly
with the decision-makers of the facility. In addition to the marketers, RTI
employs a team of registered nurses who educate healthcare providers and
healthcare workers through accredited continuing education units for in-service
training, exhibits at related trade shows, and publications of relevant articles
in trade journals and magazines. These nurses provide clinical support to
customers. In addition to marketing RTI's products, the network demonstrates
the safety and cost effectiveness of the VanishPoint(R) automated retraction
products to end-users. RTI
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provides to healthcare facilities, through its own representatives and Abbott's
representatives, cost analysis software developed by Arthur Andersen LLP which,
after entry of data for their particular facility, provides healthcare
professionals an analysis of the cost savings provided by using VanishPoint(R)
syringes compared to the costs of standard syringes. RTI has also developed
user-friendly product evaluation kits, which allow smaller facilities to conduct
on-site clinical evaluations with the aid of off-site company nursing
coordinators. These kits allow RTI to familiarize and educate a facility's
healthcare workers regarding VanishPoint(R) products.
RTI has nonexclusive distribution agreements with various organizations for
the distribution of its products in: Western Europe, Japan, Australia, Canada,
Ireland, France, Germany, Switzerland, Belgium, Netherlands, Luxembourg, Korea,
South Africa, Tanzania, Uganda, Zimbabwe, Botswana, Namibia, Mozambique, Angola,
Zaire, Kenya, Nigeria, Mauritius, and Madagascar. In addition, RTI has exclusive
distribution agreements for the distribution of its products in: the United
Kingdom, Puerto Rico, South Africa, Mexico, Korea, United States Virgin Islands,
British Virgin Islands, Antigua, Barbados, St. Martin, Cuba, Ireland, the
Dominican Republic, Saudi Arabia, Syria, Iraq, Turkey, Iran, Pakistan, Kuwait,
Morocco, Algeria, Tunisia, Egypt, Sudan, Afghanistan, Oman, Yemen, and the
United Arab Emirates. However, RTI currently utilizes 12 of these international
distributors. Sales to foreign markets are limited at this time, as the
marketing efforts are in their early stages. The total population of Western
Europe exceeds 310 million, and the recognition for the urgency of safe needle
devices in parts of Europe has echoed the United States model. In France,
England, Germany, and Italy, organized healthcare worker unions have taken
action to force hospitals and government agencies to place safety as a priority.
France has led Western Europe in its recognition of safety and has implemented
VanishPoint(R) blood collection tube holders in several hospitals and clinical
laboratories.
Key components of RTI's strategy to increase its market share are to (a)
continue marketing emphasis in states that have implemented safe needle
legislation; (b) promote legislation in other states and at the federal level;
(c) continue to add VA facilities, health departments, emergency medical
services, federal prisons, and home healthcare facilities as customers; (d)
educate healthcare providers, insurers, healthcare workers, government agencies,
government officials, and the general public on the reduction of risk and the
cost effectiveness afforded by RTI's VanishPoint(R) products; (e) supply product
through GPOs and Integrated Delivery Networks ("IDNs"); (f) explore
possibilities for future licensing agreements and joint venture agreements for
the manufacture and distribution of safety products in the United States and
abroad; (g) offer a full product line on existing products; (h) introduce new
products; and (i) continue to increase international sales, particularly in
Europe, where safety legislation appears to be moving parallel to the United
States, with a one to two year lag time.
Several factors could materially affect the marketability of RTI's
products. Demand could be dramatically increased by current legislative efforts
encouraging the use of safety syringes. Demand could also be increased if RTI
were successful in the antitrust lawsuit it has filed against B-D. See "PART
II-ITEM 2-LEGAL PROCEEDINGS." Marketability of RTI's products would depend, in
part, on RTI's ability to meet a dramatic and sudden increase in demand and on
its ability to quickly find additional production capacity through licensing
agreements and joint ventures, the purchase of appropriate facilities, or
manufacturing and storage services. RTI is currently increasing shifts and
improving machine performance in order to increase production.
Status of Publicly Announced New Products
-----------------------------------------
RTI has received FDA premarket notification, which allows these products to
be put into interstate commerce, for the 1cc tuberculin, insulin, and allergy
antigen syringes and anticipates producing them by the latter part of 2000.
Patents have been applied for and issued for the application of automated
retraction to dental syringes, winged IV's, and catheter introducers. RTI
anticipates seeking FDA premarket notification and introducing these products in
the near future.
Competition
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According to Theta's 1998 report, the leading manufacturers of hypodermic
syringes and blood collection products are B-D, with a market share of
approximately 71 percent; Sherwood/Davis & Geck Division of American Home
Products Company, which was acquired by Tyco International Ltd. ("Sherwood"),
with a market share of approximately 22 percent; and Terumo Medical Corporation
("Terumo"), with a market share of approximately 7 percent.
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Founded in 1897, B-D is headquartered in New Jersey. B-D's medical device
division accounts for approximately 1.9 billion, or 56 percent, of B-D's
estimated total fiscal 1999 sales. The injection systems segment accounts for
42 percent of B-D's fiscal 1999 device division sales. B-D currently
manufactures the SafetyLok(TM), a syringe that utilizes a tubular plastic sheath
that must be manually slid over the needle after an injection, and the
SafetyGlide(TM), a syringe which utilizes a hinged lever to cover the needle
tip. B-D also manufactures a safety blood collection tube holder that utilizes
the SafetyLok(TM) sheath. B-D's "Vacutainer(R)" blood collection tube holder is
commonly used as industry jargon to refer to blood collection tube holders in
general.
Sherwood was one of five major acquisitions by Tyco International Ltd., a
company headquartered in Bermuda. Sherwood manufactures the Monoject(R), a
safety syringe that utilizes a sheath similar to the B-D SafetyLok(TM) syringe,
but currently does not manufacture a safety blood collection tube holder.
Founded in 1974, Terumo was the first company to sell disposable syringes
in Japan. Today Terumo manufacturers standard syringes and blood collection
tube holders, operates internationally, and has sales in some 120 countries.
Both B-D's and Sherwood's safety syringes require the use of two hands and
several extra steps to activate the tubular plastic shield which must be slid
and locked into place to protect the needle. In contrast, use of the
VanishPoint(R) syringe is identical to that of a standard syringe until the end
of an injection, when the automated retraction mechanism retracts the needle
directly from the patient safely into the barrel of the syringe. This allows the
second hand to remain safely out of harm's way.
B-D and Sherwood have greater financial resources, larger and more
established sales and marketing and distribution organizations, and greater
market influence, including the long-term contracts with GPOs described earlier.
These competitors may be able to use these resources to improve their products
through research or acquisitions or develop new products, which may compete more
effectively with RTI's products. There can be no assurance that RTI's
competitors will not succeed in developing or marketing products that are
technologically superior or more effective or commercially attractive than any
that are being developed by RTI. Based on the licensing agreement B-D has
entered into with Med-Design, it is possible that B-D may in the future
manufacture retractable needle products. Med-Design owns patent rights to
manufacture a line of retractable needle products.
In addition to B-D and Sherwood, there are companies that manufacture
needlestick injury prevention products that RTI's products will compete against
for market share. Among those companies are: Bio-Plexus, Inc. ("Bio-Plexus"),
Smiths Industries Medical Systems ("SIMS"), and New Medical Technologies, Inc.
("NMT"). Bio-Plexus utilizes a recessed internal hollow blunt safety technology
where the internal blunt is advanced and locked into place beyond the sharp
outer tip of the needle. SIMS utilizes a patented sheath whereupon completion of
the procedure, the healthcare worker presses the sheath against a hard surface
to lock the needle into the sheath. NMT manufactures a syringe that utilizes
automated retraction of the used needle within the barrel of the syringe. NMT
currently manufactures and makes commercially available one syringe size in
limited needle lengths.
Other events that are having an impact on RTI's competitiveness include
class action lawsuits by healthcare workers and RTI's decision to pursue its
claims for damages against B-D and Sherwood. Class action suits on behalf of
healthcare workers have been filed in several states against B-D and Sherwood,
et al. The success of such lawsuits could, obviously, be materially beneficial
to any company that provides a safer alternative technology to the standard
needle products, which cause as many as 800,000 reported needlestick injuries
each year. RTI has filed a lawsuit against B-D; Tyco International (U.S.), Inc.;
Novation, LLC; VHA, Inc.; Premier, Inc.; Premier Purchasing Partners, L.P.; The
Community Hospital of Brazosport; and Sweeny Community Hospital to pursue claims
for damages for restraint-of-trade and anti-trust violations. See "PART II-ITEM
2-LEGAL PROCEEDINGS."
RTI's competitive strengths include that the VanishPoint(R) syringe is the
only safety syringe given the highest possible rating by ECRI. RTI's blood
collection tube holder is one of only two safety products given the highest
possible rating. RTI's products also have an advantage because minimal training
and changes to practitioners' normal routines are required. Use of RTI's
products also prevent unfortunate and improper reuse. RTI's competitive position
is strengthened by its agreements with the following: Scripps; McKessonHBOC;
HSCA;; Premier Health Systems, Inc.; AmeriNet, Inc.; InSource Health Services;
MHA/MedEcon; and Abbott.
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RTI's competitive weaknesses include its current lack of market (less than
1 percent), because two well-established companies control most of the market.
RTI's competitive position is also weakened by its higher initial price per unit
and the method that providers use for making purchasing decisions. RTI's
products are initially more expensive. However, the price per unit is
competitive or even lower than the competition once all the costs incurred
during the life cycle of a syringe are considered. Such life cycle costs
include disposal costs, testing and treatment costs for needlestick injuries,
and treatment for contracted illnesses through needlestick injuries.
Dependence Upon Key Suppliers
-----------------------------
RTI purchases most of its product components from single suppliers,
including needle cannulae, syringe lubricants, needle adhesives, and packaging
materials. There are multiple sources of these materials, and RTI owns the
molds that are used to manufacture the plastic components of its products.
Changes in suppliers such as Magor Molds (mold supplier), Sortimat Technology
GmBHd Co. ('Sortimat") (assembly machine supplier), Nissho Corporation (needle
supplier), Multivac, Inc. (packaging supplier), and/or Sterigenics
(sterilization company) could disrupt production schedules. In addition,
shortages may occur from some suppliers, creating delays or reductions in
product shipments, which could have a material adverse effect on RTI's operating
results. Further, delays in filling orders could cause problems with customers,
resulting in a permanent loss in sales.
Dependence on Certain Customers
-------------------------------
Sales from the first half of fiscal 1999 to the second half increased 261
percent due to increased sales in California due to the safe needle law which
went into effect July 1, 1999. Sales increased in California due to the
legislation. Purchases made by California customers did not appreciably
increase for locations outside California. Sales to end-users over the period
from July 1999 through March 2000 indicate that 70 percent of units sold were in
California, with over one-third of those sales made to Kaiser Permanente.
Quintiles Laboratories Limited in Georgia made up 18 percent of the unit sales
for the same period. RTI anticipates that Abbott will account for the majority
of sales of RTI's products to acute care end-user facilities in 2000. RTI
maintains distribution agreements to serve its nonacute care end-user
facilities.
RTI's current significant acute care and nonacute care end-user facilities
include: Scripps Healthcare System, Riverside Memorial Hospital, Mississippi
Department of Health, and California Department of Health.
Manufacturing
-------------
RTI currently manufactures its 3cc, 5cc, and 10cc VanishPoint(R) syringes
and the VanishPoint(R) blood collection tube holder and small tube adapter in a
controlled environment in Little Elm, Texas. RTI recently signed an agreement
with NYPRO Precision Assemblies, a California corporation, to provide
subassembly services for the 5cc and 10cc syringes. RTI has also outsourced
molding of its blood collection tube holder parts to Anura Plastics Engineering
Corporation ("APEC"), also a California company. The size of the facility in
Little Elm, Texas, is 22,500 square feet, with 18,000 square feet dedicated to
production. The facility was designed to be modular so that, as new product
lines are added or duplicate production lines are built, it can be expanded to
house this new equipment. Assembly of the 3cc syringe uses a fully automated
process, developed by Sortimat, a leading equipment manufacturer, with a
manufacturing capacity of approximately 3 1/2 million units per month. The
automated blood collection tube holder assembly has the manufacturing capacity
of approximately 1 million units per month.
All components of RTI's products, except needles, can be produced at its
Little Elm manufacturing facility. Currently, in order to increase production
capacity, RTI is outsourcing some of the molding and assembly processes. See
PART I-ITEM 1 -Production Capacity for a more complete discussion.
Technologically advanced molding machines from Sortimat, using a combination of
hot-runner and cold-runner molds (depending primarily on the size of the part
being molded) which molds are owned by RTI, produce the molded parts for
VanishPoint(R) products. The needles used in VanishPoint(R) products are
purchased from Nissho Corporation, one of the world's larger suppliers. The
retraction springs are wound in-house using a high-
9
<PAGE>
grade stainless steel spring wire. All parts have been tested for
biocompatibility and radiation tolerance. After automated assembly, products are
sealed in blister packages, boxed and sent out for sterilization at one of two
outside radiation facilities. RTI's packaging equipment was manufactured by
MultiVac, Inc., a leading packaging machine manufacturer. RTI also has an
automated assembly process for manufacturing its blood collection tube holders.
RTI has limited experience in manufacturing the VanishPoint(R) product line
in commercial quantities. Manufacturers often encounter difficulties in scaling
up production of new products, including problems involving production yields,
quality control and assurance, component supply and shortages of qualified
personnel, compliance with FDA regulations, and the need for further FDA
premarket notification of new manufacturing processes. Difficulties encountered
by RTI in manufacturing scaleup could have a material adverse effect on its
business, financial condition, and results of operations.
Production Capacity
-------------------
RTI is currently operating at a production rate of 24 million syringes and
8 million blood collection tube holders annually. Currently, market demand for
safety outpaces RTI's production capacity. RTI is working to increase its
production capacity in the 3cc syringe and blood collection tube holders by
increasing the number of operating shifts and improving machine performance. Due
to the plant's physical size constraints, RTI has increased production capacity
for its 5cc and 10cc syringes by outsourcing the subassembly for these products.
Molding has been outsourced to provide better operating efficiencies. Other
methods RTI is currently reviewing to increase capacity include: joint ventures
with manufacturers of medical equipment, the expansion of RTI's current
manufacturing facility, short-term mobile buildings to hold inventory, and the
outsourcing of production and subassembly of subcomponents. RTI has executed an
agreement with NYPRO Precision Assemblies, Inc., a California corporation, for
the provision of subassembly services for components of the 5cc and 10cc
syringes, which will enable RTI to increase its current manufacturing capacity.
RTI is considering licensing and/or sublicensing of its patents, as well as
joint ventures, and buying additional space for domestic production. RTI's
current facilities have been augmented by an outsourcing agreement with APEC
which provides RTI with additional molding capacity for parts and warehousing
space in California. Long-term plans include ordering additional assembly
equipment and building an additional manufacturing facility.
Patents and Proprietary Rights
------------------------------
Thomas J. Shaw and RTI entered into a Technology License Agreement dated
effective as of the 23rd day of June, 1995, whereby Mr. Shaw granted RTI "... a
worldwide exclusive license and right under the `Licensed Patents' and
'Information,' to manufacture, market, sell and distribute `Licensed Products'
and `Improvements' without right to sublicense and subject to such nonexclusive
rights as may be possessed by the Federal Government..." RTI may enter into
licensing arrangements with Mr. Shaw's written approval of the terms and
conditions of the licensing agreement. The 'Licensed Products' include all
retractable syringes and retractable fluid sampling devices and components
thereof, assembled or unassembled, which comprise an invention described in
'Licensed Patents', and improvements thereof including any and all Products
which employ the inventive concept disclosed or claimed in the 'Licensed
Patents'.
In exchange, RTI paid Mr. Shaw a $500,000 initial licensing fee which was
fully paid in 1997. Furthermore, RTI agreed to pay a 5 percent royalty on gross
sales after returned inventory based on the price to the end-user or
intermediary as appropriate. The license terminates upon expiration of the last
licensed patents unless sooner terminated under certain circumstances. The
licensing fee and royalties have been paid in accordance with this agreement.
RTI has the right and obligation to obtain protection of the invention and
has full and complete control over prosecution of patent properties. The
license unilaterally changes to a nonexclusive license in the event of a hostile
takeover. Also, if Mr. Shaw involuntarily loses control of RTI, the license
becomes a nonexclusive license and a right to information.
Foreign patent protection has been sought through the Patent Cooperation
Treaty, and patents have been filed for regional and national patent protection
in selective countries. These regional patents include Western Europe and
Africa. In addition, application has been made for national patents in selective
countries where RTI believes the VanishPoint(R) syringe can be utilized most.
10
<PAGE>
RTI holds 16 United States patents related to its automated retraction
technology, including patents for dental syringes, catheters, winged IV sets,
syringes, and blood collection tube holders. In addition, RTI has multiple
applications for patents currently pending.
RTI has also registered the following trade names and trademarks:
VanishPoint(R), RT with a circle mark, and the Spiral Logo used in packaging
RTI's products. RTI also has an application pending for trademark protection for
the color coded dots on the ends of its syringes.
There are currently no patent infringement claims pending against the
VanishPoint(R) retraction technology. RTI has decided, on the advice of patent
counsel, not to purchase patent insurance as it would require inappropriate
disclosure of information that is currently proprietary and confidential.
Pursuant to the terms of a loan from Legacy Bank (formerly Plano Bank &
Trust) in the amount of $710,000, RTI has executed a negative pledge on the sale
of patents without prior written permission.
Reliance on Patents, Licenses, and Protection of Proprietary Technology
-----------------------------------------------------------------------
RTI's success will depend, in part, on its ability to protect its
intellectual property and maintain the proprietary nature of its technology
through a combination of patents and other intellectual property arrangements.
RTI believes these patents will be sufficient to protect the design of its
current and proposed products. Litigation, either to enforce RTI's patent
rights or defend from patent infringement suits, would be expensive and would
divert RTI's resources from other planned uses. Any adverse outcome in such
litigation could have an adverse effect on RTI. In addition, patent applications
filed in foreign countries and patents granted in such countries are subject to
laws which differ from those in the United States. Patent protection in such
countries may be different from patent protection provided by United States laws
and may not be favorable to RTI. There is no assurance that RTI's program for
patent protection, confidentiality, and restricted access to its facilities and
product specifications will be sufficient to protect RTI's proprietary
technology from all competitors.
Regulatory Status and Effect of Regulation
------------------------------------------
RTI and its products are regulated by the FDA. The syringe is a Class II
medical device which requires assurance by the manufacturer that the device is
safe and effective and that it meets certain performance standards. The FDA
issued its "Order of Substantial Equivalence" declaring the Vanishpoint syringe
products to be substantially equivalent to a legally marketed predicate device
(i.e., granted RTI permission to market its safety syringes in interstate
commerce) for the 3cc VanishPoint(R) syringe in December 1995; for the 5cc and
10cc VanishPoint(R) syringes in May 1997; for the 1cc tuberculin syringe in
November 1997; for the 1cc VanishPoint(R) insulin, tuberculin, and allergy
antigen syringes in February 1998; and for the VanishPoint(R) blood collection
tube holder and small tube adapter in August 1997.
In addition to premarket notification, (which results in obtaining the
right to put products into interstate commerce)RTI must register with the FDA on
an annual basis and provide the FDA with a list of commercially distributed
products. Texas has similar registration requirements. The FDA is required to
inspect all medical device manufacturing facilities at least once every two
years to determine the extent to which they are complying with Quality System
Regulation. The most recent inspection occurred in April 2000, after which the
auditor determined No Action Indicated (NAI).
RTI's quality system was certified for ISO 9001 compliance through TUV
Essen, a subsidiary of RWTUV Germany. The certification was deemed in
compliance with ISO 9001, and EN46001 and the Medical Device Directive
93/42/EEC. In addition, RWTUV certified the VanishPoint(R) product line for the
CE mark according to Annex II of the council directive 93/42/EEC of 1993
relating to medical device design, production, and final control. Since the
original certification in 1997, RTI has undergone annual surveillance audits
with no major noncompliances noted. The CE Mark authorizes RTI to sell in 18
different countries. RTI has engaged a European regulatory affairs company to
be its authorized representative in Europe according to Medical Device Directive
93/42/EEC. RTI is currently pursuing registration with the Ministry of Health in
additional countries in order to sell products in those countries.
Government Funding of Research and Right to License
---------------------------------------------------
Thomas J. Shaw developed his initial version of a safety syringe with the
aid of grants by the National Institute of Drug Abuse, a subsidiary of the
National Institutes of Health. As a result, the federal
11
<PAGE>
government has the right, where the public interest justifies it, to disperse
the technology to multiple manufacturers so that the safety syringe can be made
widely available to the public. However, the funding was only used to develop
and patent the syringe design as of 1991. That syringe was a bulkier, less
effective, and more expensive version of the current product. Accordingly and on
the advice of counsel, Management believes that the risk of the government
demanding manufacture of this inferior product is minimal.
Research and Development
------------------------
RTI spent $266,029, $763,690, and $842,062 in fiscal 1997, 1998, and 1999,
respectively, on research and development, primarily on development of prototype
molds and manufacturing processes for the following products: 1cc syringe, 5cc
syringe, 10cc syringe, and a blood collection tube holder. Prior to May, 2000,
RTI's ongoing research and development activities were performed by an internal
research and development staff. This team of engineers developed automated line
assembly for the syringe and blood collection tube holder and established
processes to meet regulatory requirements. Pursuant to the Abbott Agreement
entered into between RTI and Abbott, a New Product Team, made up of no fewer
than two representatives each from Abbott and RTI, has been established for the
purpose of developing new products utilizing the automated retraction
technology. Products currently in development include the winged butterfly IV,
the catheter introducer, and the dental syringe. Possible future products
include all needle medical devices to which the automated retraction mechanism
can be applied.
Environmental Compliance
------------------------
Management believes that RTI does not incur material costs in connection
with compliance with environmental laws. RTI's manufacturing waste
(predominantly made up of hard plastic materials) is sold to Penn Tex Plastics,
which recycles the materials.
Employees
---------
As of September 15, 2000, RTI had 177 full-time employees and three
independently contracted consultants. Of the 177 full-time employees,
approximately seven persons were engaged in research and development activities,
92 persons were engaged in manufacturing and engineering, 31 persons were
engaged in quality assurance and regulatory affairs, 18 persons were engaged in
sales and marketing, 22 persons were engaged in general and administrative
functions, and seven persons in facilities. No employees are covered by
collective bargaining agreements, and RTI believes it maintains good relations
with its employees. RTI is dependent upon a number of key Management and
technical personnel, and the loss of services of one or more key employees could
have a material adverse effect on RTI. RTI's President and Chief Executive
Officer, Thomas J. Shaw, has an employment contract. In addition to Mr. Shaw's
employment contract, RTI has a one year employment contract with Phillip Zweig,
Director of Communications. RTI has entered into three consulting agreements
with independent contractors, one of which, Lillian E. Salerno, is a Director of
RTI. See PART I-ITEM 5-EMPLOYMENT AGREEMENTS and INDEPENDENT CONSULTING
AGREEMENTS for more details.
REPORTS TO SECURITY HOLDERS
As of August 22, 2000, RTI is a reporting company as defined under the
Securities Exchange Act of 1934, as amended. Accordingly, RTI will file Forms
10K-SB, 10Q-SB, proxy statements, and any other periodic reports required by the
Securities Exchange Act of 1934, as amended.
The public may read and copy any materials filed with the United States
Securities and Exchange Commission ("SEC") at the SEC's Public Reference Room at
450 Fifth Street, N.W., Washington, D.C. 20549. The public may obtain
information on the operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy
and information statements, and other information regarding issuers that file
electronically with the SEC. The address of that site is (http://www.sec.gov).
-------------------
RTI's web page is currently under construction. The Internet address for RTI is
(http://www.vanishpoint.com/).
----------------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Certain statements included by reference in this Form 10SB-A containing the
words "believes," "anticipates," "intends," "expects," and similar such words
constitute forward-looking statements within
12
<PAGE>
the meaning of the Private Securities Litigation Reform Act. Any forward-looking
statements involve known and unknown risks, uncertainties, and other factors
that may cause actual results, performance, or achievements of RTI to be
materially different from any future results, performance, or achievements
expressed or implied by such forward-looking statements. Such factors include,
among others, the impact of dramatic increases in demand, RTI's ability to
quickly increase its capacity in the event of a dramatic increase in demand, the
ability of RTI to continue to finance research and development as well as
operations and expansion of production through equity and debt financing, as
well as sales, and the increased interest of larger market players in providing
safety needle devices. Given these uncertainties, undue reliance should not be
placed on forward-looking statements.
EXTERNAL SOURCES OF INCOME
RTI has funded operations primarily from proceeds from private placements
and bank loans. RTI has been capitalized with approximately $42,000,000 raised
from five separate Private Placement Offerings. As of September 30, 1995, RTI
sold 5,000,000 shares of Series A Convertible Preferred Stock at $1 per share,
for an aggregate of $5,000,000. As of October 31, 1996, RTI sold 1,000,000
shares of Series I Class B Convertible Preferred Stock at $5 per share for an
aggregate of $5,000,000. As of January 31, 1998, RTI sold 1,000,000 shares of
Series II Class B Convertible Stock at $10 per share for an aggregate of
$10,000,000. As of September 30, 1999, RTI sold 1,160,200 shares of Series III
Class B Convertible Preferred Stock at $10 per share for an aggregate of
$11,602,000. Finally, as of June 10, 2000, RTI sold 1,133,800 shares of Series
IV Class B Convertible Preferred Stock at $10 per share for an aggregate of
$11,338,000.
RTI obtained $1,200,000, $710,000, and $2,000,000 in 1996, 1997, and
2000, respectively, from bank loans. Additionally, RTI received a Small Business
Administration loan of $1,000,000 in 1996 to pay for portions of automated
assembly equipment, multi-cavity molds, and other equipment. Furthermore, RTI
borrowed $3,000,000 in August 2000 under its Credit Agreement with Abbott.
SELECTED FINANCIAL DATA
The following selected financial data for fiscal years ended December 31,
1999 and 1998, is derived from audited financial statements of RTI, which were
audited by independent certified public accountants. The following selected data
for the six months ended June 30, 2000 and 1999, is derived from unaudited
financial statements of RTI. The data should be read in conjunction with the
audited financial statements and selected notes attached as an exhibit and the
following discussion of results of operations.
13
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31 6 Months Ended, 6 Months Ended,
-------------------------- June 30, 2000 June 30, 1999
1999 1998 (Unaudited) (Unaudited)
---- ---- ----------- -----------
<S> <C> <C> <C> <C>
Sales, net $ 3,375,158 $ 845,559 $ 2,356,307 $ 732,223
Cost of sales 2,331,070 765,448 2,336,592 519,907
----------- ----------- ----------- -----------
Gross margin (deficit) 1,044,088 80,111 19,715 212,316
----------- ----------- ----------- -----------
Operating Expenses
Preproduction manufacturing 1,837,830 1,004,828 627,200 924,632
Sales and marketing 3,742,779 1,539,822 1,636,439 1,481,183
Research and development 842,062 763,690 260,600 427,206
General and administrative 2,863,989 2,419,821 1,604,150 1,442,045
----------- ----------- ----------- -----------
Total operating expenses 9,286,660 5,728,161 4,128,389 4,275,066
----------- ----------- ----------- -----------
Loss from operations (8,242,572) (5,648,050) (4,108,674) (4,062,750)
Interest income (expense) 9,064 (56,038) 32,432 (1,555)
----------- ----------- ----------- -----------
Net Loss $(8,233,508) $(5,704,088) (4,076,242) $(4,064,305)
=========== =========== =========== ===========
Dividends $ - $ - $ - $ -
</TABLE>
RESULTS OF OPERATIONS
The following discussion contains trend information and other forward-
looking statements that involve a number of risks and uncertainties. RTI's
actual future results could differ materially from its historical results of
operations and those discussed in the forward-looking statements. All period
references are to RTI's fiscal year ended December 1999 or 1998 or periods ended
June 30, 2000 and 1999.
