-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QgZdGJH4AN6VJA2xYuxv2kjeHZDrwpko322+l/rV7KMAIb+aq0fgG8YY7DI/3l8Q LPxvlEwHIcUbq0MtcOmQQw== 0000950124-01-001880.txt : 20010409 0000950124-01-001880.hdr.sgml : 20010409 ACCESSION NUMBER: 0000950124-01-001880 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010402 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ROCKWELL MEDICAL TECHNOLOGIES INC CENTRAL INDEX KEY: 0001041024 STANDARD INDUSTRIAL CLASSIFICATION: ELECTROMEDICAL & ELECTROTHERAPEUTIC APPARATUS [3845] IRS NUMBER: 383317208 STATE OF INCORPORATION: MI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10KSB SEC ACT: SEC FILE NUMBER: 000-23661 FILM NUMBER: 1588798 BUSINESS ADDRESS: STREET 1: 28025 OAKLAND OAKS DR CITY: WIXOM STATE: MI ZIP: 48393 BUSINESS PHONE: 2484493353 MAIL ADDRESS: STREET 1: 28025 OAKLAND OAKES DR CITY: WIXOM STATE: MI ZIP: 48393 10KSB 1 k61245e10ksb.txt FORM 10-KSB 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------------------ FORM 10-KSB (Mark One) [X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000 OR [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934. FOR THE TRANSITION PERIOD FROM TO COMMISSION FILE NUMBER: 000-23-661
------------------------ ROCKWELL MEDICAL TECHNOLOGIES, INC. (Name of Small Business Issuer in Its Charter) MICHIGAN 38-3317208 (State or Other Jurisdiction of (I.R.S. Employer Identification No.) Incorporation or Organization) 28025 OAKLAND OAKS DRIVE WIXOM, MICHIGAN 48393 (Address of Principal (Zip Code) Executive offices)
(248) 449-3353 ------------------------ (Issuer's Telephone Number, including Area Code) Securities registered pursuant to Section 12(b) of the Exchange Act: NONE Securities registered pursuant to Section 12(g) of the Exchange Act: COMMON SHARES, NO PAR VALUE (TITLE OF CLASS) COMMON SHARE PURCHASE WARRANTS (TITLE OF CLASS) ------------------------ Check whether the issuer: (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-K is not contained in this form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [ ] State issuer's revenues for its most recent fiscal year: $7,457,001 State the aggregate market value of the voting and non voting common equity held by non-affiliates: $3,779,153 as of March 20, 2001. Indicate the number of shares outstanding of each of the issuer's classes of common equity as of the latest practicable date: 5,256,948 Common Shares outstanding and 3,625,000 Common Share Purchase Warrants outstanding as of March 20, 2001. Documents incorporated by reference: Portions of the Registrant's definitive Proxy Statement pertaining to the 2000 Annual Meeting of Shareholders (the "Proxy Statement") filed pursuant to Regulation 14A are herein incorporated by reference. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 PART I ITEM 1. DESCRIPTION OF BUSINESS. GENERAL Rockwell Medical Technologies, Inc. (the "Company") is a Michigan corporation, incorporated on October 25, 1996. From October 25, 1996 through February 18, 1997 the Company had no operations and incurred only legal and consulting expenses. On February 19, 1997, the Company acquired substantially all of the assets of Rockwell Medical Supplies, L.L.C. and of Rockwell Transportation, L.L.C. (collectively, the "Predecessor Company") used in connection with the business of manufacturing hemodialysis concentrates and dialysis kits and distributing and delivering these and other products to hemodialysis clinics. The Predecessor Company began operations in January 1996. Rockwell Medical Technologies, Inc. manufactures hemodialysis concentrates and dialysis kits, and sells, distributes and delivers such concentrates and dialysis kits, as well as other ancillary hemodialysis products, to hemodialysis providers in the United States. Hemodialysis is a process which is able to duplicate kidney function in patients whose kidneys have failed to function properly. Without properly functioning kidneys, the patient's body cannot rid itself of excess water and waste nor regulate the amount of electrolytes in the patient's blood. Long-term dialysis treatments are essential for these patients' survival. INDUSTRY BACKGROUND The Company provides products used in the treatment of patients with end-stage renal disease ("ESRD"). In 2001 there are an estimated 360,000 ESRD patients in the United States, whose permanent kidney failure requires long-term dialysis for survival. According to the United States Department of Health and Human Services ("DHHS"), the ESRD patient population has increased, on average, 7.9% per year for the five years preceding 1998. Incidence of kidney failure is increasing as a by-product of the aging population, an increasing occurrence of diabetes and hypertension, and increased use of prescription drugs. ESRD patients are essentially treated as chronic patients, with repeated dialysis treatments replacing their