14
<PAGE>
Comparison of Period Ended
June 30, 2000, and Period Ended June 30, 1999
Net sales increased $1,624,085, or 222%, to $2,356,307, for the six months
ended June 30, 2000, from $732,223 for the six months ended June 30, 1999.
Increases were due to the Abbott Agreement and continued sales growth in
California. Cost of sales increased 349%. The increase was due to higher sales
volume, costs incurred to establish new production lines, and lower allocations
to preproduction expense. Coincident with the May 4, 2000, signing of the Abbott
Agreement, RTI ceased reporting as a development stage enterprise, and RTI will
no longer classify any manufacturing costs as preproduction.
Preproduction expenses decreased $297,432 to $627,200 for the six months
ended June 30, 2000, compared to $924,632 for the six months ended June 30,
1999. The decrease was due to higher allocations to cost of sales rather than
preproduction costs associated with moving out of development stage reporting.
Research and development expense decreased $166,606, or 39%, to $260,600
for the six months ended June 30, 2000, compared to $427,206 for the six months
ended June 30, 1999. The decrease is largely due to smaller allocations from
production. These decreases were offset by increases in personnel and salaries
as RTI prepares for expansion of the manufacturing facility.
Sales and marketing expense increased $155,256 to $1,636,439 for the six
months ended June 30, 2000, compared to $1,481,183 for the six months ended June
30, 1999. Increases included marketing fees paid to distributors due to the
higher sales volumes. In 1999, RTI incurred contract sales expenses in
California and the contract ended in December 1999 accounting for a decrease in
expenses. Travel and outside consulting were also lower than for the same period
in the previous year.
General and administrative expenses increased $162,105, or 11%, to
$1,604,150 for the six months ended June 30, 2000, compared to $1,442,045 for
the six months ended June 30, 1999. Increases were caused by outside legal fees
and financial consulting expenses.
Interest income increased $4,861 or 7% for the six months ended June 30,
2000, compared to the six months ended June 30, 1999, due to higher invested
cash balances.
Interest expense decreased $29,126 or 40% for the six months ended June 30,
2000, compared to the six months ended June 30, 1999, due to higher capitalized
interest.
Comparison of Year Ended
December 31, 1999, and Year Ended December 31, 1998
Net sales were $3,375,158 and $845,559 for the years ended December 31,
1999, and December 31, 1998, respectively. The 300 percent increase in sales was
principally due to increased sales in California as a result of the safe needle
legislation.
Costs of sales increased from $765,448 in 1998 to $2,331,070 in 1999. As a
percentage of revenue, cost of sales decreased from 91 percent in 1998, to 69
percent in 1999. The improvement is due to increased operating efficiency and
continued allocation of certain manufacturing costs to preproduction and
research and development expensed during the development stage.
Preproduction costs increased from $1,004,828 to $1,837,830. Preproduction
costs relative to cost of sales decreased from 131 percent to 79 percent due to
a shift from a preproduction environment to a manufacturing environment.
Sales and marketing expenses increased 143 percent to $3,742,779 in 1999
from $1,539,822 in 1998 but decreased as a percentage of revenue from 182
percent to 111 percent. The increase in expenses is principally due to the
increased effort to market VanishPoint(R) products in California, including
retaining a marketing company that provided contract sales representatives to
supplement the marketing effort.
Research and development costs increased as more resources were committed
to the 1cc syringe.
15
<PAGE>
General and administrative costs increased 18 percent due to increases in
staffing, salaries, and consulting services, offset somewhat by decreases in
legal fees.
Interest income decreased due to lower average outstanding cash balances.
Interest expense decreased due to lower outstanding debt and more interest
being capitalized.
Comparison of Year Ended
December 31, 1998, and Year Ended December 31, 1997
Net sales were $845,559 and $262,315 for the years ended December 31, 1998,
and December 31, 1997, respectively. Shipments of the 3cc VanishPoint(R) syringe
began in February 1997, with 66 percent of the sales occurring during the last
four months of the year. Approximately 42 percent of 1998 sales were blood
collection tube holders to one customer. Sales of the 3cc VanishPoint(R) syringe
were at a comparable rate during 1998 as the last four months of 1997.
Costs of sales increased in 1998 as the cost of materials sold increased in
conjunction with the increase in unit sales and due to a greater allocation of
manufacturing costs to cost of sales from preproduction costs.
Preproduction manufacturing costs decreased $491,590 from 1997 to 1998,
because as operations shifted from a preproduction environment towards a
manufacturing environment, a higher portion of the manufacturing costs were
allocated to cost of sales. Also, in 1998, a significant amount of the
manufacturing costs were allocated to research and development because a
significant amount of manufacturing time was spent on development and refinement
of the production process.
Sales and marketing expenses increased 10 percent to $1,539,822 in 1998,
from $1,394,024 in 1997. The sales force was expanded in 1998, resulting in
additional salary and travel expense, in order to increase sales and product
awareness. These increases were partially offset by a reduction in sales and
marketing consulting expenses as RTI expanded its own workforce and by a
reduction in costs associated with developing marketing and advertising
materials.
Research and development costs increased $497,661 in 1998, to $763,690 from
$266,029 in 1997. This increase was due to the increase in time spent in the
manufacturing facility to further develop, refine, and validate the production
process using automated assembly equipment, so that RTI's products can be
produced efficiently while maintaining RTI's high standard for quality.
General and administrative expenses increased 24 percent in 1998, to
$2,419,821 from $1,952,561 in 1997. The increase was primarily in salaries and
consulting services offset with decreases in legal fees and insurance.
Interest income increased due to higher average outstanding cash balances.
Interest expense decreased $118,595 due to an increase in the
capitalization of interest expense on construction in progress expenditures for
production equipment that RTI is having manufactured.
LIQUIDITY AND FUTURE CAPITAL REQUIREMENTS
Based on anticipated sales in the second half of fiscal 2000, RTI believes
it will be able to sustain operations for its existing products without
additional financing. Management believes that RTI will achieve its breakeven
point in early 2001. RTI believes that the existing cash and cash equivalents
and cash flow from operations will be sufficient to meet RTI's presently
anticipated working capital needs through 2001. To the extent RTI uses all of
its cash resources, RTI will be required to obtain additional funds, if
available, through additional borrowing or equity financing. There can be no
assurance that such capital will be available on acceptable terms. If RTI is
unable to obtain sufficient financing, it may be unable to implement its long-
term plan of operation. RTI anticipates strengthening its capital structure over
the next four years by increasing capital through debt and equity offerings,
improving profitability, and participating in joint ventures or licensing
arrangements, where possible, to accelerate the manufacture and distribution of
its products.
16
<PAGE>
RTI currently produces at a rate of 24 million 3cc syringes and 8 million blood
collection tube holders annually. In order to ramp up production to meet the
expected demand for safe needle devices, RTI has raised $18 million in debt and
equity funds in 2000. Part of those funds were obtained as a result of an
agreement with Abbott. On May 4, 2000, RTI entered into a National Marketing and
Distribution Agreement with Abbott for an initial five year term (the "Abbott
Agreement"). Pursuant to the Abbott Agreement, Abbott agreed to act as a non-
exclusive marketer and distributor of RTI's 1cc, 3cc, 5cc, and 10cc syringes,
blood collection tube holders, and small tube adapters to acute care facilities.
As part of the consideration for the Abbott Agreement, Abbott agreed to make
periodic loans to RTI prior to June 30, 2005, in increments of $1,000,000 in an
aggregate amount of up to $5,000,000 at an interest rate of prime plus one
percent with any and all amounts loaned to be due and payable on June 30, 2005.
Any loans made are secured by accounts receivables and contracts where Abbott is
the account debtor, payments due to Abbott under the Abbott Agreement, and
certain equipment already owned by RTI. RTI has borrowed $3 million under the
Abbott Agreement. Pursuant to the Abbott Agreement, RTI gave Abbott the right,
at its option, to convert any and all principal amounts owed into common stock
of RTI at a price of $10 per share. Abbott also holds registration rights with
respect to the shares of common stock issued upon conversion of any principal
amount loaned. As part of the consideration paid to RTI under the Abbott
Agreement, Abbott purchased $5 million of Series IV Class B Convertible
Preferred Stock of RTI under the same terms and conditions as all other
investors in the Series IV Class B Convertible Preferred Stock offering. RTI
expects to fund future expansion through a combination of debt, a public
offering, and internally generated funds. Capital needs are expected to require
an additional $87 million over the next five years for expansion of production
discussed in greater detail in PART I-ITEM 2-"Material Commitments for
Expenditures."
Internal Sources of Liquidity and Anticipated Trends in Sales
-------------------------------------------------------------
The increase in sales is primarily attributable to the California
legislation requiring safety needles and similar legislation which had been
passed in additional states. Demand for safety products is increasing in the
United States and internationally. NIOSH issued a safety alert calling on
employers to adopt safer needles to reduce needlestick injuries. OSHA issued a
Compliance Directive which instructs OSHA inspectors to cite employers who fail
to evaluate and buy safety needle devices. The SEIU has taken a proactive stance
with regard to promoting the use of automated retraction needle devices in
member hospitals and by participating in federal and state legislation protests.
Due to recent legislation, Cal OSHA mandates that healthcare employers provide
their workers with safe needle devices. In addition, 15 other states have
adopted, and more than 20 states have introduced, legislation containing
language similar to that passed in California, and federal legislation has
passed in the House and is pending in the Senate with support from OSHA and the
Secretary of Labor. The recognition for the urgency of safe needle devices in
parts of Europe and Africa has echoed the United States model. In France,
England, Germany, and Italy, organized healthcare worker unions have taken
action to force hospitals and government agencies to place safety as a priority.
France has led Western Europe in its recognition of safety and has implemented
VanishPoint(R) blood collection tube holders in several hospitals and clinical
laboratories.
Also, as a result of the Abbott Agreement, sales are expected to increase.
Demand could also dramatically increase in the event RTI is successful in its
antitrust suit, but RTI has not based any of its financing plans on a positive
result from that suit. See "PART II-ITEM 2-LEGAL PROCEEDINGS." RTI is also
ramping up its production and continuing to introduce new products. RTI
anticipates being able to sell all that it is able to produce.
External Sources of Liquidity
-----------------------------
RTI has obtained several loans over the past four years which have,
together with proceeds from sales of equities, enabled RTI to pursue development
and production of its products.
In January 1996, RTI obtained two loans from Western Bank & Trust in the
principal amount of $1,200,000 for the purpose of financing construction
improvements and the purchase of manufacturing equipment, which matures on
October 24, 2001. One loan was in the amount of $800,000 and one loan in the
amount of $400,000. The larger note carried interest at a rate of prime as
defined by The Wall Street Journal plus 1 percent adjustable annually, while the
smaller loan carried interest at a rate of CD
17
<PAGE>
rate plus 2 percent. The loans were secured by land, building, and equipment and
by a certificate of deposit in the amount of $400,000 to be released upon
achievement of certain financial ratios (with interest payable at the
certificate of deposit rate plus 2 percent). These loans were guaranteed by
Thomas J. Shaw, RTI's President and Chief Executive Officer, and Suzanne M.
August, his wife. The $800,000 loan was paid off in February 2000 with funds
provided by a loan from 1st International Bank. The $400,000 loan was paid by
the certificate of deposit which had been held as collateral.
In July 1996, RTI obtained a United States Small Business Administration
note payable to Texas Bank in the principal amount of $1,000,000, which matures
on July 1, 2003. The note is payable monthly at an annual interest rate of
prime plus 1.5 percent adjustable quarterly. The loan is collateralized by
manufacturing equipment and guaranteed by Thomas J. Shaw, RTI's President and
Chief Executive Officer, and Suzanne M. August, his wife. This loan is in good
standing. RTI has agreed not to make any distribution upon its capital stock,
purchase any of its capital stock, or merge without prior written consent. Such
permission was obtained for the payment of dividends on the Series A Convertible
Preferred Stock and the redemption of such stock.
In April 1997, RTI obtained a loan from Legacy Bank of Texas (formerly
Plano Bank & Trust) in the principal amount of $710,000 at an interest rate of
prime plus 1 percent (adjustable daily) for reimbursement for the purchase of
equipment, which matures on July 10, 2004. The loan is collateralized by
certain machinery and equipment, a certificate of deposit in the amount of
$200,000, which was subsequently applied to the loan, and restrictions on the
transfer of certain patents. The loan is (continuously and without limit)
guaranteed by Thomas J. Shaw, the President and Chief Executive Officer. This
loan is in good standing.
In February 2000, RTI obtained loans of $2 million through the 1st
International Bank. The proceeds from these loans were used to pay off the
Western Bank loan and also for working capital purposes. $1,500,000 of the loan
is secured by a lien on the land, building, and building improvements and
matures on February 18, 2005. The remaining $500,000 is secured by RTI's
accounts receivable and matures on February 18, 2001. Both loans are guaranteed
by a continuing guaranty by Thomas J. Shaw, the President and Chief Executive
Officer. The interest rate on both loans is the prime rate as defined in The
Wall Street Journal plus 1 percent. This loan is in good standing.
In May 2000, RTI entered into an Agreement with Abbott. As part of the
consideration for the Agreement, Abbott agreed to make periodic loans prior to
June 30, 2005, to RTI in increments of $1,000,000 in an aggregate amount of up
to $5,000,000 at an interest rate of prime plus 1 percent with any and all
amounts loaned to be due and payable on June 30, 2005. In August, 2000, RTI
borrowed $3 million under the Abbott Agreement. See PART I-ITEM 2-LIQUIDITY AND
FUTURE CAPITAL REQUIREMENTS for a more detailed description.
Material Commitments for Expenditures
-------------------------------------
RTI anticipates capital expenditures in the amount of $87 million over the
next five years for the purpose of expanding capacity by adding equipment and
additional space (for 14 assembly lines for syringe production and 5 lines for
blood collection tube holder production), expanding the current building by an
additional 60,000 square feet, and constructing a second facility for additional
assembly, equipment, and warehousing needs in order to meet RTI's target
production of syringes and blood collection tube holders by 2005. RTI needs this
capital to fund equipment and facilities expansion for additional 1cc, 3cc, and
blood collection tube holders, as well as equipment to manufacture 5cc and 10cc
syringes. This production target equates to RTI's obtaining 6 percent of the
United States' 6.6 billion-unit syringe annual market and less than 1 percent of
the world's 24 billion-unit annual syringe market. RTI has obtained $18 million
in 2000 in a combination of debt and equity financing and expects to raise up to
$60 million through equity financing. RTI anticipates other funding requirements
to be paid from debt or operations.
RTI anticipates expenditures of $4,500,000 and $13,500,000 in fiscal 2000
and 2001, respectively, for building expansion and improvements. Management
anticipates $4,913,000; $25,447,000; and $16,897,000 in capital expenditures for
the manufacturing facility, equipment, and machinery in fiscal 2000, 2001, and
2002, respectively. RTI is planning to expand its manufacturing capacity by
expanding its existing facility in Little Elm, Texas, by 60,000 square feet in
2001 (to house near term production and administrative needs) and purchasing
additional assembly equipment. The equipment will include a 1cc printer, 1cc
packaging machine, 5cc/10cc assembly equipment, blood collection tube holder
assembly equipment, and blood collection tube holder molds. RTI also anticipates
constructing a second facility for additional assembly equipment and warehousing
needs through 2003.
18
<PAGE>
RTI has installed 1cc automated production equipment. RTI is in the process
of purchasing additional automated blood collection tube holder equipment. RTI
has increased capacity by outsourcing the molding of certain sub-components of
RTI's products. RTI has entered into an agreement with APEC for the provision of
additional molding capacity for both parts and warehousing space in California.
RTI is also pursuing licensing agreements and/or joint venture agreements for
the provision of manufacturing services.
ITEM 3. DESCRIPTION OF PROPERTY
RTI's 22,500 square foot headquarters is located on 35 acres, which are
owned by RTI, overlooking Lake Lewisville in Little Elm, Texas. The building is
a modular portion of a larger planned building for which the engineering design
has been finalized. The headquarters are in good condition and house RTI's
administrative offices and manufacturing facility. RTI's current expansion plans
do not include going outside the 35 acres on which the headquarters is located.
Management anticipates that any future development of facilities beyond that 35
acres will be in areas closer to the East and West Coast customer base. The land
and building on which the headquarters is located are the subject of a lien by
1st International Bank as collateral on payment of a loan in the amount of
$1,500,000.
RTI also leases Suites 618, 620, and 622 S. Mill Street, Lewisville, Texas,
as well as storage stalls located at 102 E. Purnell, Lewisville, Texas, from
Mill Street Enterprises, a sole proprietorship owned by Lillian E. Salerno, a
Director of RTI. This lease is for 4,365 square feet of office space in good
condition. The storage facility is used to store office documents. The lease is
for five years commencing July 1, 1997, and ending June 30, 2002, at a monthly
rate of $1,900. An additional lease has been signed for 628 Mill Street for a
one-year period commencing April 1, 2000. The monthly rate is $1,000. This
property is used exclusively for general office and marketing purposes. RTI does
not hold any real estate or related securities for investment purposes.
In the opinion of Management, all the properties and equipment are suitable
for their intended use and are adequately covered by an insurance policy which
lists Textron, Fleet Capital, Texas Bank, 1st International Bank, and Legacy
Bank as the loss payees.
RTI plans to expand the headquarters by 60,000 square feet in fiscal 2001
at an approximate cost of $6,000,000 for additional manufacturing space as well
as office space. This expanded facility will be capable of accommodating four
syringe assembly lines and three blood collection tube holder lines. In 2001,
RTI anticipates building a 100,000 square foot facility at an approximate cost
of $12 million which will be utilized for manufacture of the projected five 3cc
assembly lines, six 1cc assembly lines, two 5cc assembly lines, one 10cc
assembly line, and five blood collection tube holder assembly lines. Management
plans to finance the expansion by raising up to $60 million through a public
offering and $10 million in debt.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of RTI's capital stock as of the date of this Form 10SB-A (excluding
exercisable options) for (a) each person known by RTI to own beneficially 5
percent or more of the voting capital stock, and (b) each Director and Executive
Officer of RTI (earning in excess of $100,000 annually) who owns capital stock.
Except pursuant to applicable community property laws and except as otherwise
indicated, each shareholder identified in the table possesses sole voting and
investment power with respect to his or her shares.
<TABLE>
<CAPTION>
Title of Class Name and Address of Amount and Nature of Percent of
Beneficial Owner Beneficial Owner Class(1)
------------------------------------------------------------------------------------------
Common Stock
------------------------------------------------------------------------------------------
<S> <C> <C> <C>
As a Group Officers and Directors 14,050,000 96.5%
511 Lobo Lane, P.O. Box 9
Little Elm, TX 75068-0009
As Individuals Thomas J. Shaw 11,200,000 77%
Lillian E. Salerno 2,800,000 19.2%
Edith A. Zagona(2) 50,000 .3%
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------
Series A Convertible
Preferred Stock
------------------------------------------------------------------------------------------
<S> <C> <C> <C>
As a Group Officers and Directors 150,000 3.4%
511 Lobo Lane, P.O. Box 9
Little Elm, TX 75068-0009
As Individuals Jimmie Shiu 150,000 3.4%
------------------------------------------------------------------------------------------
Class B Convertible
Preferred Stock
------------------------------------------------------------------------------------------
As a Group Officers and Directors 58,500 1.4%
511 Lobo Lane, P.O. Box 9
Little Elm, TX 75068-0009
As Individuals Thomas J. Shaw 5,000 Less than 1%
Jimmie Shiu 18,500 Less than 1%
Marwan Saker(3) 30,000 Less than 1%
Edith A. Zagona 5,000 Less than 1%
</TABLE>
(1) The percentages of each class are based on 14,549,500 shares of common
stock, 4,475,500 shares of Series A Convertible Preferred Stock, and
4,254,245 shares of Class B Convertible Preferred Stock outstanding as of
the date of this filing. If all remaining holders subject to the mandatory
redemption convert, it decreases the number of shares of the Series A
Convertible preferred Stock outstanding to 4,418,500 shares.
(2) The 50,000 shares of Common Stock and the 5,000 shares of Class B
Convertible Preferred Stock are held in joint tenancy with Dr. Zagona's
husband.
(3) The 30,000 shares are held as follows: 14,500 shares by My Investments and
15,500 shares held by Saker Investments, which are companies controlled by
Mr. Saker.
There are no arrangements the operation of which would result in a change
in control of RTI.
ITEM 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, AND CONTROL PERSONS
The following table sets forth information concerning the Directors,
Executive Officers, and certain significant employees of RTI as of the date of
this filing. RTI's Board of Directors consists of a total of nine members, four
members of which are Class 1 Directors which serve for an initial one year term
and five of which are Class 2 Directors which serve for two year terms. Upon
the expiration of the Class 1 Directors' current term, the term of office of the
Class 1 Directors will be for two years.
20
<PAGE>
<TABLE>
<CAPTION>
Term as
Name Age Position Director Expires
---- --- -------- ----------------
<S> <C> <C> <C>
Management
Thomas J. Shaw 50 Chairman, President, Chief Executive Officer, and Class 2 Director 2002
Steven R. Wisner 43 Executive Vice President, Engineering & Production and Class 2 2002
Director
Lawrence G. Salerno 41 Director of Operations N/A
James A. Hoover 52 Production Manager N/A
Russell B. Kuhlman 46 Vice President, New Markets and Class 1 Director 2001
Kathryn M. Duesman 37 Director of Clinical Services N/A
Douglas W. Cowan 57 Chief Financial Officer, Treasurer, and Class 2 Director 2002
Michele M. Larios 34 Director of Legal and Legislative Policy and Secretary N/A
Outside Directors
Lillian E. Salerno 39 Class 1 Director 2001
Jimmie Shiu, M.D. 66 Class 1 Director 2001
Clarence Zierhut 71 Class 2 Director 2002
Marwan Saker 44 Class 2 Director 2002
Edith A. Zagona 50 Class 1 Director 2001
Significant Employees
Phillip L. Zweig 54 Communications Director N/A
Peter B. Hegi 26 Product Development Manager N/A
Judy Ni Zhu 42 Senior Research Design Engineer N/A
S. Kristie Haddox 29 Quality Assurance Manager N/A
Shelley K. Walley 47 Manager of Regulatory Affairs N/A
Stephen C. Bezner 50 Director of Accounting N/A
</TABLE>
MANAGEMENT
Thomas J. Shaw, the Founder of RTI, has served as Chairman of the Board,
--------------
President, Chief Executive Officer, and as a Director since RTI's inception. In
addition to his duties overseeing the management of RTI, he continues to lead
RTI's design team in product development of other medical safety devices that
utilize his unique patented friction ring technology. Mr. Shaw has 20 years of
experience in industrial product design and has developed several solutions to
complicated mechanical engineering challenges. He has been granted multiple
patents and has additional patents pending. Mr. Shaw received a Bachelor of
Science in Civil Engineering from the University of Arizona and a Master of
Science in Accounting from the University of North Texas.
Steven R. Wisner joined RTI in October 1999 as Executive Vice President,
----------------
Engineering and Production and as a Director. Mr. Wisner's responsibilities
include the management of engineering, production, regulatory affairs, quality
assurance, and human resources. Mr. Wisner has 23 years of experience in
product design and development. Before joining RTI, Mr. Wisner was the Director
of Operations for Flextronics International in Richardson, Texas, an electronic
manufacturing services company, from May 1998 to October 1999, where he had
complete responsibility for taking product ideas from the concept stage through
full design and into the manufacturing process. Mr. Wisner worked as Design
Services Manager at Altatron Technologies, an electronic manufacturing service
company, from August 1997 to May 1998, and as Director of Engineering with
Responsive Terminal Systems, a medical reporting device manufacturing company,
from 1984 to 1997. While working at Texas Instruments, a leading electronics
manufacturing company, from 1982 to 1984, Mr. Wisner was the team leader of a
product development that successfully integrated several thousand personal
computers into the worldwide Texas Instruments data network. As a project
leader with Mostek Corporation, a semiconductor manufacturing company, from 1980
to 1982, he oversaw the development of automated manufacturing control systems
for semiconductor assembly. Mr. Wisner began his engineering career with
Rockwell-Collins, an avionics division of Rockwell International , in 1977,
where he was involved in the design of flight navigation equipment, including
the first GPS (Global Positioning System). Mr. Wisner holds a Bachelor of
Science in Computer Engineering from Iowa State University.
Lawrence G. Salerno has served as Director of Operations for RTI since 1995
-------------------
and is responsible for the manufacture of all VanishPoint(R) products, as well
as all product development and process development projects. Mr. Salerno is
RTI's Management Representative, assuring that the Quality Systems are
established and implemented according to ISO 9001, MDD, and FDA mandated
standards. In addition, he supervised all aspects of the construction of RTI's
new facilities in Little Elm, Texas. Prior to joining RTI, Mr. Salerno worked
for Checkmate Engineering, an engineering firm, from 1991 to 1995
21
<PAGE>
and was responsible for engineering site design and supervision of structural
engineering products. Mr. Salerno is the brother of Lillian E. Salerno.
James A. Hoover joined RTI in February 1996 and is RTI's Production
---------------
Manager. He is responsible for supervision of the production of RTI's products.
Mr. Hoover has also developed and implemented FDA required procedures and has
been involved in the FDA inspection process. Mr. Hoover joined RTI after
working for Sherwood for 26 years. During his tenure with Sherwood, a medical
device manufacturing company, he gained hands-on experience in all aspects of
the medical device manufacturing process. Mr. Hoover began his career with
Sherwood as a materials handler and worked his way up through a series of
positions with added responsibilities to his final position there as Production
Manager of Off-Line Molding, Operating Room/Critical Care. In this capacity, he
managed several departments, ran several product lines, and hired and supervised
over 200 employees. While at Sherwood, he also gained experience with one of
the country's first safety syringes, the Monoject(R).
Russell B. Kuhlman joined RTI in February 1997 and is RTI's Vice President,
------------------
New Markets and Director. Mr. Kuhlman is responsible for developing new markets
and product training for RTI's sales organization, as well as distribution. Mr.
Kuhlman's efforts with RTI have resulted in bringing onboard Specialty
Distributors, influencing legislation, and educating influential healthcare
representatives about the benefits of the VanishPoint(R) product line. Mr.
Kuhlman is respected throughout the industry and is a main contributor to the
safety effort in this country. He has a sales background in the medical service
industry that includes his most recent work for Bio-Plexus, a medical device
manufacturing company, from 1994 to 1997, where he developed strategic marketing
plans for new safety products. Prior to his work there, Mr. Kuhlman worked as
Director of Sales and Marketing for Winfield Medical, Inc., a medical device
manufacturing company, from 1989 to 1994, where he launched several new
products, developed strategic sales territories, and was the trainer for Sales
and Regional Managers. Mr. Kuhlman also worked for Becton Dickinson
Vacutainer(R) Systems, a medical products company, in the Houston Territory from
1980 to 1989, where he was recognized as the National Sales Representative for
the year 1987. Mr. Kuhlman holds a Bachelor of Science in Finance from the
University of Tennessee
Kathryn M. Duesman, joined RTI in 1996 as the Director of Clinical Services
------------------
and provides clinical expertise on existing VanishPoint(R) products as well as
those in development. She has been instrumental in developing training and
marketing materials. Ms. Duesman has also contributed to design improvements in
the existing product line as well as applying for patents on two new products.
Ms. Duesman is well recognized as one of the key authorities on the prevention
of needlestick injuries and has spoken and been published on this issue. Many
legislators and researchers rely upon her knowledge of the clinical aspects of
the technology. In 1996, Ms. Duesman served as a Registered Nurse ("RN") at
Denton Community Hospital. From 1995 to part of 1996, Ms. Duesman served as an
RN at Pilot Point Home Health, an agency for home healthcare. From 1992 to
1995, Ms. Duesman served as an RN for Denton Community Hospital. Ms. Duesman is
a 1985 graduate of Texas Woman's University with a Bachelor of Science in
Nursing.
Douglas W. Cowan is RTI's Chief Financial Officer, Treasurer, and a
----------------
Director. He is responsible for the financial, accounting, and forecasting
functions of RTI. Prior to joining RTI in 1999, Mr. Cowan served as a
consultant to RTI and other companies from 1996 to 1999 on various accounting
and other business matters. Before becoming a consultant, he served as the
Chief Financial Officer of Wedge-Dialog Company, an oil field services company,
from 1995 to 1996. In addition, Mr. Cowan served in various capacities,
including Vice President and Controller at El Paso Natural Gas Company, an
interstate pipeline company. After leaving El Paso Natural Gas, Mr. Cowan
formed a public accounting practice that provided tax and accounting services,
as well as litigation support. Mr. Cowan has a Bachelor of Business
Administration from Texas Technological College. He is a CPA licensed in Texas.
Michele M. Larios joined RTI in February 1998 as an attorney, and now
-----------------
serves as the Director of Legal and Legislative Policy and as Secretary of RTI.
Ms. Larios is responsible for the legal and legislative functions of RTI. In
addition to working on legal matters for RTI and with outside counsel, Ms.
Larios works with legislators on pertinent issues and relevant legislation.
Prior to joining RTI, Ms. Larios served as the Legal Analyst for Applied Risk
Management Inc., a third party claims administration company, from 1995 through
1997. Ms. Larios received a Bachelor of Arts in Political Science from Saint
Mary's College in Moraga, California, and a Juris Doctorate from Pepperdine
University School of Law in Malibu, California.
OUTSIDE DIRECTORS
22
<PAGE>
Lillian E. Salerno has served on the Board of Directors since 1996.
------------------
Ms. Salerno began serving as a consultant to RTI effective June 1, 2000. Her
responsibilities include the development of foreign marketing, distribution, and
licensing agreements, principally in Europe. Previously, Ms. Salerno served RTI
since its inception in a variety of critical positions. She most recently
served as RTI's Executive Vice President, Sales and Marketing. Prior to RTI's
incorporation, Ms. Salerno was an attorney with a growing private law practice
while she served as a consultant, administrator of grants, and legal consultant
to Checkmate Engineering, an engineering firm. Ms. Salerno assisted with the
start-up of RTI. Ms. Salerno received a Bachelor of Arts from the University of
Texas at Austin, a Master of Arts from the University of North Texas, and a
Juris Doctorate from Southern Methodist University School of Law. Ms. Salerno
is the sister of Lawrence G. Salerno.
Jimmie Shiu, M.D. has served on RTI's Board of Directors since 1996. Prior
-----------------
to retirement in 1998, Dr. Shiu was in private practice as a Board Certified
Otolaryngologist at Presbyterian Hospital in Dallas for 31 years. Although
retired from private practice, Dr. Shiu continues to serve as a clinical
professor for the Department of Otolaryngology at the University of Texas
Southwestern Medical Center at Dallas. He has served on the Board of Trustees
of Presbyterian Healthcare Foundation of Dallas since 1996 and the Board of
Directors of MOTO1, Inc. since 1999. Dr. Shiu completed his undergraduate work
at Abilene Christian University and received his medical degree from University
of Texas Southwestern Medical Center at Dallas, Texas.
Clarence Zierhut has served on RTI's Board of Directors since April 1996.
----------------
Since 1955, Mr. Zierhut has operated an industrial design firm, Zierhut Design,
that develops new products from concept through final prototypes. During his
professional career, Mr. Zierhut has created over 3,000 product designs for more
than 350 companies worldwide, in virtually every field of manufacturing, and has
won many international awards for design excellence. His clients have included
Johnson & Johnson, Abbott, Gould, and McDonnell Douglas. He received a Bachelor
of Arts from Art Center College of Design in Los Angeles, California.
Marwan Saker joined RTI's Board of Directors in June 2000. Since 1983, Mr.
------------
Saker has served as CEO of Sovana, Inc., an export management company. As a
representative for United States companies seeking distribution, licensing, and
franchising in the Middle East, Europe, and North Africa, Mr. Saker was
instrumental in developing successful partnerships in more than 15 countries. He
offices in Dallas, Texas.
Edith A. Zagona, Ph.D. joined RTI's Board of Directors as a Director in
---------------
August 2000. Dr. Zagona has conducted water resources research at the
University of Colorado's Center for Advanced Decision Support for Water and
Environmental Systems since 1988. She has led the development of RiverWare, a
commercially available water basin management software modeling tool that is
widely used by leading water management agencies. She received a Bachelor of
Arts in Philosophy and a Bachelor of Science in Civil Engineering at the
University of Arizona, a Master of Science in Civil Engineering, emphasis in
hydraulics, from Colorado State University, and a Ph.D. in Civil Engineering
from the University of Colorado at Boulder with an emphasis in automation in
water resources management.
SIGNIFICANT EMPLOYEES
Phillip L. Zweig joined RTI in December 1999 as Communications Director.
----------------
Mr. Zweig is a prize winning financial journalist who has worked as a staff
reporter at The American Banker, The Wall Street Journal, and Bloomberg Business
News and other media organizations. From 1993 to 1998, he served as Corporate
Finance Editor at Business Week where he wrote a major article on RTI. Before
joining RTI, he worked as a freelance financial writer and editorial consultant.
His clients included Andersen Consulting and Boston Consulting Group. Mr. Zweig
received a Bachelor of Arts in Behavioral Psychology from Hamilton College and a
Master of Business Administration from the Baruch College Graduate School of
Business.
Peter B. Hegi joined RTI in August 1996 and is RTI's Product Development
-------------
Manager. His responsibilities include development of new products from
conception through production implementation supporting production in the
manufacturing of products and managing continual production improvement efforts.
This process includes design input and control, manufacturing feasibility, and
FDA premarket notification of the product. Product Development also assists in
continually improving existing devices. He has created product and component
specifications for the blood collection tube holder, 5cc
23
<PAGE>
syringe, and 10cc syringe. Mr. Hegi is a 1996 Mechanical Engineering graduate of
Stanford University, where he was a member of Tau Beta Pi national engineering
honor society. His new product development responsibilities include establishing
device design requirements and controls, determining product manufacturing
feasibility, and assisting in the preparation of device documentation for FDA
510(k) Submission. FDA 510(k) Submissions are summaries, submitted under section
513(i) of the Federal Food, Drug, and Cosmetic Act, of the safety and
effectiveness information contained in a premarket notification submission
(document required to be filed by persons desiring to introduce into interstate
commerce a device intended for human use) upon which a determination of
substantial equivalence can be based (510[k] Submission). He has been
instrumental in the development of the VanishPoint(R) blood collection tube
holder and the 1cc, 3cc, 5cc, and 10cc VanishPoint(R) syringe product lines.
Judy Ni Zhu has served as a Senior Research Design Engineer since
-----------
joining RTI in 1995. Her primary focus is on new product development and
improvement of current products. Prior to joining RTI, Ms. Zhu worked with
Checkmate Engineering, an engineering firm, as a design engineer on the original
3cc syringe and other SBIR grant projects. Ms. Zhu received her Bachelor of
Science from Northwest Polytechnic University in Xian, China, and her Master of
Engineering from University of Texas at Arlington. Ms. Zhu has been
instrumental in design modifications for the 3cc syringe, which have maximized
both product reliability and production efficiency. She also designed and
developed a manual needle assembly machine and an automatic lubricating and
capping system for the 3cc syringe and developed and assisted in the design of
automated blood collection tube holder assembly equipment. Ms. Zhu has
collaborated with Ms. Duesman and Mr. Shaw in the filing of several patent
applications. Prior to joining Checkmate Engineering in 1991, Ms. Zhu worked
for Shenyang Airplane Corporation, an airplane design company, in Shenyang,
China, where she was responsible for airplane control system design and its
stress computation and analysis. Ms. Zhu also worked for Mactronix, Inc., an
assembly equipment manufacturing semiconductor company, in Dallas, Texas, where
she was responsible for the design, modification, and production drawing of an
automatic wafer transfer system.
S. Kristie Haddox joined RTI in July 1996 and is RTI's Quality Assurance
-----------------
Manager and responsible for QA testing, document control, and validation. She
formerly worked as Quality Assurance Validation Scientist at Alcon Laboratories,
a pharmaceutical and medical device manufacturing company, in Fort Worth, Texas,
from 1995 to 1996. Ms. Haddox holds a Bachelor of Science degree from Texas A&M
University and is a member of the American Society for Quality Control.
Shelley K. Walley joined RTI in April 1999 as RTI's Manager of
-----------------
Regulatory Affairs and is responsible for RTI's 510(k) Submissions, handling
customer complaints, internal/external audits, training, and the Corrective and
Preventive Action system. Ms. Walley served in several regulatory and quality
capacities prior to joining RTI. She was the Compliance Coordinator with Sandoz
Agro, Inc. (formerly Zoecon Corporation), an animal healthcare products
manufacturer, for 11 years from January 1985 to July 1995 and gained valuable
experience working with the EPA and the FDA to establish compliance with GMP and
GLP guidelines for RTI. Ms. Walley's experience as Senior Regulatory Specialist
for almost four years at Mentor (from July 1995 to April 1999), a Class III
implantable medical device company, furthered her regulatory knowledge in the
medical device arena. At Mentor, she provided regulatory guidance for
submissions, validations and audits, and worked closely with the FDA, the ISO,
and third party investigations. Ms. Walley majored in Business Management at
East Texas State University and is a Certified Quality Auditor.
Stephen C. Bezner joined RTI in March 2000 as the Director of Accounting.
-----------------
He is responsible for keeping personnel, systems, and procedures in place to
produce an orderly and timely accounting of all business activities. Prior to
his employment with RTI, Mr. Bezner served as Vice President Finance for CBI
Laboratories, a public subsidiary of Thermo Electron Corporation, an electronic
equipment manufacturing company, from 1992 to 2000. Mr. Bezner has 24 years'
experience in accounting management and cost accounting, all of which were for
manufacturing operations of public companies. Previous employers include
Overhead Door Corporation and Texas Instruments. He has a Bachelor of Science
Degree from the University of Texas at Dallas.
COMMITTEES OF DIRECTORS
The Board of Directors has the following committees:
Committee Members
--------- -------
24
<PAGE>
Compensation and Benefits Thomas J. Shaw--Chairman
Lillian E. Salerno
Douglas W. Cowan
Audit Committee Clarence Zierhut
Marwan Saker
Dr. Jimmie Shiu
Executive Committee Thomas J. Shaw
Steven R. Wisner
Dr. Jimmie Shiu
The Compensation and Benefits Committee recommends to the Board of Directors the
compensation of Officers and significant employees for RTI and the granting of
stock options.
The Audit Committee assists the Board of Directors in monitoring the
integrity of the financial statements of RTI, the compliance of RTI with
securities regulations and the independence and performance of RTI's auditors.
See Exhibit No. 12.3.
The Executive Committee possesses and may exercise all the powers and
authority of the Board of Directors in the control and management of the
business and affairs of RTI during intervals between regular meetings of the
Board of Directors. These powers are limited as follows: the committee cannot
fill any of its vacancies, the committee does not have the power to declare
dividends, amend Bylaws, elect or remove any officer or director, to submit to
shareholders actions that require approval of shareholders, amend any resolution
of the Board of Directors, to act on matters assigned to other committees, to
create or fill any vacancies on the Board of Directors, to authorize
distributions or to issue shares.
Thomas J. Shaw, as President, serves ex-officio as a member of all the
standing committees.
FAMILY RELATIONSHIPS
There are no family relationships among the above persons except as set
forth above.
INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS
None of the above persons or any business in which such person was an
executive officer have been involved in a bankruptcy petition, been subject to a
criminal proceeding (excluding traffic violations and other minor offenses),
been subject to any order enjoining or suspending their involvement in any type
of business, or been found to have violated a securities law.
DIRECTORSHIPS IN OTHER COMPANIES
No Directors hold directorships in reporting companies other than as set
forth above.
ITEM 6. EXECUTIVE COMPENSATION
The following summary compensation table sets forth the total annual
compensation paid or accrued by RTI to or for the account of the Chief Executive
Officer and each other executive officer of RTI whose total cash compensation
exceeded $100,000 for any of the past three fiscal years:
25
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
------------------- ----------------------
Awards Payout(s)
------------------------- ---------------------
Other Restricted Securities
Annual Stock Underlying LTIP All Other
Name and Principal Compen- Award(s) Options/ Payouts Compen-
Position Year Salary($) Bonus($) sation($) ($) SARs (#) ($) sation($)
------------------- ---- -------- ------- -------- ---------- ---------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Thomas J. Shaw, 1997 130,400 50,000 0 0 0 0 0
President and CEO 1998 125,000 0
1999 162,019 0
Lillian E. Salerno, 1997 88,846 50,000 0 0 0 0 0
Former Executive 1998 90,000 0
Vice President, 1999 143,461 0
Sales & Marketing
Edward S. Aarons, 1997 0 0 0 0 0 0 0
Former Director 1998 0 0
of Sales 1999 108,598 0
</TABLE>
In 1998, Mr. Shaw should have received a raise under the terms of his
Employment Agreement. However, the 1998 portion of his raise in the amount of
$12,019 was paid in 1999. Officers, Directors, and significant employees hold
options exercisable for the purchase of 57,000; 110,000; 228,700; 172,075; and
34,375 shares of Common Stock in the years 1999, 2000, 2001, 2002, and 2003,
respectively. To date, no options or long-term incentive plan awards have been
issued to Mr. Shaw or Ms. Salerno, RTI's controlling common stockholders.
Directors or former Directors were granted options in 1999 as follows: Steven
R. Wisner, 150,000; Douglas W. Cowan, 25,000; Jimmie Shiu, 15,000; Clarence
Zierhut, 5,000; John H. Wilson, III, 5,000; F. John Deuschle, III, 5,000; Bob
Stathopulos, 5,000; and Joe Reeder, 25,000. Options granted to Messrs Wilson
and Deuschle terminated as a result of their departure from the Board of
Directors. The Board of Directors subsequently issued options for the purchase
of 5,000 shares of common stock of RTI to each. No other options have been
granted to Directors in 2000.
Officers, Directors, and Significant Employees hold stock options for the
purchase of Common Stock exercisable as follows:
26
<PAGE>
<TABLE>
<CAPTION>
Options Exercisable by Directors and Significant Employees
<S> <C> <C> <C> <C> <C>
1999 Plan NQSOs 1999 2000 2001 2002 2003
Steven R. Wisner 65,000 65,000
Lawrence G. Salerno 5,150
James A. Hoover 3,150
Kathryn M. Duesman 5,300
Douglas W. Cowan 2,500 2,500
Jimmie Shiu, M.D. 15,000
Clarence Zierhut 5,000
Michele M. Larios 7,700
Marwan Saker 30,500 30,500
Phillip L. Zweig 20,000
-----------------------------------------------------------------------------------
0 20,000 108,800 98,000 30,500
===================================================================================
1999 Plan ISOs 1999 2000 2001 2002 2003
Steven R. Wisner 10,000 10,000
Lawrence G. Salerno 2,500 7,650
James A. Hoover 2,500 5,650
Russell B. Kuhlman 7,800 7,800
Kathryn M. Duesman 2,500 7,800
Douglas W. Cowan 10,000 10,000
Michele M. Larios 7,700
Peter B. Hegi 3,800 3,800
Judy Ni Zhu 3,350 3,350
S. Kristie Haddox 3,950 3,950
Steven C. Bezner 3,875 3,875
Shelley K. Walley 2,500 2,500
-----------------------------------------------------------------------------------
0 0 48,900 74,075 3,875
===================================================================================
1996 Plan NQSOs 1999 2000 2001 2002 2003
Steven R. Wisner 2,500
Lawrence G. Salerno 5,000 15,000
James A. Hoover 5,000 14,000
Russell B. Kuhlman 7,500 10,000
Kathryn M. Duesman 1,500 10,000
Jimmie Shiu, M.D. 15,000 15,000 15,000
Clarence Zierhut 10,000 5,000 1,000
Peter B. Hegi 1,500 7,000
Judy Ni Zhu 7,500 10,000
S. Kristie Haddox 1,500 4,000
-----------------------------------------------------------------------------------
57,000 90,000 16,000 0 0
===================================================================================
1996 Plan ISOs 1999 2000 2001 2002 2003
Lawrence G. Salerno 7,500
James A. Hoover 7,500
Russell B. Kuhlman 7,500
Kathryn M. Duesman 7,500
Michele M. Larios 10,000
Peter B. Hegi 5,000
</TABLE>
27
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Judy Ni Zhu 5,000
S. Kristie Haddox 5,000
-----------------------------------------------------------------------------------
0 0 55,000 0 0
===================================================================================
</TABLE>
COMPENSATION OF DIRECTORS
RTI pays each nonemployee Director a meeting fee of $250 for each Board
meeting attended and has granted to each Director (except Mr. Shaw and Ms.
Salerno) stock options of common stock each year. No additional amounts are
paid for committee participation or special assignment.
EMPLOYMENT AGREEMENTS
There are no other employment agreements in place involving other Officers
or Directors of RTI, except as set forth below:
Thomas J. Shaw
--------------
RTI has a written employment agreement with Thomas J. Shaw, RTI's President
and Chief Executive Officer, for an initial period of three years ending
September 2002 with an automatic and continuous renewal for consecutive two-year
periods. The agreement is terminable either by RTI or Thomas J. Shaw upon 30
days' written notice. The agreement provides for an annual salary of at least
$150,000 with a salary increase annually equal to no less than the percentage
increase in the Consumer Price Index during the previous calendar year. Thomas
J. Shaw's salary shall be reviewed by the Board of Directors each January, which
shall make such increases as it considers appropriate. Thomas J. Shaw is also
entitled to participate in all executive bonuses as the Board of Directors, in
its sole discretion, shall determine.
Under the Employment Agreement, RTI will also provide certain fringe
benefits, including, but not limited to, participation in pension plans, profit-
sharing plans, employee stock ownership plans, stock appreciation rights,
hospitalization and health insurance, disability and life insurance, paid
vacation, and sick leave. RTI also reimburses him for any reasonable and
necessary business expenses, including travel and entertainment expenses,
necessary to carry on his duties. Pursuant to the employment agreement, RTI has
agreed to indemnify Thomas J. Shaw for all legal expenses and liabilities
incurred with any proceeding involving him by reason of his being an Officer or
agent of RTI. RTI has further agreed to pay reasonable attorney fees and
expenses in the event that, in Thomas J. Shaw's sole judgment, he needs to
retain counsel or otherwise expend his personal funds for his defense.
Thomas J. Shaw has agreed to a one-year noncompete, not to hire or attempt
to hire employees of RTI for one year and to not make known RTI customers or
accounts or to call on or solicit RTI accounts or customers in the event of
termination of his employment for one year unless the termination is without
cause or pursuant to a change of control of RTI. Furthermore, Mr. Shaw has the
right to resign in the event that there is a change in control which is defined
as a change in the majority of directors within any twelve month period without
2/3 approval of the shares outstanding and entitled to vote, or a merger where
less than 50 percent of the outstanding stock survives and a majority of the
Board of Directors remains, or the sale of substantially all of the assets of
RTI, or any other person acquires more than 50 percent of the voting capital of
RTI. Mr. Shaw retained the right to participate in other businesses as long as
they do not compete with RTI and so long as he devotes the necessary working
time to RTI.
Phillip L. Zweig
----------------
RTI entered into an employment agreement with Phillip L. Zweig, RTI's
Communications Director, dated December 22, 1999, which expires on December 12,
2000. Mr. Zweig's duties include obtaining and authoring favorable coverage of
RTI and issues important to RTI in local and national media outlets throughout
the United States. Mr. Zweig also agreed not to write articles about RTI for
independent publications and shall not provide any services relating to
marketing strategy, healthcare policy, publicity or media coverage, or any other
services in the United States to any manufacturer of needle products, healthcare
group purchasing organizations, or any individual or business entity that is in
direct competition with the business of RTI during his employment with RTI and
for three years hereafter. In exchange, RTI agreed to pay Mr. Zweig an annual
salary of $85,000 and to grant Mr. Zweig options for the
28
<PAGE>
purchase of 20,000 shares of RTI's common stock under the 1999 Stock Option
Plan. RTI also agreed to pay reasonable travel, entertainment, and related
expenses as well as to provide Mr. Zweig with standard benefits. Mr. Zweig shall
be considered for bonuses on the same terms as other management employees.
INDEPENDENT CONSULTING AGREEMENTS
Robert P. Stathopulos
---------------------
From RTI's inception to the present, Robert Stathopulos, a former Director,
has served as an independent consultant pursuant to an oral agreement with RTI
for the provision of advice regarding various matters, including, but not
limited to, Manufacturing Quality Assurance and Regulatory Affairs. RTI has
agreed to pay him $1,000 per day worked. Mr. Stathopulos currently works every
other week at the Little Elm facility. RTI has also agreed to pay Mr.
Stathopulos' expenses, which have averaged $1,000 per week and are made up of
business related travel expenses. This consulting agreement is at will and can
be terminated at any time.
Lillian E. Salerno, d/b/a MediTrade International
-------------------------------------------------
RTI entered into a consulting agreement with Lillian E. Salerno, d/b/a
MediTrade International (ending May 31, 2001), a sole proprietorship, on June 1,
2000 which was amended effective as of Aug. 23, 2000. The contract is for a one
year term and Ms. Salerno has agreed to establish contacts with major European
entities to develop marketing and distribution channels as well as licensing
agreements. Ms. Salerno will be paid $16,666 per month for a total of $200,000
plus up to $5,000 of business expenses incurred on behalf of RTI for the term of
the contract.
International Export and Consulting
-----------------------------------
RTI entered into a Consulting Agreement on March 15, 2000, with
International Export and Consulting where International Export and Consulting
agreed to advise RTI with respect to selection of an international distribution
network, potential strategic partners, and future licensing for VanishPoint(R)
technology in the Middle East. In exchange, RTI has agreed to pay a consulting
fee in the amount of $2,000 a month for ten months as well as issue nonqualified
stock options ("NQSOs") for 61,000 shares of RTI's common stock at an exercise
price of $10 per share. Marwan Saker, a principal in International Export and
Consulting, is a Director.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Management believes that all of the transactions set forth below were made
on terms no less favorable to RTI than could have been obtained from
unaffiliated third parties. There are no preset limits on payments to related
parties. Payments are made after services are provided.
Thomas J. Shaw, RTI's President and Chief Executive Officer who
beneficially owns 77-80 percent (depending on the number of shares of Series A
Convertible Preferred Stock that are converted during the current mandatory
redemption) of RTI's common stock, was paid a licensing fee of $500,000
(amortized over 17 years) from RTI for the exclusive worldwide licensing rights
to manufacture, market, sell, and distribute all the retractable medical safety
products. In addition, Mr. Shaw receives a 5 percent gross royalty on all
licensed products sold to customers over the life of the technology licensing
agreement. Mr. Shaw was paid a royalty of $110,197 and $42,571 for 1999 and
1998, respectively. Mr. Shaw was paid $348,529 in royalties from January 1,
2000, to the date of this filing. As of the date of this filing, Mr. Shaw has
been paid $494,878 as a royalty for the two years ended September 30, 2000.
In September 1996, RTI purchased the 3cc prototype molds from Thomas J.
Shaw, d/b/a Checkmate Engineering, a sole proprietorship. The purchase was
financed by a note for the full purchase price of $108,252. The note provided
for no interest for the first 305 days and, subsequently, interest at a rate of
12 percent per annum. Interest expense related to this note was $1,400 and
$5,258 for the years ended December 31, 1999 and 1998, respectively. The note
was paid in full in 1999.
Lillian E. Salerno, a Director of RTI, d/b/a Mill Street Enterprises ("Mill
Street"), a sole proprietorship, leases offices at 618, 620, and 622 S. Mill
Street, in Lewisville, Texas, to RTI for its marketing and sales department. The
lease is for a five-year term commencing July 1, 1997, and ending June 30, 2002,
at an annual rental rate of $22,800. RTI also has a lease for additional office
space with
29
<PAGE>
Mill Street for one year commencing April 1, 2000, at a rate of $1,000 per
month. Lease payments for $27,600 have been paid in 2000.
A former Director of RTI, Robert Stathopulos, was paid consulting fees by
RTI of $96,372 in 1999 and $117,145 in 2000 through the date of this filing.
Douglas W. Cowan, a Director and Chief Financial Officer and Treasurer of
RTI, received $76,651 and $58,345 in 1998 and 1999, respectively, for accounting
and other consulting services prior to becoming a Director and employee of RTI.
RTI paid $23,381 and $30,258 in 1999 and 1998, respectively, and $10,537
has been paid in 2000, to family members of its Chief Executive Officer for
various consulting services.
Pursuant to a Consulting Agreement between RTI and Lillian E. Salerno
dba/MediTrade International, Ms. Salerno, a Director, was advanced $37,500 in
September, 2000 for setting up operations in Europe. This advance will be
recouped over the remaining period of the contract.
ITEM 8. DESCRIPTION OF SECURITIES
As of the date of this filing, RTI's authorized capital consists of
100,000,000 shares of common stock, no par value, 5,000,000 shares of Series A
Convertible Preferred Stock, par value of $1 per share, and 5,000,000 shares of
Class B Convertible Preferred Stock, par value of $1 per share. No capital
stock carries preemptive rights. There are no provisions in the Second Amended
and Restated Articles of Incorporation and Amended and Restated Bylaws that
would delay, defer, or prevent a change in control of RTI other than provisions
in the Second Amended and Restated Articles of Incorporation that prohibit
cumulative voting by shareholders and provisions which provide that the Board of
Directors shall consist of two classes with each class elected every two years
(except this initial year) in alternating years. RTI serves as its own
registrar and transfer agent but is in the process of retaining the services of
American Stock Transfer & Trust Company. All of RTI's outstanding shares of
common and preferred stock are "restricted securities" and, in the future, may
be sold only upon compliance with the Securities Act of 1933, as amended
("Securities Act"), or an exemption therefrom.