nonfunctioning kidneys. Most patients undergoing hemodialysis treatments generally receive three treatments per week or 156 treatments per year, although the amount of weekly treatments may vary. Hemodialysis patients generally receive their treatments at hospitals or independent hemodialysis clinics. A hemodialysis provider, such as a hospital or a freestanding clinic, uses a dialysis station to treat patients. A dialysis station contains a dialysis machine that takes a concentrate solution and certain chemical powders, such as the Company's solutions and powders, and accurately dilutes them with purified water. The resulting solution, known as dialysate, is then pumped through a device known as a dialyzer (artificial kidney), while at the same time the patient's blood is pumped through a membrane within the dialyzer. Excess water and chemicals from the patient's blood pass through the membrane and are carried away in the dialysate while certain chemicals in the dialysate penetrate the membrane and enter the patient's blood to maintain proper chemical levels in the body. Dialysate generally contains dextrose, sodium, calcium, potassium, magnesium, chloride and acetic acid. The patient's physician chooses the formula required for each patient based on each particular patient's needs, although most patients receive one of eight common formulations. In addition to using concentrate solutions and chemical powders (which must be replaced for each use for each patient) a dialysis station requires various other ancillary products such as on-off kits, sterile subclavian dressing change trays, arterial and venous blood tubing lines, fistula needles, intravenous administration sets, transducer protectors, dialyzers and various other ancillary products, many of which the Company sells. INDUSTRY TRENDS The dialysis industry has experienced steady patient population growth based on statistics complied by the DHHS, with the patient population increasing between 7-11% each year over the last ten years. ESRD is an irreversible deterioration of kidney function. Population segments with the highest incidence of ESRD are also the fastest growing within the U.S. population including the elderly, Hispanic and African-American 1 3 population segments. More than 60% of new ESRD cases are attributed to either diabetes or hypertension, while glomerulonephritis is the primary factor behind nearly 11% of treated cases. Hemodialysis providers are generally either independent clinics or hospitals. According to the DHHS, since 1973 the total number of hemodialysis providers in the United States has more than quintupled from 606 in 1973 to over 3,586 in December 1998. Independent providers comprised 2,723 of such providers, hospitals comprised 628 of such providers and kidney transplant centers comprised 235 of such providers at the end of 1998 according to the DHHS. The Company currently supplies hemodialysis clinics in over 27 states across the United States. The number of patients receiving hemodialysis has also grown substantially in recent years. According to the last published statistics by the DHHS, in 1997 more than 228,000 patients were treated in Medicare-approved renal facilities as compared to 68,390 patients in 1985. According to the DHHS, from 1985 to 1998, the number of hemodialysis stations, which are areas equipped to provide adequate and safe dialysis therapy, grew from 17,845 stations to 53,983 stations. The number of Medicare-approved dialysis machines increased by 3,130 stations or 6.2% between 1997 and 1998 based on the latest published statistics by the DHHS. STRATEGY The Company's long term objectives are to increase its market share, expand its product line offering, extend its geographical coverage and improve its profitability by implementing the following strategies: - Acting as a Single Source Supplier. The Company has positioned itself as an independent "one-stop-shop" to its customers for the concentrates, chemicals and supplies necessary to support a hemodialysis provider's operation. Some the Company's competitors for concentrates do not offer a full line of hemodialysis products requiring customers to do business with a number of suppliers in order to purchase necessary supplies. Rockwell offers a full line of hemodialysis supplies. - Increasing Revenue Through Sales of New Products. The Company introduced two new product lines in 1999; Dri-Sate Dry Acid Concentrate and SteriLyte(TM) Liquid Bicarbonate that it believes are superior to competitors' product offerings. The Company successfully introduced the Dri-Sate product line in 1999 and it has grown to represent a significant share of the Company's Acid Concentrate sales in its first two years. The Company anticipates Dri-Sate will continue to capture market share and will allow the Company to achieve its gross margin objectives. The Company