COMMON STOCK
RTI is authorized to issue 100,000,000 shares of no par value common stock
(the "Common Stock"). As of the date of this filing, there are 14,549,500 shares
of Common Stock issued and outstanding. However, RTI has a Notice of Redemption
outstanding for 541,500 shares of Series A Convertible Preferred Stock. If the
selected shareholders do not convert their shares on a one for one basis into
Common Stock, then their shares will be redeemed on November 1, 2000. The
number of shares of Common Stock may increase, by virtue of this redemption, by
up to an additional 57,000 shares. Additionally, 1,000,000 shares are set
aside under both 1996 Stock Option Plans and 2,000,000 shares of Common Stock
have been set aside under the 1999 Stock Option Plan for employees, Directors,
and other qualified individuals. These shares are issuable upon the exercise of
options. As of September 30, 2000, options for the purchase of 359,655 shares
of Common Stock are exercisable. Options for the purchase of 369,655 shares of
Common Stock become exercisable by December 31, 2000. No shares are held as
treasury stock.
Shares of RTI's Common Stock have no conversion rights, no preemptive
rights, and no restrictions on alienation and are fully paid and are not liable
to further call or assessment. Each share of RTI's Common Stock is entitled to
share ratably in any asset available for distribution to holders of its equity
securities upon liquidation of RTI, subject to the preference of the holders of
each class and series of the preferred stock. Pursuant to the requirements of a
loan from Texas Bank, RTI has agreed not to return capital to the shareholders
or redeem outstanding shares without the bank's prior consent.
Voting Rights
-------------
All shares of RTI's Common Stock have equal voting rights and, when validly
issued and outstanding, have one vote per share on all matters to be voted upon
by stockholders. The holders of the Common Stock elect the Directors subject to
certain limited voting rights of the holders of the Series A Convertible
Preferred Shares and Series II Class B Convertible Preferred Shares where
dividends are in
30
<PAGE>
arrears for 12 consecutive quarters. See "Series A Convertible Preferred Stock"
and "Series II Class B Convertible Preferred Stock." Cumulative voting in the
election of Directors is prohibited.
Dividends
---------
Holders of RTI's Common Stock are entitled to receive dividends when and if
declared by RTI's Board of Directors out of funds available therefor. RTI has
not paid any dividends on the Common Stock since its inception and presently
anticipates that all earnings, if any, will be retained for development of RTI's
business and that no dividends on its Common Stock will be declared in the
foreseeable future. Any future dividends will be subject to the discretion of
RTI's Board of Directors and will depend upon, among other things, future
earnings, full payment of dividends on the Series A Convertible Preferred Stock,
and Series I, Series II, Series III, and Series IV Class B Convertible Preferred
Stock, the operating and financial condition of RTI, its capital requirements,
and its general business conditions.
SERIES A CONVERTIBLE PREFERRED STOCK
RTI is authorized to issue not more than 5,000,000 shares of Series A
Convertible Preferred Stock at $1.00 par value and has 4,475,500 shares issued
and outstanding held by 116 shareholders. However, RTI issued a Notice of
Redemption as of November 1, 2000. Holders of the shares selected have the right
to convert their shares or, if no notice of conversion is received by RTI as of
October 27, 2000, RTI will redeem the selected shares for the redemption price
of $1.70 per share plus accrued dividends. As of the date of this filing,
shareholders have given notice under the outstanding Notice of Redemption that
they request redemption of 15,000 shares and conversion of 469,500 shares into
Common Stock which reduced the number of outstanding shares from 5,000,000 to
4,475,500. Pursuant to the outstanding Notice of Redemption the number of shares
outstanding will decrease by conversion or redemption by an additional 57,000.
The Board of Directors of RTI has the authority to divide the Series A
Convertible Preferred Shares into series and to set the relative rights and
preferences among the series, within the limitations provided by Article 2.13 of
the Texas Business Corporation Act. This summary is not intended to be complete
and is subject to, and qualified in its entirety by reference to, the
Certificate of Designation, Preferences, Rights, and Limitations of Series A
Convertible Preferred Stock of RTI, filed with the Secretary of the State of
Texas, amending RTI's Articles of Incorporation, and setting forth the rights,
preferences, and limitations of the Series A Convertible Preferred Stock, the
form of which is attached hereto as part of Exhibit 2.1.
Dividends
---------
Holders of shares of Series A Convertible Preferred Stock (the "Series A
Stock") will be entitled to receive, if, when, and as declared by the Board of
Directors out of funds legally available therefor, cumulative cash dividends of
$.12 per share per annum, payable quarterly, commencing September 1, 1995. If a
dividend upon any shares of Series A Stock is in arrears, no dividends may be
paid or declared and set aside for payment, or other distribution made upon the
Common Stock or any other stock of RTI ranking junior to the Series A Stock as
to dividends. In addition, no Common Stock or any other stock of RTI ranking
junior to the Series A Stock as to dividends, may be redeemed, purchased, or
otherwise acquired for any consideration by RTI except in certain circumstances.
As of October 15, 2000, no dividends are in arrears.
Voting Rights
-------------
Except as required by the laws of the State of Texas, the holders of the
Series A Stock are generally not entitled to vote. In the event dividends
payable on the Series A Stock shares shall be in arrears for 12 consecutive
quarterly dividend periods, the holders of the majority of the outstanding
Series A shares shall have the exclusive right (voting separately as a class
with one vote per Series A share) to elect one-third of the Board of Directors
which Directors shall serve until the next annual meeting or so long as such
arrearage shall continue. As of March 31, 1999, dividends to Series A
shareholders were in arrears for 12 consecutive dividend periods and
accordingly, on October 4, 1999, the Class A shareholders elected three (one-
third) of the Directors to the Board of Directors. The term of office of these
Directors terminated by payment of all dividends due.
So long as any shares of Series A Stock remain outstanding, RTI shall not,
without the affirmative vote or consent of the holders of at least 51 percent of
the shares of the Series A Stock outstanding at the time: (a) authorize, create,
issue, or increase the authorized or issued amount of any class or series of
stock ranking equal to or senior to the Series A Stock with respect to payment
of dividends or the distribution of assets on liquidation, dissolution, or
winding up of RTI; or (b) amend, alter, or repeal the
31
<PAGE>
provisions of RTI's Articles of Incorporation, or of the rights of the Series A
Stock, so as to alter or change the powers, preferences, or special rights of
the shares of the Series A Stock so as to affect them adversely.
Conversion Rights
-----------------
Each share of Series A Stock will be convertible at any time subsequent to
three years after issuance, at the option of the holder thereof into Common
Stock of RTI at a conversion rate of one share of Common Stock for each share of
Series A Stock. The conversion price is subject to adjustment in certain
events.
Redemption Provisions
---------------------
RTI prior to three years from the date of issuance may not redeem the
Series A Stock. On and after such date, the Series A Stock may be redeemed at
the option of RTI, in whole or in part, at any time and from time to time, on at
least 30 days' and not more than 60 days' written notice at the redemption price
of $1.70 per share, together with accrued and unpaid dividends to the date fixed
for redemption.
Liquidation Rights
------------------
In the event of any voluntary or involuntary liquidation, dissolution, or
winding up of RTI, the holders of outstanding shares of Series A Stock are
entitled to receive liquidating distributions equivalent to $1.50 per share,
plus accrued and unpaid dividends to the date of distribution, out of the assets
of RTI available for distribution to stockholders, before any distribution of
assets is made to holders of Common Stock or any stock ranking junior to the
Series A Stock upon liquidation, dissolution, or winding up. If upon any
liquidation, dissolution, or winding up of RTI, the amounts available for
distribution with respect to the Series A Stock are not sufficient to satisfy
the full liquidation rights of the Series A Stock, the holders of the Series A
Stock will share ratably in any such distribution of assets.
Registration Rights
-------------------
Until six months after the last shares of the Series A Stock are redeemed,
retired, converted, or otherwise no longer outstanding, RTI will give notice to
the holders of the Series A Stock no less than 20 days before filing a
registration statement under the Securities Act (excluding registrations
pertaining to securities issuable pursuant to employee stock option or stock
purchase plans, or pursuant to the acquisition of a business). RTI will also
afford the holders of the Series A Stock the opportunity to have included in any
one, but not more than two registrations shares of Common Stock acquired upon
conversion of the Series A Stock. RTI is entitled to exclude the shares of any
holder from a maximum of one registration (on the advice of its investment
banking firm that inclusion would materially interfere with the orderly sale of
securities offered under such registration statement) so long as no other
holder's shares are included in the registration.
CLASS B CONVERTIBLE PREFERRED STOCK (SERIES I, II, III, AND IV)
RTI is authorized to issue 5,000,000 shares of Class B Convertible
Preferred Shares at $1 par value per share. The Board of Directors of RTI has
the authority to divide the Class B preferred shares into series and to set the
relative rights and preferences among the series, within the limitations
provided by Texas Business Corporation Act, Article 2.13. This summary is not
intended to be complete and is subject to, and qualified in its entirety by,
reference to the Certificates of Designation, Preferences, Rights, and
Limitations of Series I, II, III, and IV Class B Convertible Preferred Stock of
RTI, filed with the Secretary of the State of Texas, amending RTI's Articles of
Incorporation, and setting forth the rights, preferences, and limitations of the
Series I, II, III, and IV Class B Convertible Preferred Stock, the forms of
which are attached hereto as part of Exhibit 2.1.
SERIES I CLASS B CONVERTIBLE PREFERRED STOCK
RTI is authorized to issue not more than 5,000,000 shares and has 1,000,000
shares outstanding held by 146 shareholders as of the date of this filing. The
Series I Class B Convertible Preferred Stock ranks senior to RTI's Common Stock
with respect to dividends and upon liquidation, dissolution, or winding up and
RTI treats them as junior to RTI's 5,000,000 shares of Series A Convertible
Preferred Stock.
32
<PAGE>
Dividends
---------
Holders of shares of Series I Class B Convertible Preferred Stock (the
"Series I Stock") will be entitled to receive, if, when, and as declared by the
Board of Directors out of funds legally available therefor, cumulative cash
dividends of $.50 per share per annum, payable quarterly, commencing December
31, 1996. If a dividend upon any shares of Series I Stock is in arrears, no
dividends may be paid or declared and set aside for payment, or other
distribution made upon the Common Stock or any other stock of RTI ranking junior
to the Series I Stock as to dividends. In addition, no Common Stock, or any
other stock of RTI ranking junior to the Series I Stock as to dividends, may be
redeemed, purchased, or otherwise acquired for any consideration by RTI except
in certain circumstances. As of October 15, 2000, $2,065,292 in dividends were
in arrears.
Voting Rights
-------------
Except as required by the laws of the State of Texas, the holders of the
Series I Stock are not entitled to vote.
So long as any shares of Series I Stock remain outstanding, RTI shall not,
without the affirmative vote or consent of the holders of at least 51 percent of
the shares of the Series I Stock outstanding at the time: (a) authorize, create,
issue, or increase the authorized or issued amount of any class or series of
stock ranking equal to or senior to the Series I Stock with respect to payment
of dividends or the distribution of assets on liquidation, dissolution, or
winding up of RTI; or (b) amend, alter, or repeal the provisions of RTI's
Articles of Incorporation, or of the rights of the Series I Stock so as to alter
or change the powers, preferences, or special rights of the shares of the Series
I Stock so as to affect them adversely.
Conversion Rights
-----------------
Each share of Series I Stock will be convertible at any time subsequent to
three years after issuance, at the option of the holder thereof into Common
Stock of RTI at a conversion rate of one share of Common Stock for each share of
Series I Stock. The conversion price is subject to adjustment in certain
events.
Redemption Provisions
---------------------
RTI prior to three years from the date of issuance may not redeem the
Series I Stock. On and after such date, the Series I Stock may be redeemed at
the option of RTI, in whole or in part, at any time and from time to time, on at
least 30 days' and not more than 60 days' written notice, at the redemption
price of $7.50 per share, together with accrued and unpaid dividends to the date
fixed for redemption.
Liquidation Rights
------------------
In the event of any voluntary or involuntary liquidation, dissolution, or
winding up of RTI, the holders of outstanding shares of Series I Stock are
entitled to receive liquidating distributions equivalent to $6.25 per share,
plus accrued and unpaid dividends to the date of distribution, out of the assets
of RTI available for distribution to stockholders, before any distribution of
assets is made to holders of Common Stock or any stock ranking junior to the
Series I Stock upon liquidation, dissolution, or winding up. If, upon any
liquidation, dissolution, or winding up of RTI, the amounts available for
distribution with respect to the Series I Stock are not sufficient to satisfy
the full liquidation rights of the Series I Stock, the holders of the Series I
Stock will share ratably in any such distribution of assets in proportion to the
full respective preferential amounts to which they are entitled.
Registration Rights
-------------------
Until six months after the last shares of the Series I Stock are redeemed,
retired, converted, or otherwise no longer outstanding, RTI will give notice to
the holders of the Series I Stock no less than 20 days before filing a
registration statement under the Securities Act (excluding registrations
pertaining to securities issuable pursuant to employee stock option or stock
purchase plans, or pursuant to the acquisition of a business). RTI will also
afford the holders of the Series I Stock the opportunity to have included in any
one, but not more than two registrations shares of Common Stock acquired upon
conversion of the Series I Stock. RTI is entitled to exclude the shares of any
holder from a maximum of
33
<PAGE>
one registration (on the advice of its investment banking firm that inclusion
would materially interfere with the orderly sale of securities offered under
such registration statement) so long as no other holder's shares are included in
the registration.
SERIES II CLASS B CONVERTIBLE PREFERRED STOCK
RTI is authorized to issue not more than 5,000,000 shares and has 1,000,000
shares outstanding held by 144 shareholders as of the date of this filing. The
Series II Class B Convertible Preferred Stock ranks senior to RTI's Common Stock
with respect to dividends and upon liquidation, dissolution, or winding up, and
RTI treats them as junior to RTI's 5,000,000 shares of Series A Stock and Series
I Stock.
Dividends
---------
Holders of shares of Series II Class B Convertible Preferred Stock (the
"Series II Stock") will be entitled to receive, if, when, and as declared by the
Board of Directors out of funds legally available therefor, cumulative cash
dividends of $1 per share per annum, payable quarterly, commencing December 31,
1997. If a dividend upon any shares of Series II Stock is in arrears, no
dividends may be paid or declared and set aside for payment, or other
distribution made upon the Common Stock or any other stock of RTI ranking junior
to the Series II Stock as to dividends. In addition, no Common Stock, or any
other stock of RTI ranking junior to the Series II Stock as to dividends, may be
redeemed, purchased, or otherwise acquired for any consideration by RTI except
in certain circumstances. As of October 15, 2000, $2,977,862 in dividends are
in arrears.
Voting Rights
-------------
Except as required by the laws of the State of Texas, the holders of the
Series II Stock are generally not entitled to vote. In the event that dividends
payable on the Series II Stock shall be in arrears for 12 consecutive quarterly
dividend periods, the holders of a majority of the Series II Shares shall have
the exclusive right (voting separately as a class with one vote per share of
Series II Stock) to elect one-third of the Board of Directors to serve until the
next annual meeting or so long as such arrearage shall continue.
So long as any shares of Series II Stock remain outstanding, RTI shall not,
without the affirmative vote or consent of the holders of at least 51 percent of
the shares of the Series II Stock outstanding at the time: (a) authorize,
create, issue, or increase the authorized or issued amount of any class or
series of stock ranking equal to or senior to the Series II Stock with respect
to payment of dividends or the distribution of assets on liquidation,
dissolution, or winding up of RTI; or (b) amend, alter, or repeal the provisions
of RTI's Articles of Incorporation, or of the rights of the Series II Stock so
as to alter or change the powers, preferences, or special rights of the shares
of the Series II Stock so as to affect them adversely.
34
<PAGE>
Conversion Rights
-----------------
Each share of Series II Stock will be convertible at any time subsequent to
three years after issuance, at the option of the holder thereof into Common
Stock of RTI at a conversion rate of one share of Common Stock for each share of
Series II Stock. The conversion price is subject to adjustment in certain
events.
In the event RTI files a registration statement, the holders of the Series
II Stock will have the opportunity to convert their shares prior to the three-
year holding period.
Redemption Provisions
---------------------
RTI, prior to three years from the date of issuance, may not redeem the
Series II Stock. On and after such date, the Series II Stock may be redeemed at
the option of RTI, in whole or in part, at any time and from time to time, on at
least 30 days' and not more than 60 days' written notice at the redemption price
of $15 per share, together with accrued and unpaid dividends to the date fixed
for redemption.
In the event RTI files a registration statement, RTI may, at its option,
accelerate its redemption rights.
Liquidation Rights
------------------
In the event of any voluntary or involuntary liquidation, dissolution, or
winding up of RTI, the holders of outstanding shares of Series II Stock are
entitled to receive liquidating distributions equivalent to $12.50 per share,
plus accrued and unpaid dividends to the date of distribution, out of the assets
of RTI available for distribution to stockholders, before any distribution of
assets is made to holders of Common Stock or any stock ranking junior to the
Series II Stock upon liquidation, dissolution, or winding up. If upon any
liquidation, dissolution, or winding up of RTI, the amounts available for
distribution with respect to the Series II Stock are not sufficient to satisfy
the full liquidation rights of the Series II Stock, the holders of the Series II
Stock will share ratably in any such distribution of assets in proportion to the
full respective preferential amounts to which they are entitled.
Registration Rights
-------------------
Until six months after the last shares of the Series II Stock are redeemed,
retired, converted, or otherwise no longer outstanding, RTI will give notice to
the holders of the Series II Stock no less than 20 days before filing a
registration statement under the Securities Act (excluding registrations
pertaining to securities issuable pursuant to employee stock option or stock
purchase plans, or pursuant to the acquisition of a business). RTI will also
afford the holders of the Series II Stock the opportunity to have included in
any one, but not more than two registrations shares of Common Stock acquired
upon conversion of the Series II Stock. RTI is entitled to exclude the shares
of any holder from a maximum of one registration (on the advice of its
investment banking firm that inclusion would materially interfere with the
orderly sale of securities offered under such registration statement) so long as
no other holder's shares are included in the registration.
In the event RTI files a registration statement, the holders of the Series
II Stock will have the opportunity to convert their shares prior to the three-
year holding period, and RTI may, at its option, accelerate its redemption
rights.
SERIES III CLASS B CONVERTIBLE PREFERRED STOCK
RTI is authorized to issue not more than 2,000,000 shares and has 1,160,445
shares outstanding held by 228 shareholders as of the date of this filing. The
Series III Class B Convertible Preferred Stock ranks senior to RTI's Common
Stock with respect to dividends and upon liquidation, dissolution, or winding
up, and RTI treats them as junior to RTI's 5,000,000 shares of Series A Stock
and Series I and II Stock.
Dividends
---------
35
<PAGE>
Holders of shares of Series III Class B Convertible Preferred Stock (the
"Series III Stock") will be entitled to receive, if, when, and as declared by
the Board of Directors out of funds legally available therefor, cumulative cash
dividends of $1 per share per annum, payable quarterly, commencing December 31,
1998. If a dividend upon any shares of Series III Stock is in arrears, no
dividends may be paid or declared and set aside for payment, or other
distribution made upon the Common Stock or any other stock of RTI ranking junior
to the Series III Stock as to dividends. In addition, no Common Stock or any
other stock of RTI ranking junior to the Series III Stock as to dividends, may
be redeemed, purchased, or otherwise acquired for any consideration by RTI
except in certain circumstances. As of October 15, 2000, $1,812,494 in
dividends are in arrears.
Voting Rights
-------------
Except as required by the laws of the State of Texas, the holders of the
Series III Stock are not entitled to vote.
So long as any shares of Series III Stock remain outstanding, RTI shall
not, without the affirmative vote or consent of the holders of at least 51
percent of the shares of the Series III Stock outstanding at the time: (a)
authorize, create, issue, or increase the authorized or issued amount of any
class or series of stock ranking equal to or senior to the Series III Stock with
respect to payment of dividends or the distribution of assets on liquidation,
dissolution, or winding up of RTI; or (b) amend, alter, or repeal the provisions
of RTI's Articles of Incorporation, or of the rights of the Series III Stock so
as to alter or change the powers, preferences, or special rights of the shares
of the Series III Stock so as to affect them adversely.
Conversion Rights
-----------------
Each share of Series III Stock will be convertible at any time subsequent
to three years after issuance, at the option of the holder thereof into Common
Stock of RTI at a conversion rate of one share of Common Stock for each share of
Series III Stock. The conversion price is subject to adjustment in certain
events.
In the event RTI files a registration statement, the holders of the Series
III Stock will have the opportunity to convert their shares prior to the three-
year holding period. RTI may, at its option at any time within 180 days after
the registration statement is deemed effective, demand the conversion of the
Series III Stock.
Redemption Provisions
---------------------
RTI, prior to three years from the date of issuance, may not redeem the
Series III Stock. On and after such date, the Series III Stock may be redeemed
at the option of RTI, in whole or in part, at any time and from time to time, on
at least 30 days' and not more than 60 days' written notice at the redemption
price of $15 per share, together with accrued and unpaid dividends to the date
fixed for redemption.
In the event RTI files a registration statement, RTI may, at its option at
any time within 180 days after the registration statement is deemed effective,
demand the conversion of the Series III Stock.
Liquidation Rights
------------------
In the event of any voluntary or involuntary liquidation, dissolution, or
winding up of RTI, the holders of outstanding shares of Series III Stock are
entitled to receive liquidating distributions equivalent to $12.50 per share,
plus accrued and unpaid dividends to the date of distribution, out of the assets
of RTI available for distribution to stockholders, before any distribution of
assets is made to holders of Common Stock or any stock ranking junior to the
Series III Stock upon liquidation, dissolution, or winding up. If upon any
liquidation, dissolution, or winding up of RTI, the amounts available for
distribution with respect to the Series III Stock are not sufficient to satisfy
the full liquidation rights of the Series III Stock, the holders of the Series
III Stock will share ratably in any such distribution of assets in proportion to
the full respective preferential amounts to which they are entitled.
Registration Rights
-------------------
36
<PAGE>
Until six months after the last shares of the Series III Stock is redeemed,
retired, converted, or otherwise no longer outstanding, RTI will give notice to
the holders of the Series III Stock no less than 20 days before filing a
registration statement under the Securities Act (excluding registrations
pertaining to securities issuable pursuant to employee stock option or stock
purchase plans, or pursuant to the acquisition of a business). RTI will also
afford the holders of the Series III Stock the opportunity to have included in
any one, but not more than two registrations shares of Common Stock acquired
upon conversion of the Series III Stock. RTI is entitled to exclude the shares
of any holder from a maximum of one registration (if in its sole discretion it
decides that the inclusion of such shares will materially interfere with the
orderly sale of the securities being offered under such registration statement)
so long as no other holder's shares are included in the registration.
In the event RTI files an initial registration statement, the holders of
the Series III Stock will have the opportunity to convert their shares prior to
the three-year holding period. RTI may, at its option at any time within 180
days after the registration statement is deemed effective, demand the conversion
of the Series III Stock.
SERIES IV CLASS B CONVERTIBLE PREFERRED STOCK
On December 10, 1999, RTI was authorized to issue not more than 1,300,000
shares and has 1,133,800 shares outstanding held by 30 shareholders as of the
date of this filing. The Series IV Class B Convertible Preferred Stock ranks
senior to RTI's Common Stock with respect to dividends and upon liquidation,
dissolution, or winding up, but RTI treats them as junior to RTI's 5,000,000
shares of Series A Stock and Series I, II, and III Stock.
Dividends
---------
Holders of shares of Series IV Class B Convertible Preferred Stock (the
"Series IV Stock") will be entitled to receive, if, when, and as declared by the
Board of Directors out of funds legally available therefor, cumulative cash
dividends of $1 per share per annum, payable quarterly, commencing December 31,
2000. If a dividend upon any shares of Series IV Stock is in arrears, no
dividends may be paid or declared and set aside for payment or other
distribution made upon the Common Stock or any other stock of RTI ranking junior
to the Series IV Stock as to dividends. In addition, no Common Stock or any
other stock of RTI ranking junior to the Series IV Stock as to dividends may be
redeemed, purchased, or otherwise acquired for any consideration by RTI except
in certain circumstances. As of October 15, 2000, $459,268 in dividends are in
arrears.
Voting Rights
-------------
Except as required by the laws of the State of Texas, the holders of the
Series IV Stock are not entitled to vote.
So long as any shares of Series IV Stock remain outstanding, RTI shall
not, without the affirmative vote or consent of the holders of at least 51
percent of the shares of the Series IV Stock outstanding at the time: (a)
authorize, create, issue, or increase the authorized or issued amount of any
class or series of stock ranking equal to or senior to the Series IV Stock with
respect to payment of dividends or the distribution of assets on liquidation,
dissolution, or winding up of RTI; or (b) amend, alter, or repeal the provisions
of RTI's Articles of Incorporation, or of the rights of the Series IV Stock so
as to alter or change the powers, preferences, or special rights of the shares
of the Series IV Stock so as to affect them adversely.
Conversion Rights
-----------------
Each share of Series IV Stock will be convertible at any time subsequent to
three years after issuance, at the option of the holder thereof into Common
Stock of RTI at a conversion rate of one share of Common Stock for each share of
Series IV Stock. The conversion price is subject to adjustment in certain
events.
In the event that RTI files an initial registration statement, the holders
of Series IV Stock may convert their shares prior to the three-year holding
period. RTI may also, at its option any time within 180 days after the
registration statement is deemed effective, demand the conversion of the Series
IV Stock.
37
<PAGE>
Redemption Provisions
---------------------
RTI, prior to three years from the date of issuance, may not redeem the
Series IV Stock. On and after such date, the Series IV Stock may be redeemed at
the option of RTI, in whole or in part, at any time and from time to time, on at
least 30 days' and not more than 60 days' written notice to convert or redeem
the shares, at the redemption price of $11 per share, together with accrued and
unpaid dividends to the date fixed for redemption.
In the event that RTI files an initial registration statement, RTI may, at
its option any time within 180 days after the registration statement is deemed
effective, demand the conversion of the Series IV Stock.
Liquidation Rights
------------------
In the event of any voluntary or involuntary liquidation, dissolution, or
winding up of RTI, the holders of outstanding shares of Series IV Stock are
entitled to receive liquidating distributions equivalent to $11 per share, plus
accrued and unpaid dividends to the date of distribution, out of the assets of
RTI available for distribution to stockholders, before any distribution of
assets is made to holders of Common Stock or any stock ranking junior to the
Series IV Stock upon liquidation, dissolution, or winding up. If upon any
liquidation, dissolution, or winding up of RTI, the amounts available for
distribution with respect to the Series IV Stock are not sufficient to satisfy
the full liquidation rights of the Series IV Stock, the holders of the Series IV
Stock will share ratably in any such distribution of assets in proportion to the
full respective preferential amounts to which they are entitled.
Registration Rights
-------------------
Until six months after the last shares of the Series IV Stock are
redeemed, retired, converted, or otherwise no longer outstanding, RTI will give
notice to the holders of the Series IV Stock no less than 20 days before filing
a registration statement under the Securities Act (excluding registrations
pertaining to securities issuable pursuant to employee stock option or stock
purchase plans, or pursuant to the acquisition of a business). RTI will also
afford the holders of the Series IV Stock the opportunity to have included in
any one, but not more than two registrations shares of common stock acquired
upon conversion of the Series IV Stock. RTI is entitled to exclude the shares
of any holder from a maximum of one registration (if in its sole discretion it
decides that inclusion would materially interfere with the orderly sale of
securities offered under such registration statement) so long as no other
holder's shares are included in the registration.
In the event that RTI files an initial registration statement, the holders
of Series IV Stock may convert their shares prior to the three-year holding
period. RTI may also, at its option any time within 180 days after the initial
registration statement is deemed effective, demand the conversion of the Series
IV Stock.
OVERVIEW OF RTI'S 1999 STOCK OPTION PLAN
On September 14, 1999, the Board of Directors adopted the 1999 Stock Option
Plan effective as of July 1, 1999 (the "Plan" for purposes of this section
only). In order to qualify options under the Plan as incentive stock options
("ISOs"), the shareholders must approve the Plan on or before September 14,
2000. The shareholders approved the Plan on September 14, 1999. The Plan
provides for the granting of ISOs and NQSOs as defined in the Plan and
collectively referred to in this section only as "Awards." The purpose of the
Plan is to encourage stock ownership by RTI's key employees, to provide an
incentive for such employees to expand and improve the profitability of RTI, and
to assist RTI in attracting and retaining key personnel through the grant of
ISOs and NQSOs to purchase shares of common stock. The following description is
intended to be a summary of the Plan's principal terms and is qualified in its
entirety by reference to the complete text attached as an exhibit to this Form
10SB-A.
General
-------
The Plan authorizes the Compensation and Benefits Committee or, in the
absence of a committee, the Board of Directors to grant ISOs to key employees of
RTI and NQSOs to other employees, independent contractors, and nonemployee
directors. No directors have options vesting within 60 days of this filing.
38
<PAGE>
As of September 30, 2000, RTI had granted ISOs to purchase 514,150
shares and NQSOs to purchase 217,550 shares to employees under the 1999 Stock
Option Plan. There were ISOs to purchase 119,750 shares and employee NQSOs to
purchase 5,300 shares that were cancelled under the terms of the Plan. There
were 43,500 employee NQSOs exercisable at the filing date. No ISOs were
exercisable. The exercise price for the ISOs is $10. The NQSOs have exercise
prices from $1 to $10. RTI granted NQSOs to purchase 238,500 shares to
nonemployees, 10,000 of which have been cancelled and none are exercisable at
the date of the filing.
Exercisable options under the 1999 Stock Option Plan are shown below:
<TABLE>
<S> <C> <C> <C> <C> <C>
All Options, Including Officers and
Significant Employees 1999 2000 2001 2002 2003
ISOs - - 161,200 207,075 26,125
Employee NQSOs 26,000 27,500 91,250 67,500 -
Nonemployee Directors NQSOs - - 20,000 30,500 30,500
Nonemployee NQSOs - 10,000 52,500 67,498 17,502
------ ------ ------- ------- -------
Total 26,000 37,500 324,950 372,573 74,127
====== ====== ======= ======= =======
Officers and significant employees 1999 2000 2001 2002 2003
ISOs 0 0 48,900 74,075 3,875
Nonemployee Directors NQSOs 0 0 20,000 30,500 30,500
Employee NQSOs 0 20,000 88,800 67,500 0
------ ------ ------- ------- -------
Total 0 20,000 157,700 172,075 34,375
====== ====== ======= ======= =======
</TABLE>
A maximum of 2 million shares of common stock are reserved and available
for distribution pursuant to Awards granted under the Plan, subject to
adjustment to reflect a subdivision or consolidation of shares or any other
capital adjustment, payment of a stock dividend, or other increase or decrease
in such shares effected without consideration. Shares may be distributed under
the Plan, in whole or in part, from authorized and unissued shares or treasury
shares. The Compensation and Benefits Committee shall be responsible to the
Board of Directors for the operation of the Plan and shall make recommendations
to the Board of Directors with respect to participation in the Plan and with
respect to the terms, limitations, restrictions, conditions, and extent of that
participation. The interpretation and construction of a provision of the Plan
by the Compensation and Benefits Committee shall be final unless otherwise
determined by the Board of Directors. The Board of Directors, upon
recommendation by the Compensation and Benefits Committee or upon its own
action, may grant stock options. Options may not be exercised by tendering
outstanding shares except as permitted by the Compensation and Benefits
Committee, in its sole discretion.
Awards
------
Options granted under the Plan may be ISOs, as defined under and subject to
Section 422 of the Internal Revenue Code (the "Code"), or NQSOs.
The options will be exercisable at such times and subject to such terms
and conditions as the Board of Directors or the Compensation and Benefits
Committee may determine. All options must expire no later than ten years from
the date of grant in the case of ISOs held by a non-10 percent shareholder, no
later than five years from the date of grant in the case of a 10 percent
shareholder, and as determined by the Board of Directors/Compensation and
Benefits Committee at the date of grant in the case of NQSOs.
39
<PAGE>
Generally, ISOs will terminate three months after termination of the
optionee's employment without cause and automatically upon termination for
cause, or one year following the termination of employment due to death or
permanent disability; provided, however, that options will expire prior to said
times if and at such time that the original option exercise term otherwise
expires. Generally, options may be exercised only to the extent exercisable on
the date of termination, death, or disability. Generally, NQSOs will terminate
automatically upon termination of the optionee's employment for cause and one
year following termination of employment due to death. Nonvested NQSOs are
forfeited upon termination of employment with or without cause, permanent
disability, or death; provided, however, that options will expire prior to said
times if and at such time that the original option exercise term otherwise
expires.
The option price for any ISO will not be less than 100 percent of the
fair market value of RTI's Common Stock as of the date of grant. In the event
the optionee is a 10 percent shareholder, the price of the ISO shall be 110
percent of the fair market value of the common stock as of the date of grant.
In the event the optionee is not a 10 percent shareholder, the price of the ISO
shall be 100 percent of the fair market value of the Common Stock as of the date
of grant. The Board of Directors has set $10 as the fair market value of RTI's
Common Stock for ISOs granted to date. The option price for an NQSO will be
determined by the Board of Directors or Compensation and Benefits Committee on
the date of grant. The holder of an NQSO must, prior to issuance of a stock
certificate, remit to RTI the amount, if any, of any taxes required to be
withheld upon exercise of the NQSO.
The ISOs are not transferable except by will or the laws of descent and
distribution. NQSOs may not be transferred for a period of one year from the
date of grant to a nonaffiliate and may not be transferred for a period of two
years from the date of grant to affiliates.
Miscellaneous
-------------
The Plan may be amended or discontinued by the Board of Directors or
the Compensation and Benefits Committee provided that the Board of Directors may
not, without the approval of the stockholders: (a) except as expressly provided
in the Plan, increase the total number of shares reserved for the purposes of
the Plan, (b) decrease the option price of an ISO to less than the amounts
provided for in the Plan, and (c) extend the duration of the Plan. No
amendment, alteration, or discontinuation may impair the rights of an optionee
without his consent.
Under the Plan, the Board of Directors and Compensation and Benefits
Committee has wide discretion and flexibility, enabling it to administer the
Plan in the manner it determines to be in the best interest of RTI. Thus,
Awards may be granted in various combinations and sequences and may be subject
to various conditions, restrictions, and limitations at grant or upon exercise
or payment not inconsistent with the terms of the Plan. The Board of Directors'
and Compensation and Benefits Committee's determinations with respect to which
employees will receive Awards, and the form, amount and frequency, and the terms
and conditions thereof, need not be uniform as to similarly situated persons.
The designation of an employee to receive one form of an Award under the Plan
does not require the Board of Directors or Compensation and Benefits Committee
to designate or entitle such employee to receive any other form of Award.
The Plan limits the number of ISOs that can be issued to key employees.
Other than limiting Awards to key employees, there are no restrictions on the
number of officers or other employees eligible to receive Awards or the Awards
that may be granted to one person. In addition, the Plan does not limit the
aggregate number of Awards that may be granted except that the number of shares
reserved for distribution under the Plan cannot exceed 2 million shares.
OVERVIEW OF THE 1996 INCENTIVE STOCK OPTION PLAN OF RTI
On January 30, 1996, the Board of Directors adopted the 1996 Incentive
Stock Option Plan of RTI (the "Plan" for purposes of this section only). The
shareholders of RTI adopted the Plan on April 26, 1996. The Plan provides for
the granting of ISOs as defined in the Plan and collectively referred to in this
section only as "Awards." The purpose of the Plan is to encourage stock
ownership by certain officers and key employees of RTI, in attracting qualified
personnel to RTI, and to provide additional incentives for such employees to
promote and contribute to the success of RTI. The following description is
intended to be a summary of the Plan's principal terms and is qualified in its
entirety by reference to the complete text attached as an exhibit to this Form
10SB-A.
40
<PAGE>
General
-------
The Plan authorizes the Compensation and Benefits Committee to grant
ISOs to current, full-time employees. As of the date of this filing, ISOs for
the right to purchase 184,550 shares of RTI have been granted of which 73,800
have terminated under the provisions of the Plan. The exercise price for the
ISOs is $10. As of the date of this filing, 47,500 options granted to directors
have vested. Stock options, which were granted under the Plan but which do not
meet certain statutory requirements for ISOs, are classified as NQSOs.
As of September 30, 2000, RTI had granted NQSOs for the purchase of 344,205
shares to employees under the 1996 Incentive Stock Option Plan of which 178,800
have terminated under the provisions of the Plan. The NQSOs have exercise prices
from $1 to $10.
Exercisable Options under the 1996 Incentive Stock Option Plan are as
follows:
<TABLE>
<S> <C> <C> <C>
All Options, Including Officers and
Significant Employees 1999 2000 2001
ISOs 0 1,750 109,000
NQSOs 41,105 124,300 0
------ ------- -------
41,105 126,050 109,000
====== ======= =======
Officers and significant employees
1999 2000 2001
ISOs 0 0 55,000
NQSOs 29,500 70,000 0
------ ------- -------
29,500 70,000 55,000
====== ======= =======
</TABLE>
Under the 1996 Incentive Stock Option Plan, a maximum of 800,000 shares of
Common Stock are reserved and available for distribution pursuant to Awards
granted under the Plan, subject to adjustment to reflect a subdivision or
consolidation of shares payment of a stock dividend on Common Stock or other
increase or decrease in such shares effected without consideration. If shares
subject to an Award granted under the Plan ceases to be subject to such Awards,
such shares will again be available for distribution under the Plan. Shares may
be distributed under the Plan, in whole or in part, from authorized and unissued
shares. The Compensation and Benefits Committee shall be responsible to the
Board of Directors for the operation of the Plan and shall make recommendations
to the Board of Directors with respect to participation in the Plan and with
respect to the terms, limitations, restrictions, conditions, and extent of that
participation. The interpretation and construction of a provision of the Plan
by the Compensation and Benefits Committee shall be final unless otherwise
determined by the Board of Directors.
Awards
------
Options granted under the Plan shall be ISOs as defined under and
subject to Section 422 of the Code.
The options will be exercisable at such times and subject to such terms
and conditions as the Compensation and Benefits Committee may determine. In no
event shall an option be exercisable prior to three years from the date of grant
or after the expiration of ten years from the date of grant.
Generally, ISOs will terminate three months after termination of the
optionee's employment if termination is for a reason other than death or
disability. If termination is by disability, the Compensation and Benefits
Committee has the right to extend the exercise period for up to one year from
termination. If the termination is a result of death, the option may be
exercised within three months after death. Generally, options may be exercised
only to the extent exercisable on the date of termination, death, or disability.
41
<PAGE>
The option price for any ISO will not be less than 100 percent of the
fair market value of RTI's Common Stock as of the date of grant. In the event
the optionee is a 10 percent shareholder, the price of the ISO shall be 110
percent of the fair market value of the Common Stock as of the date of grant.
In the event the optionee is not a 10 percent shareholder, the price of the ISO
shall be 100 percent of the fair market value of the Common Stock as of the date
of grant.
The options are not transferable except by will or the laws of descent
and distribution. In the event an optionee exercises his option and RTI issues
shares as a result of that exercise, no disposition of the resulting shares by
the optionee may be made within three years from the date of the grant of the
option or within one year after transfer of such shares to the optionee. RTI
shall not be required upon exercise of an option to issue or deliver shares
prior to completion of registration or other qualification under any state or
federal law as RTI shall determine to be desirable. In the event the optionee
exercises his option and receives a bona fide offer for all or a portion of the
shares, he shall give RTI the exclusive right and option within 15 days of the
date of notice to RTI to purchase the shares on the same terms. In the event of
a dissolution of RTI or a merger where RTI is not the surviving entity, each
option shall terminate but not before RTI gives 30 days' notice of the
optionee's right to exercise his option.
Miscellaneous
-------------
The Plan may be amended or discontinued by the Board of Directors or the
Compensation and Benefits Committee provided that they may not modify an
outstanding option so as to specify a lower price or accept the surrender of
outstanding options and authorize the granting of new options in substitution
thereof specifying a lower price. The Plan may be modified or amended by
affirmative vote of the majority of the common stock plus the affirmative vote
of all the remaining stock. No amendment, alteration, or discontinuation may
impair the rights of an optionee without his consent.
Under the Plan, the Compensation and Benefits Committee has wide discretion
and flexibility, enabling it to administer the Plan in the manner it determines
to be in the best interest of RTI. Thus, Awards may be granted in various
combinations and sequences and may be subject to various conditions,
restrictions, and limitations at grant or upon exercise or payment not
inconsistent with the terms of the Plan. The Compensation and Benefits
Committee's determinations, with respect to which employees will receive Awards,
and the form, amount and frequency, and the terms and conditions thereof, are
subject to wide discretion. The designation of an employee to receive one form
of an Award under the Plan does not require the Board of Directors or
Compensation and Benefits Committee to designate or entitle such employee to
receive any other form of Award.
The Plan does limit the employees eligible to receive Awards to certain
officers and key employees and contain limits on the number of shares which may
be subject to options which may be granted to any one person. However, the Plan
does not limit the aggregate number of Awards that may be granted except that
the number of shares reserved for distribution under the Plan cannot exceed
800,000 shares.
OVERVIEW OF RTI'S 1996 STOCK OPTION PLAN FOR DIRECTORS AND OTHER INDIVIDUALS
On April 23, 1996, the Board of Directors adopted RTI's 1996 Stock Option
Plan for Directors and Other Individuals (the "Plan" for purposes of this
section only). The Plan provides for the granting of NQSOs as defined in the
Plan and collectively referred to in this section only as "Awards." The purpose
of the Plan is to encourage stock ownership by certain directors and other
individuals, in attracting qualified directors to RTI's Board of Directors and
to provide additional incentives for such directors to promote and contribute to
the success of RTI. The following description is intended to be a summary of
the Plan's principal terms and is qualified in its entirety by reference to the
complete text attached as an exhibit to this Form 10SB-A.
General
-------
The Plan authorizes the Compensation and Benefits Committee to grant
NQSOs to members of RTI's current Board of Directors and other individuals who
have made a contribution toward RTI's success, who have served continuously as a
Director for not less than three years from grant, or who have continuously
provided services as a consultant, independent contractor, or otherwise for not
less than three years from grant and who before such option is not the holder of
more than 10 percent of the total combined voting power or value of all classes
of stock.
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As of September 30, RTI granted 283,500 NQSOs for the purchase of 283,500
shares to nonemployees, options for the purchase of 98,000 shares of which have
been cancelled. The prices ranged from $1 to $10.
Exercisable Options under the 1996 Stock Option Plan for Directors and
Other Individuals are as follows:
<TABLE>
<S> <C> <C> <C>
All Options, Including Officers and
Significant Employees 1999 2000 2001
Nonemployee Directors NQSOs 25,000 20,000 16,000
Employee Directors NQSOs 2,500
Nonemployee NQSOs 46,500 45,000 30,500
------ ------ ------
Total 74,000 65,000 46,500
====== ====== ======
Officers and significant employees 1999 2000 2001
Employee Directors NQSOs 2,500 0 0
Nonemployee Directors NQSOs 25,000 20,000 16,000
------ ------ ------
Total 27,500 20,000 16,000
====== ====== ======
</TABLE>
A maximum of 200,000 shares of common stock are reserved and available for
distribution pursuant to Awards granted under the Plan, subject to adjustment to
reflect a subdivision or consolidation of shares payment of a stock dividend on
common stock or other increase or decrease in such shares effected without
consideration. If shares subject to an Award granted under the Plan ceases to
be subject to such Awards, such share will again be available for distribution
under the Plan. Shares may be distributed under the Plan, in whole or in part,
from authorized and unissued shares. The Compensation and Benefits Committee
shall be responsible to the Board of Directors for the operation of the Plan and
shall make recommendations to the Board of Directors with respect to
participation in the Plan and with respect to the terms, limitations,
restrictions, conditions, and extent of that participation. The interpretation
and construction of a provision of the Plan by the Compensation and Benefits
Committee shall be final unless otherwise determined by the Board of Directors.
Awards
------
Options granted under the Plan shall be NQSOs.
The options will be exercisable at such times and subject to such terms
and conditions as the Compensation and Benefits Committee may determine. In no
event shall an option be exercisable prior to three years from the date of grant
or after the expiration of ten years from the date of grant.
Generally, the options will terminate three months after termination of
the optionee's service if termination is for a reason other than death or
disability. If termination is by disability, the Compensation and Benefits
Committee has the right to extend the exercise period for one year from
termination. If the termination is a result of death, the option may be
exercised within three months after death. Generally, options may be exercised
only to the extent exercisable on the date of termination, death, or disability.
The option price for any option will not be less than 100 percent of
the fair market value of RTI's Common Stock as of the date of grant. In the
event the optionee is a 10 percent shareholder, the price of the option shall be
110 percent of the fair market value of the Common Stock as of the date of
grant. In the event the optionee is not a 10 percent shareholder, the price of
the option shall be 100 percent of the fair market value of the Common Stock as
of the date of grant.
The NQSOs are not transferable except by will or the laws of descent
and distribution. In the event an optionee exercises his option and RTI issues
shares as a result of that exercise, no disposition of the resulting shares by
the optionee may be made within three years from the date of the grant of the
option. RTI shall not be required upon exercise of an option to issue or deliver
shares prior to completion of registration or other qualification under any
state or federal law as RTI shall determine to be desirable.
43
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In the event the optionee exercises his option and receives a bona fide offer
for all or a portion of the shares, he shall give RTI the exclusive right and
option within 15 days of the date of notice to RTI to purchase the shares on the
same terms. In the event of a dissolution of RTI or a merger where RTI is not
the surviving entity, each option shall terminate but not before RTI gives 30
days' notice of the optionee's right to exercise his option.
Miscellaneous
-------------
The Plan may be amended or discontinued by the Board of Directors or the
Compensation and Benefits Committee provided that it may not modify an
outstanding option so as to specify a lower price or accept the surrender of
outstanding options and authorize the granting of new options in substitution
thereof specifying a lower price. The Plan may be modified or amended by
affirmative vote of the majority of the Common Stock plus the affirmative vote
of all the remaining stock. No amendment, alteration, or discontinuation may
impair the rights of an optionee without his consent.
Under the Plan, the Compensation and Benefits Committee has wide
discretion and flexibility, enabling it to administer the Plan in the manner it
determines to be in the best interest of RTI. Thus, Awards may be granted in
various combinations and sequences and may be subject to various conditions,
restrictions, and limitations at grant or upon exercise or payment not
inconsistent with the terms of the Plan. The Compensation and Benefits
Committee's determinations with respect to which employees will receive Awards,
and the form, amount and frequency, and the terms and conditions thereof, are
subject to wide discretion. The designation of an employee to receive one form
of an Award under the Plan does not require the Board of Directors or
Compensation and Benefits Committee to designate or entitle such employee to
receive any other form of Award.
The Plan does not limit either the number of persons eligible to receive
Awards or the type or number of shares which may be subject to options or other
Awards which may be granted to any one person. In addition, the Plan does not
limit the aggregate number of Awards that may be granted except that the number
of shares reserved for distribution under the Plan cannot exceed 200,000 shares.
OPTION FOR CONVERSION OF LOAN PRINCIPAL INTO COMMON STOCK
---------------------------------------------------------
Pursuant to the agreement between RTI and Abbott, Abbott agreed to make
periodic loans to RTI prior to June 30, 2005, in increments of $1,000,000 in an
aggregate amount of up to $5,000,000. Pursuant to the Abbott Agreement, RTI
gave Abbott the right, at its option, to convert any and all principal amounts
owed into Common Stock of RTI at a price of $10 per share (adjustable for events
affecting the number of outstanding shares of Common Stock). RTI has borrowed
$3 million under the Abbott Agreement. Abbott also holds registration rights
with respect to the shares of Common Stock issued upon conversion of any
principal amount loaned pursuant to the Abbott Agreement. Subject to
limitations contained in the Abbott Agreement and related Registration Rights
Agreement, these registration rights include the following:
. Any time after RTI becomes eligible to file a registration statement on Form
S-3, Abbott may require that RTI use its best efforts to effect a
registration of Abbott Common Stock acquired by conversion of any principal
amounts owed (the "Registerable Securities") only where Abbott agrees to
abide by the terms of the underwriting as agreed upon by the underwriters and
RTI. The right to request registration may not be exercised more than three
times. This right is subject to the ability of the underwriters to limit the
number of shares included in the offering in view of market conditions.
. If RTI registers any Common Stock in a public offering for cash whether as a
primary or secondary offer or pursuant to registration rights granted to
other holders (not including a registration relating solely to employee
benefit plans on Form S-8 or registration on Form S-4 relating solely to a
transaction subject to Rule 145), Abbott is entitled to request and RTI must
take reasonable efforts to include the Registerable Securities in the
registration. This right is subject to the ability of the underwriters to
limit the number of shares included in the offering in view of market
conditions.
FEDERAL INCOME TAX CONSEQUENCES OF OPTIONS
------------------------------------------
The following is a brief summary of RTI's understanding of the principal
anticipated federal income tax consequences of Awards made under the Plans based
upon the applicable provisions of the
44
<PAGE>
Code in effect on the date hereof. This summary is not intended to be exhaustive
and does not describe foreign, state, or local tax consequences.
Incentive Stock Options Generally
---------------------------------
An optionee will not realize taxable income at the time an ISO is granted
or exercised. RTI Common Stock is issued to an optionee pursuant to the exercise
of an ISO, and if no disqualifying disposition of the shares is made by the
optionee within two years of the date of grant or within one year after exercise
of the option, then (a) any gain upon the subsequent sale of the shares will be
taxed to the optionee as a capital gain, and any loss sustained will be a
capital loss, and (b) no deduction will be allowed to RTI for federal income tax
purposes. The spread between the ISO price and the fair market value of the
shares at the time of exercise is a preference item for purposes of the
alternative minimum tax.
If an optionee disposes of shares acquired upon the exercise of an ISO
before the expiration of the holding periods described above, then generally (a)
the optionee will be taxed as if he had received compensation income in the year
of disposition in an amount equal to the excess, if any, of the fair market
value of the shares on the exercise date (or, if less, the amount realized on
value of the shares on the disposition of the shares) over the option price paid
for such shares, and (b) RTI will generally be entitled to a corresponding
deduction in that year. Any further gain or loss realized by the participant
will be taxed as short-term or long-term capital gain or loss, as the case may
be, and will not result in any deduction by RTI.
Exercise of an ISO may cause the optionee to incur alternative minimum tax
liability even if he has no taxable income from the exercise under general
income tax principles.
Stock acquired through exercise of an ISO must be held for more than 12
months to obtain long-term capital gains treatment.
All stock acquired pursuant to the exercise of an ISO is subject to the
holding period rules and disqualifying disposition rules described above.
Pursuant to the Plan, an ISO can only be exercised by payment of the
consideration in cash.
To the extent that the fair market value of RTI's Common Stock (determined
as of the date of grant) subject to ISOs exercisable for the first time by an
optionee during any calendar year exceeds $100,000, those options will not be
considered ISOs.
Nonqualified Stock Options Generally
------------------------------------
An optionee will generally not recognize taxable income at the time an NQSO
is granted, but taxable income will be realized, and RTI will generally be
entitled to a deduction, at the time of exercise of the NQSO. The amount of
income and RTI's deduction will be equal to the difference between the fair
market value of the shares on the date of exercise and the NQSO exercise price.
The income realized will be taxed to the optionee at the ordinary income tax
rates for federal income tax purposes. Withholding is required upon exercise of
an NQSO. On subsequent disposition of the shares acquired upon exercise of an
NQSO, capital gain or loss as determined under the normal capital asset holding
period rules will be realized in the amount of the difference between the
proceeds of sale and the fair market value of the shares on the date of
exercise.
Withholding Generally
---------------------
Under the Plans, a participant must pay RTI, no later than the date on
which an amount first becomes includable in the participant's gross income for
federal income tax purposes with respect to an Award, any taxes required to be
withheld with respect to such amount. Such withholding may generally not be
settled with shares that constitute part of the Award giving rise to the
withholding obligation unless the Compensation and Benefits Committee grants
special permission. Otherwise, withholding must be made in a manner that
provides cash to RTI. The amount of income recognized is not reduced by the
retention of RTI of shares issuable under an Award to satisfy withholding
obligations; the transaction is taxed as if the shares were sold.
45
<PAGE>
PART II - FORM 10SB-A
ITEM 1. MARKET PRICE OF AND DIVIDENDS ON RTI'S COMMON EQUITY AND OTHER
SHAREHOLDER MATTERS
Currently, there is no public trading market for RTI's Common Stock. RTI's
14,549,500 shares of outstanding Common Stock are currently held 77% by RTI's
Chief Executive Officer, Thomas J. Shaw, and 19.2% by Lillian E. Salerno, a
Director. See PART I - ITEM 4 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT for a discussion explaining the ranges of percentage ownership.
469,500 of the shares are held by converting Series A shareholders under the
current Notice of Redemption. There is currently an outstanding Notice of
Redemption for 541,500 shares of Series A Stock which may result in conversion
into Common Stock of a total of 57,000 additional shares. The right of
conversion for those shares terminates on October 27, 2000. As of September 30,
2000, 1,296,805 shares of Common Stock are subject to outstanding options and
8,729,745 shares are reserved for issuance upon conversion of both the Series A
and Class B stock. 7,725 shares of Series IV Stock are reserved for issuance
upon exercise of warrants. RTI has not agreed to register any shares of Common
Stock for public sale except for those registration rights held by Abbott
pursuant to the Abbott Agreement and those contained in Certificates of
Designation for certain Convertible Preferred Stock as set forth in greater
detail in PART I -ITEM 8 - DESCRIPTION OF SECURITIES.
RTI has not declared or paid any dividends on its Common Stock since its
inception. RTI has no current plans to pay any cash dividends on the Common
Stock. RTI intends to retain all earnings, except those required to be paid to
the holders of the Preferred Stock, to support RTI's operations and future
growth. As of October 15, 2000, approximately $7,314,915 in dividends had
accumulated on the Class B Preferred Stock. RTI has reserved the right to issue
500,000 shares of Class B Convertible Preferred Shares as a dividend. Pursuant
to the requirements of a loan from Texas Bank, RTI has agreed not to return
capital to the shareholders or redeem outstanding shares without the bank's
prior consent. RTI did have permission from the bank for the dividends and the
recent redemption of Series A Stock.