also anticipates that its Sterilyte(TM) Liquid Bicarbonate product line will gain market share in the acute care market segment due to its higher quality and longer shelf life. - Increasing Revenue Through Ancillary Product Line Expansion. The Company believes that the market potential for ancillary products and supplies used by hemodialysis providers is equivalent to or greater than the market for dialysis concentrates. The Company's strategy is to offer cost effective ancillary products that include ancillary products such as specialized kits, fistula needles, gloves, chemicals, sterile dressings and blood lines. Many of these ancillary items are purchased based on price and are generally acquired from various suppliers. The Company believes that as it continues to gain market share that it will increasingly be able to procure these ancillary items on a cost effective basis and will provide its customers with both convenience from a single supply source and at a highly competitive price level. - Offering a Higher Level of Delivery/Customer Service. By using its own delivery vehicles and drivers, the Company believes that it can offer a higher level of customer service to hemodialysis providers than if it relied primarily on the use of common carriers to distribute its products. The Company's drivers perform services for customers that are generally not available from common carriers, such as stock rotation, non-loading-dock delivery and drum pump-offs. A drum pump-off requires the driver to pump hemodialysis concentrates from a 55 gallon drum into larger holding tanks within the hemodialysis clinic. The Company's main competitors generally use common carriers for delivery of their products. The Company believes it offers a higher level of distribution service to its customers through the use of its own delivery vehicles and drivers. 2 4 - Expanding Market Share in Target Regions. Because of the costs associated with transporting and delivering hemodialysis concentrates, the Company believes that it has a competitive cost advantage with certain clinics that are located within a reasonable proximity to the Company's manufacturing facility over other manufacturers outside of such proximity. The Company also believes that it can add additional manufacturing sites in certain geographic regions that will provide it with a competitive cost advantage and with superior customer service levels due to their proximity to the customer. The Company intends to leverage its existing customer relationships to expand into geographic areas where it currently has a minor or negligible presence. PRODUCTS The Company manufactures hemodialysis concentrates and sells, distributes and delivers such products, as well as a full line of ancillary hemodialysis products to hemodialysis providers and distributors located in more than 27 states as well as several foreign countries. Hemodialysis concentrates are comprised of two primary product types, which are generally described as acid dialysate and bicarbonate. "Acidified Dialysate Concentrate" Acid dialysate generally contains sodium chloride, dextrose and electrolyte additives such as magnesium, potassium, and calcium. Acid products are manufactured in three basic series to reflect the dilution ratios used in dialysis machines which are manufactured by various companies. The Company supplies all three product series and currently manufactures approximately 60 different formulations. The Company supplies liquid acid concentrate in both 55 gallon drums and in cases with 4 -- 1 gallon containers. "Dri-Sate Dry Acid Concentrate" In June of 1998, the Company obtained 510(k) clearance from the FDA to manufacture and market Dri-Sate Dry Acid Concentrate. This product line enhanced the Company's previous product liquid acid product offering. Since its introduction in 1999, the Company's dry acid product line has grown to represent over 45% of acid product sales. The Company's Dri-Sate Dry Acid Concentrate allows a clinic to mix its acid concentrate on-site. The clinical technician, using a specially designed mixer, adds pre-measured packets of the necessary ingredients to 50 or 100 gallons of purified water (AMII standard). Once mixed, the product is equivalent to the acid provided to the clinic in liquid form. By using Dri-Sate Dry Acid Concentrate numerous advantages are realized by the clinics including lower cost per treatment, increased storage space, reduced number of deliveries and more flexibility in scheduling. The Company believes it will attain increased profit margins due to the reduction in freight cost associated with shipping the dry product as compared to the liquid form. The Company also believes it will generate increased back-haul revenue due to the elimination of returning empty drums to the Company's facility, thus allowing its trucks to obtain increased