ITEM 2. LEGAL PROCEEDINGS
RTI filed a lawsuit on September 30, 1998, in the District Court of
Brazoria County in the 239th Judicial District against B-D, Tyco International
(U.S.), Inc., VHA, Inc., The Community Hospital of Brazosport, Angleton-Danbury
General Hospital, and Sweeny Community Hospital. RTI is alleging an antitrust
conspiracy between the defendants whereby they contracted among themselves and
many other hospitals, doctors, and healthcare organizations in order to exclude
RTI from selling the safety syringes and to maintain their own market share in
violation of Texas Free Enterprise and Antitrust Act ("TFEAA"). The case is
still in the discovery stage. RTI is not a party to any other legal proceeding.
As of the date of this filing, Angleton-Danbury General Hospital has been
dropped from the lawsuit. Premier, Inc., Novation, LLC, and Premier Purchasing
Partners, L.P. have been added to the lawsuit. RTI is seeking all damages to
which RTI is entitled, including actual damages, exemplary damages, injunctive
relief, attorneys' fees, costs of court and pre- and post- judgment interest.
ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
There have been no changes in or disagreements with the principal
independent accountants during the two most recent fiscal years.
ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES
The following discussion outlines all securities sold by RTI for cash or
services rendered during the previous three years. Unless otherwise described,
all of the shares sold or granted were issued pursuant to the authority granted
by the private offering exemption outlined in Section 4(2) of the Securities
Act. None of the below mentioned "sales" were made to more than 35
nonaccredited investors and none were made with a view toward distribution. All
shares issued were restricted and contained a Rule 144 legend.
In 1997, RTI issued ISOs for the purchase of 1,750 shares of Common Stock
and employee NQSOs for the purchase of 273,200 shares of Common Stock under the
1996 Incentive Stock Option Plan. RTI issued NQSOs for the purchase of 100,500
shares under the 1996 Stock Option Plan for Directors and Other Individuals.
46
<PAGE>
From May 10, 1997, to November 15, 1997, RTI, with the assistance of
Southwest Merchant Group, offered and sold pursuant to Rule 506 of the
Securities Act to 131 accredited and 14 nonaccredited investors 1,000,000 shares
of Series II Stock at a price of $10 per share for a total payment of
$10,000,000. RTI entered into an agreement with Southwest Merchant Group
effective July 16, 1997, whereby Southwest Merchant agreed to provide best
efforts to sell up to 1,000,000 shares of Series II Stock. In return RTI agreed
to pay a combined financial advisory, investment banking, and selling commission
equal to 5 percent of the value of the shares sold with an option to take,
instead of cash, 2 1/2 percent of the gross funds in warrants. Southwest
Merchant Group was to receive two warrants for each dollar of compensation owed
to Southwest Merchant Group. Each warrant gave Southwest Merchant Group the
right to purchase 1/10 of a share of Series IV Stock. $37,500 in compensation
was paid to Southwest Merchant Group in the form of cash. Southwest Merchant
Group was issued 75,000 warrants for the purchase of a total of 7,500 shares of
Series IV Stock. No warrants have been exercised and none have expired.
In 1998, RTI issued ISOs for the purchase of 182,800 shares of Common Stock
under the 1996 Incentive Stock Option Plan and NQSOs for the purchase of 86,500
shares of Common Stock under the 1996 Stock Option Plan for Directors and Other
Individuals.
From July 10, 1998, to September 30, 1999, RTI, with the assistance of
Northstar Securities Corporation, Asset Allocations Securities Corp., and
Ameriprop Inc. ("broker dealers"), offered and sold pursuant to Rule 506 of the
Securities Act to 225 accredited and 21 nonaccredited investors 1,160,200 shares
of Series III Stock at a price of $10 per share for a total payment of
$11,602,000. RTI entered into an agreement with the broker dealers that, in
exchange for the best efforts of the broker to sell the shares, the brokers
would be entitled to a combined due diligence fee and selling commission equal
to 7 percent of the value of each share sold by the brokers. Northstar
Securities Corporation was paid $279,580, Asset Allocations Securities Corp. was
paid 247,450, and Ameriprop was paid $25,550.
In 1999 and in connection with an employment agreement, RTI issued NQSOs
for the purchase of 20,000 shares of RTI's Common Stock under the 1999 Stock
Option Plan to Phillip Zweig. Half of the options vest on the 180th day of the
agreement (June 10, 2000) and the other half vest on the day prior to the
expiration of the agreement (December 11, 2000).
In 1999, RTI issued ISOs for the purchase of 451,900 shares and NQSOs for
the purchase of 347,550 shares of Common Stock of RTI under the 1999 Stock
Option Plan.
From January 11, 2000, to May 10, 2000, RTI, with the assistance of Asset
Allocations Securities Corp. and Northstar Securities Corporation, offered and
sold 1,138,800 shares of Series IV Stock to 25 accredited and 3 nonaccredited
investors pursuant to Rule 506 at a price of $10 per share for a total of
$11,388,000. Pursuant to individual Selling Agreements dated March 9, 2000, and
March 1, 2000, respectively, warrants for the purchase of 75 and 150 shares of
Series IV Stock of RTI were issued to Asset Allocations Securities Corp. and
Northstar Securities Corporation as partial commissions. Three warrants were
issued for each 100 shares sold. Asset Allocations Corp. and Northstar
Securities Corporation sold 2,500 and 5,000 shares of Series IV Stock,
respectively. Each warrant entitles the holder to purchase one share of the
Series IV Stock at an exercise price of $10 per share. The warrants expire on
March 15, 2002. Asset Allocations Securities Corp. and Northstar Securities
Corporation received $1,750 and $3,500 in cash commissions, respectively.
Through September 30, 2000, RTI has issued ISOs for the purchase of 62,250
shares and NQSOs for the purchase of 108,500 shares of Common Stock under the
1999 Stock Option Plan.
In connection with a consulting agreement, RTI issued NQSOs for the
purchase of 61,000 shares of RTI's Common Stock at an exercise price of $10 per
share to Saker Investments.
In March 2000, RTI entered into a letter agreement with New Horizons
International ("NHI") and Colebrand Limited whereby NHI and Colebrand Limited
would provide consulting services regarding marketing advice. In the event they
provide RTI with a contact that resulted in a proposed investment in any amount
up to $60 million which terms are acceptable to RTI in its sole and absolute
discretion, NHI was entitled to receive 5 percent of the total amount of capital
invested in cash, and Colebrand Limited would receive the issuance of a number
and type of securities equal to 2 1/2 percent of the total number and type of
securities issued and a warrant for the right to purchase up to an amount of
securities equal
47
<PAGE>
to 2 1/2 percent of the total number and type of securities sold. This
relationship was terminated in early 2000. No shares were issued.
In May 2000, RTI entered into an agreement with Abbott. Pursuant to the
Abbott Agreement, Abbott agreed to loan to RTI, in increments of $1,000,000, an
aggregate of up to $5,000,000 at an interest rate of prime plus 1% per year up
to the maturity date of June 30, 2005. In consideration, RTI agreed that any
and all principal amounts borrowed could be converted into Common Stock at a
price of $10 per share. As of the date of this filing, RTI has borrowed
$3,000,000 of funds under this Agreement. No Common Stock has been issued.
ITEM 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Indemnification Under the Amended and Restated Bylaws
-----------------------------------------------------
RTI's Amended and Restated Bylaws provide that RTI shall indemnify each of
its Directors and Officers to the maximum extent allowed by the Texas Business
Corporation Act ("TBCA") for expenses incurred in proceedings where the Officer
or Director is a party by reason of holding his position as an Officer or
Director subject to not being found liable for negligence or misconduct.
Expenses incurred in anticipation of litigation or in settlement of anticipated
litigation are also covered. The TBCA permits such indemnification, so long as
such person acted in good faith and in a manner he or she reasonably believed to
be in or not opposed to the best interests of RTI. Such indemnification may be
made only upon a determination by the Board of Directors that such
indemnification is proper in the circumstances because the person to be
indemnified has met the applicable standard of conduct to permit indemnification
under the law. RTI is also permitted to advance to such persons payment for
their expenses incurred in defending a proceeding to which indemnification might
apply, provided the recipient provides an undertaking agreeing to repay all such
advanced amounts if it is ultimately determined that he or she is not entitled
to be indemnified. However, please see below regarding limitations on
indemnification for liabilities arising under the Securities Act.
Indemnification by Contract
---------------------------
EMPLOYMENT PRACTICES LIABILITY INSURANCE
RTI obtained an Employment Practices Liability Insurance Policy ("Employment
Policy") from Executive Risk Indemnity Inc. (the "Underwriter") for policy
period August 22, 2000 to 2001 for individual and aggregate claim liability. The
Employment Policy covers 100% of Losses (damage awards including punitive,
interest amounts and settlements but not including civil or criminal fines, most
multiple damage awards, costs of bringing RTI into compliance with the American
Disabilities Act, non-monetary awards, severance pay, payment of insurance plan
benefits, or amounts awarded pursuant to labor arbitration) and Defense Expenses
(reasonable legal fees incurred through counsel to the Underwriter). The
Underwriter pays for the amount of such liabilities in excess of RTI's retention
($50,000 per claim). RTI has the option to extend the Employment Policy for an
additional two years for an additional premium.
Generally, the Underwriter has agreed to pay on behalf of the Insureds
(RTI, its officers, directors, and employees acting in the scope of their
duties) 100% of the Defense Expenses and Loss in excess of the retention of
$50,000 per claim due from RTI resulting from claims first made against the
Insureds during the period from November 28, 1997 for Employment Practices
Wrongful Acts occurring subsequent to RTI's incorporation and before expiration
of the Employment Policy. No Insured may incur Defense Expenses or settle any
Claim without the Underwriter's consent. Furthermore, if the Insured refuses to
agree to a settlement negotiated by the Underwriter, the amount of coverage is
materially reduced.
Claims are defined to mean any written notice that a person intends to hold
an Insured liable for an Employment Practices Wrongful Act, a judicial or
administrative proceeding (including civil and criminal) for such an act or any
written request to toll or waive the statute of limitations relating to such
judicial or administrative proceeding excepting claims including labor or
grievance arbitration pursuant to a collective bargaining agreement. An
Employment Practices Wrongful Act is defined to mean any of the following
alleged actions (which are all defined in the Employment Policy): 1) Wrongful
Termination, 2)
48
<PAGE>
Discrimination, 3) Harassment, 4) Retaliation, 5) Workplace Tort, 6) Third Party
Discrimination, or 7) Third Party Sexual Harassment. Costs for claims for
liability regarding violations of Employee Retirement Income Security Act of
1974 and liability arising out of violation of workers' compensation or
unemployment acts are not covered. Such exclusions do not apply to claims based
on retaliation for pursuing rights under those acts. The Employment Policy also
excludes from coverage costs for claims arising out of bodily injury except the
Employment Policy does cover claims for emotional distress resulting from an
Employment Practices Wrongful Act. The Employment Policy does not cover claims
for non-monetary relief. Furthermore, the Employment Policy does not cover
claims arising out of a claim which was the subject of notice under any prior
policy regarding any act for which a supervisor of RTI had knowledge prior to
November 28, 1997. This Employment Policy does not cover claims that Insureds
are obligated to pay by assumption of another's liability. Finally, the
Employment Policy does not cover costs associated with actions in connection
with labor disputes or negotiations.
EXECUTIVE LIABAILITY INSURANCE POLICY
RTI obtained an Executive Liability Insurance Policy from Executive Risk
Indemnity Inc. (the "Underwriter") for the policy period August 22, 2000 to 2001
(the "Policy Period") for a maximum individual and aggregate liability of
$5,000,000 (the "Executive Policy"). Coverage per claim begins after payment of
the retention amount for any given claim. RTI owes a retention amount of $0 per
Insured Person, $50,000 per Claim for Loss as to which indemnification by RTI is
permissible, and $125,000 per Claim for Losses arising out of Securities Claims.
No Defense Expenses can be incurred and no settlement of any Claim may be made
without the Underwriter's consent. The maximum aggregate liability may be
reinstated after exhaustion of all coverage but may only be reinstated once.
The reinstated amount shall be only for non-securities based claims. No
retention will be paid by RTI in the event Defense Expenses are incurred in
connection with a Securities Claim and such claim is dismissed or there is a
final judgment of no liability. In the event that RTI intends to sell
securities in a public offering, the Underwriter shall be entitled to impose
such terms and limitations of coverage and add such additional premium in its
sole discretion that it may require.
The Executive Policy covers Insured Persons (any past, present, or future
officer or director and employee (employees are only covered for Securities
Claims) of RTI for Loss (Defense Expenses [reasonable legal fees] and judgments
and settlements including punitive awards against an Insured Person or that RTI
is obligated to pay as a result of any Securities Claim against an Insured
Person in excess of the retention amount owed by RTI and except wages, fines,
and multiplied portion of damage awards) from Claims (any civil proceedings
including appeals commenced by filing of a complaint, any criminal proceeding,
any administrative or regulatory proceeding, or any written demand to an Insured
describing circumstances likely to give rise to the commencement of any such
proceeding) first made during the Policy Period against the Insured Persons for
Wrongful Acts except for Loss which RTI pays to the Insured Person in
indemnification.
The Executive Policy provides coverage of RTI for Losses from Claims during
the Policy Period against the Insured Persons for Wrongful Acts (misstatement,
omission, or breach of duty by an Insured Person or any other matter asserted
against an Insured Person solely by reason of his or her status as an Insured
Person and any Securities Wrongful Act) which RTI pays to the Insured Person as
indemnification. Furthermore, the Executive Policy provides coverage of Loss
from Securities Claims (claims for Securities Activity Wrongful Acts [violation
of any securities laws, violation of any law asserted by a shareholder of RTI,
or claims arising as a result of any act in connection with the offer and sale
or purchase of securities issued by RTI]) made during the Policy Period against
RTI.
The Executive Policy does not cover Loss for Claims against an Insured
Person contributed to in fact by intentional dishonest or fraudulent act or by
the gaining of an Insured of any profit to which they are not entitled. Defense
expenses associated with defending such actions, however, are covered. The
Executive Policy does not cover any Losses including Defense Expenses for Claims
for any alleged bodily sickness, libel, defamation or destruction of tangible
property or any threatened exposure, storage, discharge, treatment, removal and
related issues regarding smoke, vapors, toxic chemicals or other pollutants or
any related regulation. The Executive Policy does not cover: Losses, including
Defense Expenses, for Claims 1) based upon any situation or Wrongful Act alleged
in prior (to November 28, 1997) litigation, 2) any fact which was the subject of
notice given under any other policy, 3) any alleged violation of Employee
Retirement Income Security Act of 1974 or any similar law, 4) any alleged
nuclear or radioactive substance, or 5) the service of an Insured Person as a
director or officer of any entity other than RTI or a charitable corporation.
The Executive Policy does not cover Losses,
49
<PAGE>
including Defense Expenses, for Claims by or on behalf RTI excepting derivative
actions brought by a security holder and brought independent of solicitation of
RTI or an Insured Person or any Claim in the form of a cross-claim for
contribution by an Insured Person or any Claim for the alleged wrongful
termination of an Insured Person. However, please see below regarding
limitations on indemnification for liabilities arising under the Securities Act.
EMPLOYMENT AGREEMENT
Pursuant to a written employment agreement with Thomas J. Shaw, RTI has
agreed to indemnify Thomas J. Shaw for all legal expenses and liabilities
incurred with any proceeding involving him by reason of his being an Officer or
agent of RTI. RTI has further agreed to pay reasonable attorney fees and
expenses in the event that, in Thomas J. Shaw's sole judgment, he needs to
retain counsel or otherwise expend his personal funds for his defense. However,
please see below regarding limitations on indemnification for liabilities
arising under the Securities Act.
No Indemnification for Violations Regarding Capital Stock
---------------------------------------------------------
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to Directors, Officers, and Controlling Persons of RTI
pursuant to the foregoing provisions, or otherwise, RTI has been advised that,
in the opinion of the SEC, such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by RTI of expenses incurred or paid by a Director or Officer of RTI in
the successful defense of any action, suit, or proceeding) is asserted by such
Director or Officer in connection with the securities being registered, RTI
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 of whether such indemnification is against public policy as expressed
in the Securities Act and will be governed by the final adjudication of such
issue.
50
<PAGE>
PART F/S FORM 10SB-A
FINANCIAL STATEMENTS
RETRACTABLE TECHNOLOGIES, INC.
Texas
FINANCIAL STATEMENTS
AS OF
DECEMBER 31, 1999 AND 1998
AND
REPORT OF INDEPENDENT ACCOUNTANTS
AND
UNAUDITED FINANCIAL STATEMENTS
AS OF
JUNE 30, 2000 AND 1999
51
<PAGE>
RETRACTABLE TECHNOLOGIES, INC.
A Development Stage Enterprise
FINANCIAL STATEMENTS AND
REPORT OF INDEPENDENT ACCOUNTANTS
DECEMBER 31, 1999 AND 1998
52
<PAGE>
RETRACTABLE TECHNOLOGIES, INC.
A Development Stage Enterprise
INDEX TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Accountants 54
Financial Statements:
Balance Sheets as of December 31, 1999 and 1998 55
Statements of Operations for the years ended
December 31, 1999, 1998 and 1997 and inception
(May 9, 1994) through December 31, 1999 56
Statements of Changes in Stockholders' Equity
for the years ended December 31, 1999, 1998 and 1997 57
Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997 and inception
(May 9, 1994) through December 31, 1999 58
Notes to Financial Statements 59-73
</TABLE>
53
<PAGE>
Report of Independent Accountants
To the Board of Directors and
the Stockholders of Retractable Technologies, Inc.
In our opinion, the accompanying balance sheets and the related statements of
operations, of changes in stockholders' equity and of cash flows present fairly,
in all material respects, the financial position of Retractable Technologies,
Inc. (a development stage enterprise) at December 31, 1999 and 1998, and the
results of its operations, its changes in stockholders' equity and its cash
flows for each of the three years in the period ended December 31, 1999 and the
period from inception (May 9, 1994) to December 31, 1999, in conformity with
accounting principles generally accepted in the United States of America. 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 of these statements in accordance with
auditing standards generally accepted in the United States of America, which
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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Dallas, Texas
September 12, 2000
54
<PAGE>
RETRACTABLE TECHNOLOGIES, INC
A Development Stage Enterprise
BALANCE SHEETS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31,
------------- ---------------
ASSETS 1999 1998
------------- ---------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 646,005 $ 1,627,863
Accounts receivable, net of allowance for doubtful accounts of
$10,972 and $0, respectively 599,424 100,728
Inventories 677,962 653,958
Other current assets 47,800 51,103
------------- ---------------
Total current assets 1,971,191 2,433,652
Property, plant and equipment, net 10,101,524 8,923,842
Restricted certificates of deposit 600,000 600,000
Intangible assets and deferred charges, net 536,014 554,757
------------- ---------------
Total assets $ 13,208,729 $ 12,512,251
============= ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 844,165 $ 332,241
Current portion of long-term debt 463,329 431,743
Note payable to related party - 25,966
Accrued compensation 118,038 107,226
Marketing fees payable 338,526 -
Other accrued liabilities 250,783 52,491
------------- ---------------
Total current liabilities 2,014,841 949,667
------------- ---------------
Long-term debt, net of current maturities 2,506,335 2,870,959
------------- ---------------
Stockholders' equity:
Preferred stock $1 par value:
Class A; authorized, issued and outstanding: 5,000,000 shares
(liquidation preference of $7,500,000) 5,000,000 5,000,000
Class B; authorized: 5,000,000 shares
Series I Class B; issued and outstanding:
1,000,000 shares, (liquidation preference of $6,250,000) 1,000,000 1,000,000
Series II Class B; issued and outstanding:
1,000,000 shares, (liquidation preference of $12,500,000) 1,000,000 1,000,000
Series III Class B; issued and outstanding:
1,160,200 and 301,800 shares, respectively (liquidation preference of
$14,502,500 and $3,772,500, respectively) 1,160,200 301,800
Common stock, no par value; authorized: 40,000,000 shares; issued and
outstanding: 14,000,000 shares 1,000 1,000
Additional paid-in capital 23,564,235 16,378,481
Unearned compensation (185,635) (370,917)
Deficit accumulated during the development stage (22,852,247) (14,618,739)
------------- ---------------
Total stockholders' equity 8,687,553 8,691,625
------------- ---------------
Total liabilities and stockholders' equity $ 13,208,729 $ 12,512,251
============= ===============
</TABLE>
See accompanying notes to the financial statements.
55
<PAGE>
RETRACTABLE TECHNOLOGIES, INC
A Development Stage Enterprise
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
Cumulative
from
Years ended December 31, inception
--------------------------------------------------------
1999 1998 1997 (May 9, 1994)
----------------- ------------------ ----------------- -----------------
<S> <C> <C> <C> <C>
Sales, net $ 3,375,158 $ 845,559 $ 262,315 $ 4,483,032
Cost of sales 2,331,070 765,448 474,147 3,570,665
----------------- ------------------ ----------------- -----------------
Gross margin (deficit) 1,044,088 80,111 (211,832) 912,367
----------------- ------------------ ----------------- -----------------
Operating expenses:
Preproduction manufacturing 1,837,830 1,004,828 1,496,418 5,457,201
Sales and marketing 3,742,779 1,539,822 1,394,024 7,047,952
Research and development 842,062 763,690 266,029 2,326,127
General and administrative 2,863,989 2,419,821 1,952,561 8,807,932
----------------- ------------------ ----------------- -----------------
Total operating expenses 9,286,660 5,728,161 5,109,032 23,639,212
----------------- ------------------ ----------------- -----------------
Loss from operations (8,242,572) (5,648,050) (5,320,864) (22,726,845)
Interest income 122,028 162,116 133,413 647,042
Interest expense, net (112,964) (218,154) (336,749) (772,444)
----------------- ------------------ ----------------- -----------------
Net loss incurred during
development stage $ (8,233,508) $ (5,704,088) $ (5,524,200) $ (22,852,247)
================= ================== ================ =================
</TABLE>
See accompanying notes to the financial statements.
56
<PAGE>
RETRACTABLE TECHNOLOGIES, INC.
A Development Stage Enterprise
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A Series I Class B Series II Class B
---------------------------- ---------------------------- ------------------------
Shares Amount Shares Amount Shares Amount
------------- ------------- ------------- ------------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance as of December 31, 1996 5,000,000 $ 5,000,000 983,000 $ 983,000 $
Issued Preferred Series I Class B
9,000 shares, $1 par 9,000 9,000
Issued Preferred Series II Class B
945,700 shares, $1 par 945,700 945,700
Issuance of compensatory stock options
Recognition of stock option compensation
Collections of notes receivable
Reclassification of note receivable
to reflect collection
Net loss incurred during development stage
----------- ------------ ---------- ------------ ---------- -----------
Balance as of December 31, 1997 5,000,000 $ 5,000,000 992,000 $ 992,000 945,700 $ 945,700
----------- ------------ ---------- ------------ ---------- -----------
Issued Preferred Series I Class B
8,000 shares, $1 par 8,000 8,000
Issued Preferred Series II Class B
54,300 shares, $1 par 54,300 54,300
Issued Preferred Series III Class B
301,800 shares, $1 par (net of
commissions and other expenses
of $290,221)
Issuance of compensatory stock options
Recognition of stock option compensation
Terminations of stock options
Net loss incurred during development stage
----------- ------------ ---------- ------------ ---------- -----------
Balance as of December 31, 1998 5,000,000 $ 5,000,000 1,000,000 $ 1,000,000 1,000,000 $ 1,000,000
----------- ------------ ---------- ------------ ---------- -----------
Issued Preferred Series III Class B
858,400 shares, $1 par
Issuance of compensatory stock options
Recognition of stock option compensation
Terminations of stock options
Net loss incurred during development stage
----------- ------------ ---------- ------------ ---------- -----------
Balance as of December 31, 1999 5,000,000 $ 5,000,000 1,000,000 $ 1,000,000 1,000,000 $ 1,000,000
=========== ============ ========== ============ ========== ===========
<CAPTION>
Series III Class B Common
---------------------------- ----------------------------
Shares Amount Shares Amount
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Balance as of December 31, 1996 $ 14,000,000 $ 1,000
Issued Preferred Series I Class B
9,000 shares, $1 par
Issued Preferred Series II Class B
945,700 shares, $1 par
Issuance of compensatory stock options
Recognition of stock option compensation
Collections of notes receivable
Reclassification of note receivable
to reflect collection
Net loss incurred during development stage
------------ ------------- ----------- ------------
Balance as of December 31, 1997 - $ - 14,000,000 $ 1,000
------------ ------------- ----------- ------------
Issued Preferred Series I Class B
8,000 shares, $1 par
Issued Preferred Series II Class B
54,300 shares, $1 par
Issued Preferred Series III Class B
301,800 shares, $1 par (net of
commissions and other expenses
of $290,221) 301,800 301,800
Issuance of compensatory stock options
Recognition of stock option compensation
Terminations of stock options
Net loss incurred during development stage
------------ ------------- ----------- ------------
Balance as of December 31, 1998 301,800 $ 301,800 14,000,000 $ 1,000
------------ ------------- ----------- ------------
Issued Preferred Series III Class B
858,400 shares, $1 par 858,400 858,400
Issuance of compensatory stock options
Recognition of stock option compensation
Terminations of stock options
Net loss incurred during development stage
------------ ------------- ----------- ------------
Balance as of December 31, 1999 1,160,200 $ 1,160,200 14,000,000 $ 1,000
============ ============= =========== ============
<CAPTION>
Deficit
Notes Accumulated
Receivable Additional During
from Paid-in Unearned Development
Stockholders Capital Compensation Stage Total
-------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Balance as of December 31, 1996 $ (257,500) $ 4,303,213 $ (287,290) $ (3,390,451) $ 6,351,972
Issued Preferred Series I Class B
9,000 shares, $1 par 36,000 45,000
Issued Preferred Series II Class B
945,700 shares, $1 par 8,436,300 9,382,000
Issuance of compensatory stock options 748,539 (748,539)
Recognition of stock option compensation 286,540 286,540
Collections of notes receivable 207,500 207,500
Reclassification of note receivable
to reflect collection 50,000 50,000
Net loss incurred during development stage (5,524,200) (5,524,200)
----------- ------------- ------------ ------------ -------------
Balance as of December 31, 1997 $ - $ 13,524,052 $ (749,289) $ (8,914,651) $ 10,798,812
----------- ------------- ------------ ------------ -------------
Issued Preferred Series I Class B
8,000 shares, $1 par 32,000 40,000
Issued Preferred Series II Class B
54,300 shares, $1 par 488,700 543,000
Issued Preferred Series III Class B
301,800 shares, $1 par (net of
commissions and other expenses
of $290,221) 2,425,979 2,727,779
Issuance of compensatory stock options 70,000 (70,000)
Recognition of stock option compensation 286,122 286,122
Terminations of stock options (162,250) 162,250
Net loss incurred during development stage (5,704,088) (5,704,088)
----------- ------------- ------------ ------------ -------------
Balance as of December 31, 1998 $ - $ 16,378,481 $ (370,917) $(14,618,739) $ 8,691,625
----------- ------------- ------------ ------------ -------------
Issued Preferred Series III Class B
858,400 shares, $1 par 7,266,914 8,125,314
Issuance of compensatory stock options 214,354 (214,354)
Recognition of stock option compensation 104,122 104,122
Terminations of stock options (295,514) 295,514
Net loss incurred during development stage (8,233,508) (8,233,508)
----------- ------------- ------------ ------------ -------------
Balance as of December 31, 1999 $ - $ 23,564,235 $ (185,635) $(22,852,247) $ 8,687,553
=========== ============= ============ ============ =============
</TABLE>
See accompanying notes to the financial statements.