back-haul revenue from third parties. "Bicarbonate" Bicarbonate is generally sold in powder form and each clinic generally mixes bicarbonate on site as required. The company offers approximately 20 bicarbonate products covering all three series of manufacturers' bicarbonate dilution ratios. "SteriLyte(TM) Liquid Bicarbonate" In June of 1997, the Company obtained 510(k) clearance from the FDA to manufacture and market SteriLyte(TM) Liquid Bicarbonate. The Company's SteriLyte(TM) Liquid Bicarbonate, which is used primarily in acute care settings, is currently the only liquid bicarbonate on the market manufactured utilizing a process called gamma irradiation. Historically, other manufacturers have been required to recall product due to excess levels of molds and bacteria in their product. Gamma irradiation is a process that minimizes the presence of mold and bacteria in the product thereby providing a higher quality product to the customer. The Company's 3 5 SteriLyte(TM) Liquid Bicarbonate, by utilizing gamma irradiation, offers the dialysis community a high-quality product and provides the clinic a safe and uninterrupted supply source. "Ancillary Products" The Company offers a wide range of ancillary products including fistula needles, gloves, kits, dressings, cleaning agents, filtration salts and other supplies used by hemodialysis providers. DISTRIBUTION AND DELIVERY OPERATIONS The majority of the distribution of the Company's products is provided by the Company's subsidiary, Rockwell Transportation, Inc. Rockwell Transportation, Inc. leases and operates a fleet of nine trucks which are used to deliver products to the Company's customers. A minor portion of the Company's deliveries, primarily to medical products distributors, is provided by common carriers contracted by the Company on a competitive rate basis. Rockwell Transportation, Inc. currently employs nine drivers to operate its truck fleet and a fleet operations manager to manage its distribution operations. The Company's liquid acid concentrates are generally packaged in 55-gallon re-usable drums weighing approximately 550 pounds each. The Company performs services for customers that are generally not available from common carriers, such as stock rotation, non-loading-dock delivery and drum pump-offs. The Company's primary competitors generally use common carriers and/or do not perform the same services for delivery of their products. The Company believes it offers a higher level of service to its customers through the use of its own delivery vehicles and drivers. As the Company continues to grow and migrate its product mix to its Dri-Sate Dry Acid Concentrate the Company anticipates that it will achieve distribution efficiencies from its truck fleet as a result of reduced frequency of deliveries, increased end user sales volume per truckload and increased backhaul revenue. The Company's trucking operations are and will continue to be subject to various state and federal regulations, which if changed or modified, could adversely affect the Company's business, financial condition and results of operations. SALES AND MARKETING The Company primarily sells its products directly to domestic hemodialysis providers through five independent sales representative companies and three direct salespeople employed by the Company. In addition, the President and Chief Executive Officer of the Company leads and directs the sales efforts to the Company's major accounts. The Company also utilizes several independent distributors in the United States. Certain international customers are sold through sales agents. The Company's sales and marketing initiatives are directed at purchasing decision makers at both large for profit national and regional hemodialysis chains and toward independent hemodialysis service providers. The Company's marketing efforts include advertising in trade publications, distribution of product literature and attendance at industry trade shows and conferences. Targeted audiences of the Company's sales and marketing efforts include clinic administrators, purchasing professionals, nurses, hospital administrators and nephrologists. COMPETITION The Company competes against larger more established competitors with substantially greater financial, technical, manufacturing, marketing, research and development and management resources than those of the Company. The Company competes against three major competitors, of which its two largest competitors are primarily in the business of operating hemodialysis clinics. The two largest providers of hemodialysis concentrates are Fresenius Medical Care, Inc. ("Fresenius") and Gambro Healthcare, Inc. ("Gambro") who the Company believes also have the first and third largest ESRD patient base in the United States. These companies produce and sell a more comprehensive line of dialysis equipment, supplies and services. 4 6 Fresenius treats an estimated 75,000 dialysis patients in the United States and operates an estimated 1,000 clinics. It also has a renal products business that manufactures a broad array of equipment including dialysis machines, dialyzers (artificial kidneys), concentrates and other supplies used in hemodialysis. In addition to its captive customer base in its own clinics, Fresenius also serves other clinic chains and independent clinics with its broad array of products. The Company believes that Fresenius sources its concentrate manufacturing through its own manufacturing facilities. Fresenius operates an extensive warehouse network in the United States serving its captive customer base and other independent clinics. Gambro treats an estimated 38,000 dialysis patients in the United States and operates approximately 500 clinics, based upon its public filings. Gambro manufactures and sells hemodialysis machines and other ancillary supplies. Gambro sells its concentrate solutions to both its own captive clinic base and to other clinic chains and independent clinics. The Company believes that Gambro operates one manufacturing facility in Central Florida and additionally sources concentrate through a private label manufacturer in the eastern United States. Gambro also imports products from its European manufacturing facilities. The Company believes that Gambro engages a third party trucking company to deliver its products throughout the United States directly from the point of manufacture and regional public and private warehouse locations. Gambro serves the independent clinic market with liquid acid and powder bicarbonate concentrate products used by its brand of dialysis machines as well as those machines manufactured by its competitors in that segment. Gambro does not offer a liquid bicarbonate product line nor does it offer a powder acidified concentrate product line. The Company also competes against the Renal Systems division of Minntech Corporation ("Minntech"). In its Renal Systems division, Minntech primarily sell concentrates and Renalin, a specialty reuse agent for dialyzers and does not offer the full breadth of products offered by the Company. The Company believes that Minntech has one domestic manufacturing facility located in Minnesota and a distribution center in Camp Hill, Pennsylvania. The Company believes that Minntech largely uses its own vehicles for delivery of product to customers. QUALITY ASSURANCE AND CONTROL The U.S. Food and Drug Administration ("FDA") expanded the regulatory requirements governing manufacturers of medical devices effective January 1, 2000. The Company has revised its operational manuals and quality system to conform with the new regulations. The FDA inspected the Company during 2000 and found the Company to be in substantial compliance with regulatory requirements. To assure quality and consistency of the Company's concentrates, the Company conducts specific analytical tests during the manufacturing process for each type of product that it manufactures. The Company's quality control laboratory conducts analytical tests to verify that the chemical properties of the mix comply with the specifications required by industry standards. Upon verification that a batch meets those specifications, the Company then packages those concentrates. The Company also tests packaged concentrates at the beginning and end of each production run to assure product consistency during the filling process. Each batch is assigned a lot number for tracking purposes and becomes available for shipment subsequent to verification that all product specifications have been met. The Company utilizes automated testing equipment in order to assure quality and consistency in the manufacture of its concentrates. The equipment allows the Company to analyze the materials used in the hemodialysis concentrate manufacturing process, to assay and adjust the in-process hemodialysis concentrate, and to assay and certify that the finished products are within the chemical and biological specifications required by industry regulations. The Company's testing equipment provides it with high degree of accuracy and efficiency in performing the necessary testing. GOVERNMENT REGULATION The testing, manufacture and sale of the Company's hemodialysis concentrates and the ancillary products distributed by the Company are subject to regulation by numerous governmental authorities, principally the United States Food and Drug Administration ("FDA") and corresponding state and foreign agencies. 