57
<PAGE>
RETRACTABLE TECHNOLOGIES, INC
A Development Stage Enterprise
STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Cumulative
Years ended December 31, from inception
------------------------------------------------
1999 1998 1997 (May 9, 1994)
-------------- --------------- --------------- -----------------
<S> <C> <C> <C> <C>
Cash flows from operating activities
Net loss incurred during development stage $ (8,233,508) $ (5,704,088) $ (5,524,200) $ (22,852,247)
Depreciation and amortization 950,471 807,060 455,909 2,765,730
Provision for doubtful accounts 10,972 - - 10,972
Recognition of stock option compensation 104,122 286,122 286,540 760,707
Adjustments to reconcile net loss to net cash
used in operating activities:
Increase in inventories (24,004) (173,308) (308,188) (677,962)
(Increase) decrease in accounts and note
receivable (509,668) 6,320 (102,048) (610,396)
Increase in deferred charges - - - (25,931)
(Increase) decrease in other current assets 3,303 (34,603) (16,500) (47,800)
Increase (decrease) in accounts payable
and note payable to related party 485,958 (647,460) 738,725 780,699
Increase in other accrued liabilities 547,630 70,811 57,994 707,347
-------------- --------------- --------------- -----------------
Net cash used by operating activities (6,664,724) (5,389,146) (4,411,768) (19,188,881)
-------------- --------------- --------------- -----------------
Cash flows from investing activities
Purchase of property, plant and equipment (1,960,609) (1,179,547) (3,252,731) (11,445,793)
Acquisition of patents, trademarks and licenses (39,077) (45,095) - (182,595)
Purchase of restricted certificate of deposit - - (200,000) (600,000)
Organization costs paid - - (15,291) (20,851)
-------------- --------------- --------------- -----------------
Net cash used by investing activities (1,999,686) (1,224,642) (3,468,022) (12,249,239)
-------------- --------------- --------------- -----------------
Cash flows from financing activities
Borrowings under long-term debt and notes payable - 25,749 986,242 3,065,362
Repayments of long-term debt and notes payable (442,762) (438,000) (350,675) (1,297,830)
Proceeds from issuance of preferred stock 8,584,000 3,601,000 9,427,000 31,307,000
Proceeds from issuance of common stock - - - 1,000
Commissions and other expenses related to
preferred stock issuance (458,686) (290,221) - (748,907)
Collections of notes receivable from stockholders - - 257,500 257,500
Obligation under license agreement - - (56,175) (500,000)
-------------- --------------- --------------- -----------------
Net cash provided by financing activities 7,682,552 2,898,528 10,263,892 32,084,125
-------------- --------------- --------------- -----------------
Net increase (decrease) in cash (981,858) (3,715,260) 2,384,102 646,005
Cash and cash equivalents at:
Beginning of period 1,627,863 5,343,123 2,959,021 -
-------------- --------------- --------------- -----------------
End of period $ 646,005 $ 1,627,863 $ 5,343,123 $ 646,005
============== =============== =============== =================
Supplemental disclosures of cash flow
information:
Interest paid $ 281,905 $ 324,116 $ 321,887 $ 1,025,443
============== =============== =============== =================
Supplemental schedule of noncash financing
activities:
Preferred stock issued in exchange for notes
receivable $ - $ - $ - $ 257,500
============== =============== =============== =================
Offering costs to be settled with warrants $ - $ - $ 37,500 $ 37,500
============== =============== =============== =================
Acquisition of equipment through capital lease $ 109,724 $ 50,435 $ 380,485 $ 1,228,097
============== =============== =============== =================
</TABLE>
See accompanying notes to the financial statements.
58
<PAGE>
RETRACTABLE TECHNOLOGIES, INC.
A Development Stage Enterprise
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
1. BUSINESS OF THE COMPANY
Retractable Technologies, Inc. (the "Company") was incorporated in Texas on
May 9, 1994, to design, develop, manufacture and market safety syringes and
other safety medical products for the health care profession. The Company
began operations in 1995. The Company's manufacturing and administrative
facilities are located in Little Elm, Texas. The Company's primary
products are the VanishPoint(R) Syringe in the 3cc, 5cc and 10cc sizes and
Blood Collection Tube Holders. The Company has conducted preliminary
clinical evaluations and worked with national distributors to encourage
healthcare facilities to transition from the use of standard syringes to
the VanishPoint(R) Syringe. Preliminary shipments, which commenced in
February 1997, included syringes for hospital product evaluations as well
as for sale in clinics and other healthcare settings. The Company has been
considered a development stage enterprise for financial reporting purposes
as significant efforts have been devoted to financial planning, raising
capital, research and development, acquiring equipment, training personnel,
developing markets and starting up production. Coincident with the
agreement with Abbot Laboratories (see Note 11), effective May 4, 2000, the
Company completed its development stage.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Accounting estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ significantly from
those estimates.
Cash and cash equivalents
For purposes of reporting cash flows, cash and cash equivalents include
unrestricted cash and investments with original maturities of three months
or less.
Inventories
Inventories are valued at the lower of cost or market, with cost being
determined using a standard cost method, which approximates average cost.
Provision is made for any excess or obsolete inventories.
Property, plant and equipment
Property, plant and equipment are stated at cost. Expenditures for
maintenance and repairs are charged to operations as incurred. Cost
includes major expenditures for improvements, and replacements which extend
useful lives or increase capacity and interest cost associated with
significant capital additions. For the years ended December 31, 1999 and
1998, the Company capitalized interest of approximately $169,000 and
$105,000, respectively, and none in fiscal year 1997. Gains or losses from
property disposals are included in income.
59
<PAGE>
RETRACTABLE TECHNOLOGIES, INC.
A Development Stage Enterprise
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Depreciation and amortization is calculated using the straight-line method
over the following useful lives:
Production equipment 7 to 10 years
Office furniture and equipment 3 to 10 years
Building 39 years
Building improvements 15 years
Automobiles 7 years
Long-lived assets
When events or changes in circumstances indicate that the carrying amount
of long-lived assets may not be recoverable, the Company will review the
net realizable value of the long-lived assets through an assessment of the
estimated future cash flows related to such assets. In the event that
assets are found to be carried at amounts which are in excess of estimated
gross future cash flows, the assets will be adjusted for impairment to a
level commensurate with a discounted cash flow analysis of the underlying
assets.
Restricted certificates of deposit
Investments in certificates of deposit are restricted in accordance with
the terms of certain notes payable.
Intangible assets and deferred charges
Intangible assets are stated at cost and consist primarily of patents, a
license agreement granting exclusive rights to use patented technology, and
trademarks which are amortized using the straight-line method over 17
years. Other intangible assets consist of deferred charges for loan
origination fees, which are amortized over the life of the debt (seven
years).
Financial instruments
The fair market value of financial instruments is determined by reference
to various market data and other valuation techniques as appropriate. The
Company believes that the fair value of financial instruments approximate
their recorded values.
Concentrations of credit risk
The Company's financial instruments exposed to concentrations of credit
risk consist primarily of cash, cash equivalents and accounts receivable.
Cash balances, which may exceed the federally insured limits, are
maintained in financial institutions; however, management believes the
institutions are of high credit quality. The majority of accounts
receivable are due from companies which are well-established entities. As a
consequence, management considers any exposure from concentrations of
credit risks to be limited.
60
<PAGE>
RETRACTABLE TECHNOLOGIES, INC.
A Development Stage Enterprise
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Revenue recognition
Revenue is recognized for sales to distributors when title and risk of
ownership passes to the distributor, generally upon shipment. Revenue is
recorded on the basis of sales price to distributors. Revenues on sales to
distributors for federal or GPO contracts are recorded net of contractual
pricing allowances to those end customers. Revenue for shipments directly
to end users is recognized when title and risk of ownership passes from the
Company.
Income taxes
The Company provides for deferred income taxes in accordance with Statement
of Financial Accounting Standard No. 109, "Accounting for Income Taxes"
("SFAS 109"). SFAS 109 requires an asset and liability approach for
financial accounting and reporting for income taxes based on the tax
effects of differences between the financial statement and tax bases of
assets and liabilities, based on enacted rates expected to be in effect
when such basis differences reverse in future periods. Deferred tax assets
are periodically reviewed for reliability. Valuation allowances are
recorded when realizability of deferred tax assets is not likely.
Research and development costs
Research and development costs are expensed as incurred.
Stock-based compensation
The Company has adopted the disclosure only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"), which establishes accounting and reporting
standards for stock-based employee compensation plans. As permitted by SFAS
123, the Company has elected not to adopt the fair value based method of
accounting for stock-based employee compensation and will account for such
arrangements under Accounting Principles Board Opinion No. 25. Accordingly,
compensation cost for stock options issued to directors, officers and
employees is measured as the excess, if any, of the fair market value of
the Company's stock at the date of grant over the amount the director,
officer or employee must pay to acquire the stock. Expense is recognized
ratably from the date of grant over the vesting period of the option.
Unearned compensation reflected in the Stockholders' Equity section of the
balance sheet is the portion of such compensation that has not been charged
to operations.
61
<PAGE>
RETRACTABLE TECHNOLOGIES, INC.
A Development Stage Enterprise
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
3. INVENTORIES
Inventories consist of the following
December 31,
---------------------------
1999 1998
--------- ---------
Raw materials $ 405,823 $ 348,053
Work in process 27,699 5,464
Finished goods 268,766 300,441
--------- ---------
702,288 653,958
Inventory reserve (24,326) -
--------- ---------
$ 677,962 $ 653,958
========= =========
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
December 31,
--------------------------
1999 1998
------------ ------------
Land $ 261,893 $ 261,893
Building and building improvements 1,767,185 1,752,115
Production equipment 7,719,979 6,692,236
Office furniture and equipment 596,058 464,945
Construction in progress 2,306,916 1,410,509
Automobiles 21,858 21,858
------------ -----------
12,673,889 10,603,556
Accumulated depreciation and amortization (2,572,365) (1,679,714)
------------ -----------
$ 10,101,524 $ 8,923,842
============ ===========
Acquisition costs of production equipment financed through capital leases
were $1,118,556 and $1,008,832 at December 31, 1999, and 1998 respectively.
Accumulated amortization on these leases was $358,552 and $255,852 at
December 31, 1999 and 1998, respectively.
Depreciation expense and capital lease amortization expense for the years
ended December 31, 1999, 1998 and 1997 was $892,651, $761,282 and $414,894,
respectively.
62
<PAGE>
RETRACTABLE TECHNOLOGIES, INC.
A development Stage Enterprise
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
5. INTANGIBLE ASSETS AND DEFERRED CHARGES
Intangible assets and deferred charges consist of the following:
December 31,
-------------------------
1999 1998
----------- ------------
License agreement $ 500,000 $ 500,000
Trademarks and patents 182,590 143,513
Loan origination fees 25,938 25,938
Organization costs - 20,851
----------- ------------
708,528 690,302
Accumulated amortization (172,514) (135,545)
----------- ------------
$ 536,014 $ 554,757
----------- ------------
In 1995, the Company entered into the license agreement with an officer of
the Company for the exclusive right to manufacture, market and distribute
products utilizing automated retraction technology. This technology is the
subject of various patents and patent applications owned by the officer of
the Company. The initial licensing fee of $500,000 is being amortized over
17 years. The license agreement also provides for quarterly payments of a
5% royalty fee to the officer on gross sales. The royalty fee expense is
recognized in the period in which it is earned. Royalty fees of $194,247,
$46,098 and $9,284 are included in cost of sales for the years ended
December 31, 1999, 1998 and 1997, respectively.
Amortization expense for the years ended December 31, 1999, 1998 and 1997
was $57,820, $45,778 and $41,015, respectively.
63
<PAGE>
RETRACTABLE TECHNOLOGIES, INC.
A Development Stage Enterprise
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
6. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
December 31,
--------------------------------
1999 1998
-------------- ---------------
<S> <C> <C>
Small Business Administration note payable to Texas Bank for a maximum
of $1,000,000, all of which was drawn during 1997. Payable in monthly
principal and interest installments of approximately $16,000. Interest
at prime plus 1.5%; 10% on December 31, 1999; adjustable quarterly.
Matures on July 1, 2003. Collateralized by equipment. Guaranteed by an
officer. $ 569,630 $ 705,566
Notes payable to Western Bank and Trust. Interest adjustable annually on
October 24. Matures on October 24, 2001. Secured by land, building and
equipment, and by a certificate of deposit to be released upon
achievement of certain financial ratios. Guaranteed by an officer.
- Interest only payable until October 24, 1996; thereafter, monthly
principal and interest payments of approximately $8,000.
Interest at prime plus 1%; 9.5% on December 31, 1999. 750,789 767,960
- Interest payable monthly at Bank's certificate of deposit rate
plus 2%; 7% on December 31, 1999. 400,000 400,000
Note payable to Legacy Bank of Texas. Payable in monthly installments of
approximately $8,000 plus interest. Interest at prime plus 1%; 9.5% on
December 31, 1999; adjustable daily. Matures on July 10, 2004.
Collateralized by certain machinery and equipment, a certificate of
deposit of $200,000 and restrictions on the transfer of certain
patents. Covenants require the Company to achieve defined debt
coverage ratios or maintain a defined ratio of total liabilities to
total net worth. Guaranteed by an officer.
464,881 566,309
Note payable to First State Bank of Texas in monthly principal and
interest installments of approximately $400. Interest at 7.5%. Matures on
August 13, 2000. Collateralized by company vehicle. 3,333 8,119
Note payable to AFCO. Payable in monthly principal and interest installments
of approximately $2,000. Interest at 8.8%. Matures on May 28, 2000. 7,491 24,403
Capital lease obligations payable in monthly installments ranging from
approximately $500 to $10,000 through October, 2004. Interest at rates
from 9.98% to 14.18%. Collateralized by certain machinery and equipment.
Covenants require the Company to maintain a minimum net worth of
$3,750,000 and a defined ratio of total liabilities to total net worth.
Guaranteed by an officer. The Company is not in compliance with
obligations to deliver documents under this agreement. The lessor
has provided a waiver related to this noncompliance. 773,540 830,345
-------------- ---------------
2,969,664 3,302,702
Less: current portion (463,329) (431,743)
-------------- ---------------
$ 2,506,335 $ 2,870,959
============== ===============
</TABLE>
64
<PAGE>
RETRACTABLE TECHNOLOGIES, INC.
A Developmemtal Stage Enterprise
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
The aggregate maturities of long-term debt as of December 31, 1999 are as
follows:
2000 $ 463,329
2001 1,572,041
2002 467,577
2003 373,358
2004 93,359
Thereafter -
-------------
Total $ 2,969,664
-------------
Subsequent to December 31, 1999, the Company obtained two new loans from 1st
International Bank totaling $2,000,000. Land, building and improvements
secure $1,500,000, and the remaining $500,000 is secured by accounts
receivable. The proceeds, along with a release of $400,000 of restricted
cash by Western Bank subsequent to December 31, 1999, were used to pay off
indebtedness to Western Bank. Remaining proceeds provided funds for
equipment and operating needs. The building loan matures on February 18,
2005 and the note secured by accounts receivable matures February 18, 2001.
7. INCOME TAXES
The provision for income taxes consists of the following:
December 31,
--------------------------------
1999 1998
-------------- ----------------
Current $ - $ -
Deferred benefit (2,932,189) (2,096,602)
Increase in valuation allowance 2,932,189 2,096,602
-------------- ----------------
$ - $ -
-------------- ----------------
The Company has net operating loss carryforwards of approximately
$24,129,273, and $15,600,527 at December 31, 1999 and 1998, respectively,
which will begin to expire in 2010. The Company has established a valuation
allowance to the extent of its deferred tax assets since presently it is more
likely than not that a tax benefit will not be realized prior to the
expiration of related carryforward periods.
65
<PAGE>
RETRACTABLE TECHNOLOGIES, INC.
A Developmemtal Stage Enterprise
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
The provision for income taxes varies from the statutory income tax rate as
follows:
<TABLE>
<CAPTION>
December 31,
-----------------------------------
1999 1998
--------------- ---------------
<S> <C> <C>
Income tax benefit at the U.S. federal statutory rate (35.0)% (35.0)%
Valuation allowance 35.6 36.8
Permanent differences 0.6 1.9
State income tax, net of federal benefits (2.7) (2.6)
Other 1.5 (1.1)
--------------- ---------------
Effective tax (benefit) provision rate - -
=============== ===============
</TABLE>
Temporary differences between the financial statement carrying amounts and
the tax basis of assets and liabilities that gave rise to significant
portions of deferred tax amounts related to the following:
<TABLE>
<CAPTION>
December 31,
-----------------------------------
1999 1998
---------------- ---------------
<S> <C> <C>
Net operating loss carryforwards $ 9,084,478 $ 5,873,269
Property, plant and equipment (1,007,274) (714,913)
Deferred charges 142,155 159,883
Accrued expenses and reserves 54,213 23,144
--------------- ---------------
Net noncurrent deferred tax asset before valuation allowance 8,273,572 5,341,383
Valuation allowance (8,273,572) (5,341,383)
--------------- ---------------
Net deferred tax asset $ - $ -
=============== ===============
</TABLE>
8. STOCKHOLDERS' EQUITY
Preferred stock
The Company has two classes of preferred stock, Class A and Class B. The
Class B Preferred Stock has three series: Series I, Series II and Series III.
Subsequent to December 31, 1999, the Company began taking subscriptions for a
fourth series, Series IV Class B (see Note 11).
Class A
-------
The Company authorized 5,000,000 shares of $1 par value Class A Convertible
Preferred Stock ("Class A Stock") in April 1995. These shares were
outstanding at December 31, 1999 and 1998. Holders of Class A Stock are
entitled to receive a cumulative annual cash dividend of $.12 per share,
payable quarterly if declared by the board of directors. Holders of Class A
Stock generally have no voting rights until dividends are in arrears and
unpaid for twelve consecutive quarters. In such case, the holders of Class A
Stock have the right to elect one-third of the board of directors of the
Company. At December 31, 1999 and 1998, approximately $2,616,983 and
$2,016,983, respectively, of dividends which have not been declared were in
arrears. Accordingly, Class A shareholders elected three members to the
Board during 1999.
Class A Stock is redeemable after three years from the date of issuance at
the option of the Company at a price of $1.70 per share, plus all accrued and
unpaid dividends. Each share of Class A Preferred Stock may be converted to
one share of common stock after three years from the date of issuance at the
option of the shareholder. In the event of voluntary or involuntary
dissolution, liquidation or winding up of the Company, holders of Class A
Stock then outstanding are entitled to $1.50 per share plus all accrued and
unpaid dividends, prior to any distributions to holders of Class B preferred
stock or of common stock.
Class B
-------
The Company has authorized 5,000,000 shares of $1 par value Convertible
Preferred Stock which have been allocated among Series I, II, III and IV in
the amounts of 1,000,000, 1,000,000, 1,160,200 and 1,300,000 shares,
respectively. The remaining 539,800 authorized shares have not been assigned
a series.
66
<PAGE>
RETRACTABLE TECHNOLOGIES, INC.
A Development Stage Enterprise
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Series I Class B
----------------
There were 1,000,000 shares of $1 par value Series I Class B Convertible
Preferred Stock ("Series I Class B Stock") issued and outstanding at
December 31, 1999 and 1998. Holders of Series I Class B Stock are entitled
to receive a cumulative annual dividend of $.50 per share, payable
quarterly if declared by the board of directors. At December 31, 1999 and
1998 approximately $1,689,949 and $1,185,552, respectively, of dividends
which have not been declared were in arrears.
Series I Class B Stock is redeemable after three years from the date of
issuance at the option of the Company at a price of $7.50 per share, plus
all accrued and unpaid dividends. Each share of Series I Class B Stock may,
at the option of the stockholder, be converted to one share of common stock
after three years from the date of issuance or in the event the Company
files an initial registration statement under the Securities Act of 1933.
In the event of voluntary or involuntary dissolution, liquidation or
winding up of the Company, holders of Series I Class B Stock then
outstanding are entitled to $6.25 per share, plus all accrued and unpaid
dividends, after distribution obligations to Class A Stock have been
satisfied and prior to any distributions to holders of Series II Class B
Convertible Preferred Stock ("Series II Class B Stock"), Series III Class B
Convertible Preferred Stock ("Series III Class B Stock") or common stock.
Series II Class B
-----------------
There were 1,000,000 shares of $1 par value Series II Class B Stock issued
and outstanding at December 31, 1999 and 1998, respectively. Holders of
Series II Class B Stock are entitled to receive a cumulative annual
dividend of $1.00 per share, payable quarterly if declared by the board of
directors. Holders of Series II Class B Stock generally have no voting
rights until dividends are in arrears and unpaid for twelve consecutive
quarters. In such case, the holders of Series II Class B Stock have the
right to elect one-third of the board of directors of the Company. At
December 31, 1999 and 1998 approximately $2,227,177 and $1,256,981,
respectively, of dividends which have not been declared were in arrears.
Series II Class B Stock is redeemable after three years from the date of
issuance at the option of the Company at a price of $15.00 per share plus
all accrued and unpaid dividends. Each share of Series II Class B Stock
may, at the option of the stockholder, be converted to one share of common
stock after three years from the date of issuance or in the event the
Company files an initial registration statement under the Securities Act of
1933. In the event of voluntary or involuntary dissolution, liquidation or
winding up of the Company, holders of Series II Class B Stock then
outstanding are entitled to $12.50 per share, plus all accrued and unpaid
dividends, after distribution obligations to holders of Class A Stock and
Series I Class B Stock have been satisfied and prior to any distributions
to holders of Series III Class B Stock or common stock.
Series III Class B
------------------
There were 1,160,200 shares and 301,800 shares of $1 par value Series III
Class B Stock issued and outstanding at December 31, 1999 and 1998,
respectively. Holders of Series III Class B Stock are entitled to receive a
cumulative annual dividend of $1.00 per share, payable quarterly if
declared by the board of directors. At December 31, 1999 and 1998,
approximately $941,549 and $41,701, respectively, of dividends which have
not been declared were in arrears.
67
<PAGE>
RETRACTABLE TECHNOLOGIES, INC.
A Development Stage Enterprise
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Series III Class B Stock is redeemable after three years from the date of
issuance at the option of the Company at a price of $15.00 per share, plus
all accrued and unpaid dividends. Each share of Series III Class B Stock
may, at the option of the stockholder, be converted to one share of common
stock after three years from the date of issuance or in the event the
Company files an initial registration statement under the Securities Act of
1933. In the event of voluntary or involuntary dissolution, liquidation or
winding up of the Company, holders of Series III Class B Stock then
outstanding are entitled to $12.50 per share, plus all accrued and unpaid
dividends, after distribution obligations to Class A Stock, Series I Class
B Stock and Series II Class B Stock have been satisfied and prior to any
distributions to holders of common stock.
Series IV Class B
-----------------
On January 11, 2000, the Company issued a Private Placement Memorandum
offering up to 1,300,000 shares of its Series IV Class B Convertible
Preferred Stock ("Series IV Class B Stock") at $10 per share.
As of May 22, 2000, subscriptions for 1,133,800 shares of the Series IV
Class B Stock had been received.
Series IV Class B Stock ranks senior to the Company's common stock with
respect to dividends and upon liquidation, dissolution or winding up, but
secondary to the Company's Class A Stock; and Series I Class B, Series II
Class B and Series III Class B Stock. Holders of Series IV Class B Stock
will be entitled to receive a cumulative annual dividend of $1.00 per
share, payable quarterly, if declared by the board of directors. Holders of
Series IV Class B Stock generally have no voting rights.
68
<PAGE>
RETRACTABLE TECHNOLOGIES, INC.
A Development Stage Enterprise
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Series IV Class B Stock is redeemable after three years from the date of
issuance at the option of the Company at a price of $11.00 per share plus
all accrued and unpaid dividends. Each share of Series IV Class B Stock
may, at the option of the stockholder any time subsequent to three years
from date of issuance, be converted into common stock at a conversion price
of $10 per share, or in the event the Company files an initial registration
statement under the Securities Act of 1933.
In the event of voluntary or involuntary liquidation, dissolution or
winding up of the Company, holders of Series IV Class B Stock then
outstanding are entitled to receive liquidating distributions of $11.00 per
share, plus accrued and unpaid dividends.
Common stock
The Company is authorized to issue 40,000,000 shares of no par value common
stock, of which 14,000,000 shares are issued and outstanding at December
31, 1999 and 1998. Subsequent to December 31, 1999, the board of directors
approved an increase in the number of authorized shares to 100,000,000.
9. RELATED PARTY TRANSACTIONS
In September 1996, the Company purchased the 3cc prototype mold from
Checkmate Engineering, a sole proprietorship of an officer of the Company.
The purchase was financed by a note for the full purchase price of
$108,252. The note provided for no interest for the first 305 days and,
subsequently, for interest at a rate of 12% per annum. Interest expense
related to this note was $1,357, $5,258 and $4,092 for the years ended
December 31, 1999, 1998 and 1997, respectively. The balance of the note was
$25,966 as of December 31, 1998. The remaining balance on the note was paid
in full in 1999.
The Company has a lease with Mill Street Enterprises ("Mill Street"), a
sole proprietorship owned by a Board member, for sales and marketing
offices in Lewisville, Texas. During 1999, 1998 and 1997, the Company paid
$22,800 each year under this lease. The Company also has a lease with Mill
Street for additional office space for one year commencing April 1, 2000,
at a rate of $1,000 per month.
During 1999, 1998 and 1997, the Company paid $23,381, $30,258 and $49,615,
respectively, to family members of its chief executive officer for various
consulting services. During 1999, 1998 and 1997, the Company paid $96,372,
$127,921 and $77,430, respectively, to a former director for various
consulting services.
The Company has a license agreement with an officer of the Company. See
Note 5.
See Note 11 for related party subsequent event.
69
<PAGE>
RETRACTABLE TECHNOLOGIES, INC.
A Developmemtal Stage Enterprise
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
10. STOCK OPTIONS AND WARRANTS
Stock options
The Company has three stock option plans that provide for the granting of
stock options to officers, employees and other individuals. During 1999,
the Company approved the 1999 Stock Option Plan. The 1999 Plan is the only
plan with stock option awards available for grant and the Company has
reserved 2,000,000 shares of common stock for use upon the exercise of
options under this plan.
The Company also has shares outstanding under the 1996 Incentive Stock
Option Plan and the 1996 Stock Option Plan for Directors and Other
Individuals. All plans are administered and exercise prices at which
options are granted are determined by a committee appointed by the board of
directors. Shares exercised come from the Company's authorized but unissued
common stock. The options vest over periods up to three years from the date
of grant and generally expire ten years after the date of grant. All
options issued under the 1996 plans expire three months after termination
of employment or service to the Company. No options have been exercised
under these plans.
Director, officer and employee options
Pro forma information regarding net income is required by SFAS 123. This
information has been derived as if the Company had accounted for its
directors, officers and employee stock options under the fair value method
in accordance with SFAS 123. The fair value of each option grant is
estimated on the date of grant using the Black-Scholes option pricing model
with the following weighted average assumptions used for grants in 1999,
1998 and 1997: no dividend yield; expected volatility of 0%; risk-free
interest rates of 5.9%, 5.4% and 6.4%, respectively; and expected lives of
5.3 years. For purposes of pro forma disclosures, the estimated fair value
of the options is amortized to expense over the options' vesting periods.
The Company's pro forma information follows:
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------------------------------------------------------
1999 1998 1997
--------------------------- ----------------------------- -----------------------------
As As As
Reported Pro Forma Reported Pro Forma Reported Pro Forma
----------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Net loss $(8,233,508) $ (8,341,433) $ (5,704,088) $ (5,842,497) $ (5,524,200) $ (5,627,602)
</TABLE>
The effects of applying FAS 123 in this pro forma disclosure are not
indicative of future amounts as FAS 123 does not consider additional awards
anticipated in the future.
70
<PAGE>
RETRACTABLE TECHNOLOGIES, INC
A Development Stage Enterprise
NOTES OF FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
A summary of director, officer and employee options granted and outstanding
under the Plans is presented below:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------------------------
1999 1998 1997
---------------------- --------------------- ---------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
---------- ---------- -------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of period 566,855 $ 6.01 460,305 $ 4.28 130,105 $ 1.53
Granted at prices in excess of
fair market value 715,950 10.00 177,800 10.00 22,750 10.00
Granted at prices below
fair market value 8,500 4.53 - - 345,700 5.00
Exercised - - - - - -
Forfeited (294,700) (7.63) (71,250) (4.78) (38,250) (4.90)
---------- ----------- --------- ----------- --------- ----------
Outstanding at end of period 996,605 $ 8.38 566,855 $ 6.01 460,305 $ 4.28
========== =========== ========= ========== ========== ==========
Exercisable at end of period 117,105 $ 3.41 - $ - - $ -
Weighted average fair value
of options granted during period $ .04 $ - $ 3.45
</TABLE>
The following table summarizes information about directors, officer and
employee options outstanding under the Plans at December 31, 1999:
<TABLE>
<CAPTION>
Weighted
Average
Remaining
Exercise Shares Contractual Shares
Prices Outstanding Life Exercisable
------------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
$ 1.00 77,780 6.32 77,780
$ 5.00 182,125 7.31 14,325
$ 10.00 736,700 9.42 25,000
</TABLE>
Compensation expense has been recognized for the years ended December 31,
1999, 1998 and 1997 in connection with options which were granted with exercise
prices less than the fair market value of the common stock of the Company on the
date of grant as determined by the board of directors.
71
<PAGE>
RETRACTABLE TECHNOLOGIES, INC.
A Development Stage Enterprise
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Non-employee options
Options were granted to non-employees during the years ended December 31 as
follows:
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------------------------------------
1999 1998 1997
--------------------- --------------------- --------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
-------- ---------- -------- ---------- ------ ----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of period 152,500 $ 6.91 67,000 $ 2.97 34,000 $ 1.00
Granted 75,000 10.00 86,500 10.00 33,000 5.00
Exercised - - - - - -
Forfeited (42,000) (9.05) (1,000) (10.00) - -
------- --------- ------- --------- ------ ---------
Outstanding at end of period 185,500 $ 7.54 152,500 $ 6.91 67,000 $ 2.97
======= ========= ======= ========= ====== =========
Exercisable at end of period 34,000 $ 1.00 - $ - - $ -
Weighted average fair value
of options granted during period $ 1.79 $ 1.71 $ 3.88
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted average
assumptions used for grants in 1999, 1998 and 1997: no dividend yield;
expected volatility of 30%, 30% and 60%, respectively; risk-free interest
rates of 5.9%, 5.4% and 6.3%, respectively; and expected lives of 5.3
years, 5.3 years and 3 years, respectively. The expense related to these
grants is reflected in periods up to three years, in which services must be
completed, for these options to become exercisable. Unearned compensation
reflects the portion of the grant that has not yet been charged to
operations.
Warrants
The Company has an obligation to issue warrants in connection with the
underwriting of the Series II Class B Stock sales. Ten warrants entitle the
holder to purchase one share of common stock at an exercise price of $1.00
per warrant. The fair market value of the warrants was recorded as part of
the fees for the preferred stock offering.
72
<PAGE>
RETRACTABLE TECHNOLOGIES, INC.
A Development Stage Enterprise
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
11. SUBSEQUENT EVENTS
On May 4, 2000, the Company entered into four agreements with Abbott
Laboratories ("Abbott"): 1) National Marketing and Distribution Agreement;
2) Registration Rights Agreement; 3) Credit Agreement and 4) Security
Agreement. The National Marketing and Distribution Agreement provides that
Abbott will purchase and market the Company's Vanish Point(R) automated
retraction syringes and blood collection devices to its U.S. acute care
hospital customers. The agreement is for a five year term. The agreement
also calls for the establishment of a new product team comprised by key
personnel from both companies designed to concentrate on development of new
safety products that incorporate the Company's patented, proprietary
technology.
The Credit Agreement provides that Abbott will extend to the Company a
credit line in the amount of $5 million. Disbursement amounts shall be in
multiples of $1 million. Interest accrues at a rate of prime rate plus 1%
and is payable quarterly beginning June 30, 2001. The Credit Agreement also
provides that Abbott may, at its option, convert the note balance into
common stock at a specified conversion price. The loan matures on June 30,
2005. In connection with the Credit Agreement, the Security Agreement
grants Abbott a continuing security interest in certain of the Company's
assets.
The Registration Rights Agreement gives Abbott certain registration rights
if the conversion privilege in the Credit Agreement is exercised.
On April 7, 2000, the Company entered into a manufacturing agreement with
an unrelated party to outsource the assembly of its 5cc and 10cc syringes.
The agreement calls for the Company to purchase and consign machinery and
equipment to the unrelated party and provide training for its employees.
The Company is obligated under the agreement to purchase a minimum volume
of product from the unrelated party at mutually agreed upon prices. The
volume and price for the initial contract year ended April 30, 2001
resulted in a purchase commitment of $100,000 for the Company.
Effective June 1, 2000, the Company entered into a Consulting Agreement
("Agreement") with a Board member, formerly Executive Vice President of
Sales and Marketing, who is also related to an employee of the Company. The
Agreement is for a one-year term, renewable with consent of both parties,
whereby the Board member has agreed to establish contacts with major
European entities, approved by the Company, to develop marketing and
distribution channels as well as licensing agreements. The Agreement calls
for an annual payment of $200,000, payable in equal monthly installments
and an expense allowance of up to $5,000 for expenses incurred on behalf of
the Company. In the event a licensee contacted by the Board member is
signed with the Company, the Board member will receive 5% of licensing fees
collected by the Company.
See footnotes 6 and 8 for subsequent event activity related to debt and
equity, respectively.
73
<PAGE>
RETRACTABLE TECHNOLOGIES, INC.
CONDENSED FINANCIAL STATEMENTS
(Unaudited)
QUARTER ENDED June 30, 2000
<PAGE>
RETRACTABLE TECHNOLOGIES, INC.
INDEX TO CONDENSED FINANCIAL STATEMENTS
--------------------------------------------------------------------------
(Unaudited)
Page
----
Condensed Financial Statements:
Condensed Balance Sheets 1
Condensed Statements of Operations 2
Condensed Statements of Cash Flows 3
Notes to Condensed Financial Statements 4-8
<PAGE>
RETRACTABLE TECHNOLOGIES, INC.
CONDENSED BALANCE SHEETS
-------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
December 31, June 30,
1999 2000
------------ ------------
(Unaudited)
ASSETS
Cash and cash equivalents $ 646,005 $ 6,812,253
Accounts receivable 599,424 956,546
Inventories 677,962 1,496,993
Other current assets 47,800 185,270
------------ ------------
Total current assets 1,971,191 9,451,062
Property, plant, and equipment, net $ 10,101,524 $ 10,757,378
Restricted cash 600,000 -
Intangible assets and deferred charges, net 536,014 553,284
------------ ------------
Total assets $ 13,208,729 $ 20,761,724
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable $ 844,165 $ 449,738
Current portion of long-term debt 463,329 963,433
Accrued compensation 118,038 169,394
Marketing fees payable 338,526 441,877
Other accrued liabilities 250,783 275,100
------------ ------------
Total current liabilities 2,014,841 2,299,542
------------ ------------
Long-term debt, net of current maturities 2,506,335 2,425,353
------------ ------------
Stockholders' equity
Preferred Stock $1 par value
Class A 5,000,000 5,000,000
Series I, Class B 1,000,000 1,000,000
Series II, Class B 1,000,000 1,000,000
Series III, Class B 1,160,200 1,160,445
Series IV, Class B 1,133,800
Common stock 1,000 1,000
Additional paid-in capital 23,564,235 33,762,940
Unearned compensation (185,635) (92,865)
Accumulated deficit (22,852,247) (26,928,491)
------------ ------------
Total stockholders' equity 8,687,553 16,036,829
------------ ------------
Total liabilities and stockholders' equity $ 13,208,729 $ 20,761,724
============ ============
</TABLE>
See accompanying notes to the condensed financial statements.
76
<PAGE>
RETRACTABLE TECHNOLOGIES, INC.
CONDENSED STATEMENTS OF OPERATIONS
---------------------------------------------------------------------------
(Unaudited)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Three Months Three Months Six Months Six Months
ended ended ended ended
June 30, June 30, June 30, June 30,
2000 1999 2000 1999
---------------- --------------- --------------- ---------------
Sales, net $ 1,528,488 $ 477,235 $ 2,356,307 $ 732,223
Cost of sales 1,691,891 313,651 2,336,592 519,907
---------------- --------------- --------------- ---------------
Gross margin (deficit) (163,403) 163,584 19,715 212,316
---------------- --------------- --------------- ---------------
Operating expenses:
Preproduction manufacturing 176,588 533,287 627,200 924,632
Sales and marketing 931,178 934,004 1,636,439 1,481,183
Research and development 124,347 149,618 260,600 427,206
General and administrative 936,635 670,893 1,604,150 1,442,045
---------------- --------------- --------------- ---------------
Total operating expenses 2,168,748 2,287,802 4,128,389 4,275,066
---------------- --------------- --------------- ---------------
Loss from operations (2,332,151) (2,124,218) (4,108,674) (4,062,750)
Interest income 59,786 39,233 75,328 70,467
Interest expense (22,149) (25,794) (42,896) (72,022)
---------------- --------------- --------------- ---------------
Net loss $ (2,294,514) $ (2,110,779) $ (4,076,242) $ (4,064,305)
================ =============== =============== ===============
</TABLE>
See accompanying notes to the condensed financial statements.
77
<PAGE>
RETRACTABLE TECHNOLOGIES, INC.
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------
(Unaudited)
Three Months Three Months Six Months Six Months
ended ended ended ended
June 30, June 30, June 30, June 30,
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Cash flows from operating activities
Net loss $ (2,294,514) $ (2,110,779) $ (4,076,242) $ (4,064,305)
Depreciation and amortization 251,662 233,236 499,027 451,791
Recognition of stock option compensation 30,348 102,839 92,770 189,793
Adjustments to reconcile net loss to net cash
provided by operating activities:
(Increase) decrease in inventories (242,158) 106,319 (819,031) 204,916
(Increase) decrease in accounts and note receivable (602,042) (196,219) (357,122) (290,056)
(Increase) decrease in other current assets (11,727) (156,782) (137,470) (183,004)
Increase (decrease) in accounts payable (87,818) (86,182) (394,427) (128,112)
Increase (decrease) in other accrued liabilities 197,110 63,948 179,024 178,568
------------ ------------ ------------ ------------
Net cash used by operating activities (2,759,139) (2,043,620) (5,013,471) (3,640,410)
------------ ------------ ------------ ------------
Cash flows from investing activities
Purchase of property, plant, and equipment (1,002,242) (730,629) (1,129,470) (1,290,478)
Acquisition of patents, trademarks, and licenses (3,920) (7,887) (42,683) (14,774)
Sale of restricted certificates of deposit - - 600,000 -
------------ ------------ ------------ ------------
Net cash used by investing activities (1,006,162) (738,516) (572,153) (1,305,252)
------------ ------------ ------------ ------------
Cash flows from financing activities
Borrowings under long-term debt and notes payable - - 2,079,851 24,718
Repayments of long-term debt and notes payable (165,183) (128,222) (1,660,729) (276,656)
Proceeds from issuance of preferred stock 9,717,750 4,410,695 11,332,750 7,411,181
------------ ------------ ------------ ------------
Net cash provided by financing activities 9,552,567 4,282,473 11,751,872 7,159,243
------------ ------------ ------------ ------------
Net increase in cash 5,787,266 1,500,337 6,166,248 2,213,581
Cash and cash equivalents at:
Beginning of period 1,024,987 2,341,107 646,005 1,627,863
------------ ------------ ------------ ------------
End of period $ 6,812,253 $ 3,841,444 $ 6,812,253 $ 3,841,444
============ ============ ============ ============
</TABLE>
See accompanying notes to the condensed financial statements.
78
<PAGE>
RETRACTABLE TECHNOLOGIES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
[Unaudited]
1. BUSINESS OF THE COMPANY, RECENT DEVELOPMENTS, AND BASIS OF PRESENTATION
Business
Retractable Technologies, Inc. (the "Company") was incorporated in Texas on
May 9, 1994, to design, develop, manufacture and market safety syringes and
other safety medical products for the healthcare profession. The Company began
operations in 1995. The Company's manufacturing and administrative facilities
are located in Little Elm, Texas. The Company's primary products are the
VanishPoint(R) syringe in the 3cc, 5cc and 10cc sizes and blood collection tube
holders. The Company has conducted preliminary clinical evaluations and worked
with national distributors to encourage healthcare facilities to transition from
the use of standard syringes to the VanishPoint(R) syringe. Preliminary
shipments, which commenced in February 1997, included syringes for hospital
product evaluations as well as for sale in clinics and other healthcare
settings.
Recent Developments
The Company has been considered a development stage enterprise for
financial reporting purposes as significant efforts have been devoted to
financial planning, raising capital, research and development, acquiring
equipment, training personnel, developing markets and starting up production.
Coincident with the agreement with Abbott Laboratories, effective May 4, 2000,
the Company completed its development stage.
On May 4, 2000, the Company entered into four agreements with Abbott
Laboratories ("Abbott"): 1) National Marketing and Distribution Agreement; 2)
Registration Rights Agreement; 3) Credit Agreement and 4) Security Agreement.
The National Marketing and Distribution Agreement provides that Abbott will
purchase and market the Company's VanishPoint(R) automated retraction syringes
and blood collection devices to its U.S. acute care hospital customers. The
agreement is for a five-year term. The agreement also calls for the
establishment of a new product team comprised by key personnel from
both companies designed to concentrate on development of new safety products
that incorporate the Company's patented, proprietary technology.
The Credit Agreement provides that Abbott will extend to the Company a
credit line in the amount of $5 million. Disbursement amounts shall be in
multiples of $1 million. Interest accrues at a rate of prime rate plus 1% and is
payable quarterly beginning June 30, 2001. The Credit Agreement also provides
that Abbott may, at its option, convert the note balance into common stock at a
specified conversion price. The loan matures on June 30, 2005. In connection
with the Credit Agreement, the Security Agreement grants Abbott a continuing
security interest in certain of the Company's assets.
The Registration Rights Agreement gives Abbott certain registration rights
if the conversion privilege in the Credit Agreement is exercised.
On April 7, 2000, the Company entered into a manufacturing agreement with
an unrelated party to outsource the assembly of its 5cc and 10cc syringes. The
agreement calls for the Company to purchase and consign machinery and equipment
to the unrelated party and provide training for its employees. The Company is
obligated under the agreement to purchase a minimum volume of product from the
unrelated party at
79
<PAGE>
RETRACTABLE TECHNOLOGIES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
[Unaudited]
mutually agreed upon prices. The volume and price for the initial contract year
ended April 30, 2001, resulted in a purchase commitment of $100,000 for the
Company.
Effective June 1, 2000, the Company entered into a Consulting Agreement
("Agreement") with a Board member and former Executive Vice President of
Sales and Marketing, who is also related to an employee of the Company. The
Agreement is for a one-year term, renewable with consent of both parties,
whereby the Board member has agreed to establish contacts with major European
entities, approved by the Company, to develop marketing and distribution
channels as well as licensing agreements. The Agreement calls for an annual
payment of $200,000 payable in equal monthly installments and an expense
allowance of up to $5,000 per month for expenses incurred on behalf of the
Company.
On June 23, 2000, the Company filed a Form 10-SB with the Securities and
Exchange Commission. The filing should be effective no later than 60 days from
the date of the filing, at which time RTI will become a public reporting entity.
Basis of Presentation
The accompanying condensed financial statements are unaudited and, in the
opinion of management, reflect all adjustments that are necessary for a fair
presentation of the financial position and results of operations for the periods
presented. All of such adjustments are of a normal and recurring nature. The
results of operations for the periods presented are not necessarily indicative
of the results to be expected for the entire year. The condensed financial
statements should be read in conjunction with the financial statement
disclosures contained in the Company's audited financial statements for the year
ended December 31, 1999.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Accounting Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ significantly from those
estimates.
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include
unrestricted cash and investments with original maturities of three months or
less.
Inventories
Inventories are valued at the lower of cost or market, with cost being
determined using a standard cost method, which approximates average cost.
Provision is made for any excess or obsolete inventories.
80
<PAGE>
RETRACTABLE TECHNOLOGIES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
[Unaudited]
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Expenditures for
maintenance and repairs are charged to operations as incurred. Cost includes
major expenditures for improvements, and replacements which extend useful lives
or increase capacity and interest cost associated with significant capital
additions. For the quarters ended June 30, 2000 and 1999, the Company
capitalized interest of $64,320 and $39,746, respectively. Gains or losses from
property disposals are included in income.
Depreciation and amortization is calculated using the straight-line method
over the following useful lives:
Production equipment 7 to 10 years
Office furniture and equipment 3 to 10 years
Building 39 years
Building improvements 15 years
Automobiles 7 years
Long-lived Assets
When events or changes in circumstances indicate that the carrying amount
of long-lived assets may not be recoverable, the Company will review the net
realizable value of the long-lived assets through an assessment of the estimated
future cash flows related to such assets. In the event that assets are found to
be carried at amounts which are in excess of estimated gross future cash flows,
the assets will be adjusted for impairment to a level commensurate with a
discounted cash flow analysis of the underlying assets.
Intangible Assets and Deferred Charges
Intangible assets are stated at cost and consist primarily of patents, a
license agreement granting exclusive rights to use patented technology, and
trademarks which are amortized using the straight-line method over 17 years.
Other intangible assets consist of deferred charges for loan origination fees,
which are amortized over the life of the debt.
Financial Instruments
The fair market value of financial instruments is determined by reference
to various market data and other valuation techniques as appropriate. The
Company believes that the fair value of financial instruments approximate their
recorded values.
Concentrations of Credit Risk
The Company's financial instruments exposed to concentrations of credit
risk consist primarily of cash, cash equivalents and accounts receivable. Cash
balances, which may exceed the federally insured limits, are maintained in
financial institutions; however, management believes the institutions are of
high credit quality. The majority of accounts receivable are due from companies
which are well-established entities. As a consequence, management considers any
exposure from concentrations of credit risks to be limited.
81
<PAGE>
RETRACTABLE TECHNOLOGIES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
[Unaudited]
Revenue Recognition
Revenue is recognized for sales to distributors when title and risk of
ownership passes to the distributor, generally upon shipment. Revenue is
recorded on the basis of sales price to distributors. Revenues on sales to
distributors for federal or GPO contracts are recorded net of contractual
pricing allowances to those end customers. Revenue for shipments directly to end
users is recognized when title and risk of ownership passes from the Company.
Income Taxes
The Company provides for deferred income taxes in accordance with Statement
of Financial Accounting Standard No. 109, "Accounting for Income Taxes" ("SFAS
109"). SFAS 109 requires an asset and liability approach for financial
accounting and reporting for income taxes based on the tax effects of
differences between the financial statement and tax bases of assets and
liabilities, based on enacted rates expected to be in effect when such basis
differences reverse in future periods. Deferred tax assets are periodically
reviewed for reliability. Valuation allowances are recorded when realizability
of deferred tax assets is not likely.
Research and Development Costs
Research and development costs are expensed as incurred.
Stock-Based Compensation
The Company has adopted the disclosure only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS 123"),which establishes accounting and reporting standards
for stock-based employee compensation plans. As permitted by SFAS 123, the
Company has elected not to adopt the fair value based method of accounting for
stock-based employees compensation and will account for such arrangements under
Accounting Principles Board Opinion No. 25. Accordingly, compensation cost for
stock options issued to directors, officers, and employees is measured as the
excess, if any, of the fair market value of the Company's stock at the date of
grant over the amount the director, officer or employee must pay to acquire the
stock. Expense is recognized ratably from the date of grant over the vesting
period of the option. Unearned compensation reflected in the Stockholder's
Equity section of the balance sheet is the portion of such compensation that has
not been charged to operations.
3. LONG TERM DEBT
On February 18, 2000, the Company obtained two new loans from 1st
International Bank totaling $2,000,000. Land, building and improvements secured
$1,500,000, and the remaining $500,000 is secured by accounts receivable. The
proceeds, along with a release of $400,000 of restricted cash by Western Bank
subsequent to December 31, 1999, were used to pay off indebtedness to Western
Bank. Remaining proceeds provided funds for equipment and operating needs. The
building loan matures on February 18, 2005, and the note secured by accounts
receivable matures February 18, 2001.
82
<PAGE>
RETRACTABLE TECHNOLOGIES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
[Unaudited]
4. STOCKHOLDERS EQUITY
On January 11, 2000, the Company issued a Private Placement Memorandum
offering up to 1,300,000 shares of its Series IV Class B Convertible Preferred
Stock ("Series IV, Class B Stock") at $10 per share.
As of May 22, 2000, subscriptions for 1,133,800 shares of the Series IV
Class B had been received.
Series IV Class B stock ranks senior to the Company's common stock with
respect to dividends and upon liquidation, dissolution or winding up, but
secondary to the Company's Class A Stock, and Series I Class B, Series II Class
B, and Series III Class B. Dividends of $1.00 per share are payable quarterly,
if declared by the board of directors.
Holders of Series IV Class B Stock generally have no voting rights. Series
IV Class B Stock is redeemable after three years from the date of issuance at
the option of the Company at a price of $11.00 per share plus all accrued and
unpaid dividends. Each share of Series IV Class B Stock may, at the option
of the stockholder any time subsequent to three years from date of issuance, be
converted into common stock at a conversion price of $10 per share, or in the
event the Company files an initial registration statement under the Securities
Act of 1933.
In the event of voluntary or involuntary liquidation, dissolution or
winding up of the Company, holders of Series IV Class B Stock then outstanding
are entitled to receive liquidating distributions of $11.00 per share, plus
accrued and unpaid dividends.
5. SUBSEQUENT EVENTS
On July 26, 2000 the Board of Directors declared dividends for the Class A
Convertible Preferred shareholders. On July 27, 2000, dividends were paid
through June 30, 2000 in the amount of $2,818,542.
On August 8, 2000, the Company borrowed $3,000,000 under its Credit
Agreement with Abbott.
83
<PAGE>
PART III - FORM 10SB-A
<TABLE>
<CAPTION>
ITEM 1. INDEX TO EXHIBITS
Exhibit No. Description
----------- -----------
<S> <C>
2.1* Second Amended and Restated Articles of Incorporation of RTI
filed August 14, 2000
2.2* Amended and Restated Bylaws of RTI dated as of the 11th day of
August 2000
3.1 Sample Common Stock certificate
3.2 See 2.1 - Exhibit A to Second Amended and Restated Articles of
Incorporation of RTI filed August 14, 2000 (Certificate of
Designation, Preferences, Rights and Limitations of Series A
Convertible Preferred Stock of RTI)
3.3 Sample Series A Convertible Preferred Stock Certificate
3.4 See 2.1 - See Exhibit B to Second Amended and Restated Articles
of Incorporation of RTI filed August 14, 2000 (Certificate of
Designation, Preferences, Rights, and Limitations of Class B
Convertible Preferred Stock of RTI)
3.5 Sample Series I Class B Convertible Preferred Stock Certificate
3.6 See 2.1 - Exhibit C to Second Amended and Restated Articles of
Incorporation of RTI filed August 14, 2000 (Certificate of
Designation, Preferences, Rights and Limitations of the Series II
Class B Convertible Preferred Stock of RTI)
3.7 Sample Series II Class B Convertible Preferred Stock Certificate
3.8 See 2.1 - Exhibit D to Second Amended and Restated Articles of
Incorporation of RTI filed August 14, 2000 (Certificate of
Designation, Preferences, Rights and Limitations of the Series
III Class B Convertible Preferred Stock of RTI)
3.9 Sample Series III Class B Convertible Preferred Stock Certificate
3.10 See 2.1 - Exhibit E to Second Amended and Restated Articles of
Incorporation of RTI filed August 14, 2000 (Certificate of
Designation, Preferences, Rights and Limitations of the Series IV
Class B Convertible Preferred Stock of RTI)
3.11 Sample Series IV Class B Convertible Preferred Stock Certificate
3.12 RTI's 1999 Stock Option Plan
3.13 1996 Incentive Stock Option Plan of RTI
3.14 1996 Stock Option Plan for Directors and Other Individuals
3.15 See 6.1 - National Marketing and Distribution Agreement between
RTI and Abbott Laboratories dated as of May 4, 2000 and
Registration Rights Agreement between RTI and Abbott Laboratories
dated as of May 4, 2000
3.16 Form of Southwest Merchant Group Warrant to Purchase 7,500 shares
of Series IV Class B Preferred Stock issued
3.17 Selling Agreement between RTI and Northstar Securities
Corporation dated March 1, 2000
3.18 Selling Agreement between RTI and Asset Allocations Securities
Corp. dated March 9, 2000
</TABLE>
84
<PAGE>
<TABLE>
<S> <C>
6.1 National Marketing and Distribution Agreement between RTI and
Abbott Laboratories dated as of May 4, 2000 with exhibits
6.2 Contract Manufacturing Agreement Between RTI and Nypro Precision
Assemblies, Inc. dated as of April 7, 2000
6.3 Sample United States Distribution Agreement
6.4 Sample Foreign Distribution Agreement
6.5* Amended Consulting Agreement between RTI and Lillian E. Salerno
dba/MediTrade International dated August 23, 2000
6.6 Employment Agreement between RTI and Thomas J. Shaw dated as of
September 28, 1999
6.7 Technology License Agreement between Thomas J. Shaw and RTI dated
the 23rd day of June 1995
6.8 Consulting Agreement by and between RTI and International Export
and Consulting dated March 15, 2000
12.1* Consent of Independent Accountants dated October 24, 2000
12.2* Audit Committee Charter
27* Financial Data Schedule
</TABLE>
Exhibits marked above are included in this filing. All other exhibits are
incorporated by reference to the filing of the Form 10SB on June 23, 2000.
ITEM 2. DESCRIPTION OF EXHIBITS
Exhibits identified in the Index above are bound and included herewith.
85
<PAGE>
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934,
Retractable Technologies, Inc. caused this registration statement to be signed
on its behalf by the undersigned thereunto duly authorized.
Date: October 25, 2000 RETRACTABLE TECHNOLOGIES, INC.
(Registrant)
BY: /s/ Thomas J. Shaw
---------------------------------------
THOMAS J. SHAW
CHAIRMAN, PRESIDENT, AND CHIEF
EXECUTIVE OFFICER
86