5 7 Pursuant to the Federal Food, Drug and Cosmetic Act (the "FDA Act"), and the regulations promulgated thereunder, the FDA regulates the pre-clinical and clinical testing, manufacture, labeling, distribution and promotion of medical devices. Noncompliance with applicable requirements can result in, among other things, fines, injunctions, civil penalties, recall or seizure of products, total or partial suspension of production, failure of the government to grant pre-market clearance or pre-market approval for devices, withdrawal of marketing clearances or approvals and criminal prosecution. A medical device may be marketed in the United States only with prior authorization from the FDA unless it is subject to a specific exemption. Devices classified by the FDA as posing less risk than class III devices are categorized as class I (general controls) or class II (general and specific controls) and are eligible to seek "510(k) clearance." Such clearance generally is granted when submitted information establishes that a proposed device is "substantially equivalent" in intended use to a class I or II device already legally on the market or to a "pre-amendment" class III device (i.e., one that has been in commercial distribution since before May 28, 1976) for which the FDA has not called for pre-market approval ("PMA") applications. The FDA in recent years has been requiring a more rigorous demonstration of substantial equivalence than in the past, including requiring clinical trial data in some cases. For any devices that are cleared through the 510(k) process, modifications or enhancements that could significantly affect safety or effectiveness, or constitute a major change in the intended use of the device, will require new 510(k) submissions. The Company believes that it now usually takes from one to four months from the date of submission to obtain 510(k) clearance, but it can take substantially longer. The Company's hemodialysis concentrates, liquid bicarbonate and other ancillary products are categorized as class II devices. A device requiring prior marketing authorization that does not qualify for 510(k) clearance is categorized as class III, which is reserved for devices classified by FDA as posing the greatest risk (e.g., life-sustaining, life-supporting or implantable devices), or devices that are not substantially equivalent to a legally marketed class I or class II device. A class III device generally must receive approval of a PMA application, which requires proving the safety and effectiveness of the device to the FDA. The process of obtaining PMA approval is expensive and uncertain. The Company believes that is usually takes from one to three years after filing, but it can take longer. If human clinical trials of a device are required, whether for a 510(k) submission or a PMA application, and the device presents a "significant risk," the sponsor of the trial (usually the manufacturer or the distributor of the device) will have to file an investigational device exemption ("IDE") application prior to commencing human clinical trials. The IDE application must be supported by data, typically including the results of animal and laboratory testing. If the IDE application is approved by the FDA and one or more appropriate Institutional Review Boards ("IRBs"), human clinical trials may begin at a specific number of investigational sites with a specific number of patients, as approved by the FDA. If the device presents a "non-significant risk" to the patient, a sponsor may begin the clinical trial after obtaining approval for the study by one or more appropriate IRBs without the need for FDA approval. Any devices manufactured or distributed by the Company pursuant to FDA clearances or approvals are subject to pervasive and continuing regulation by the FDA and certain state agencies. Manufacturers of medical devices for marketing in the United States are required to adhere to applicable regulations setting forth detailed Good Manufacturing Practice ("GMP") requirements, which include testing, control and documentation requirements. Manufacturers and distributors must also comply with Medical Device Reporting ("MDR") requirements that a firm report to the FDA any incident in which its product may have caused or contributed to a death or serious injury, or in which its product malfunctioned and, if the malfunction were to recur, it would be likely to cause or contribute to a death or serious injury. Labeling and promotional activities are subject to scrutiny by the FDA and, in certain circumstances, by the Federal Trade Commission. Current FDA enforcement policy prohibits the marketing of approved medical devices for unapproved uses. The Company is subject to routine inspection by the FDA and certain state agencies for compliance with GMP requirements and other applicable Quality System regulations. The Company also is subject to numerous federal, state and local laws relating to such matters as safe working conditions, manufacturing 6 8 practices, environmental protection, fire hazard control, transportation and disposal of hazardous or potentially hazardous substances. The Company has 510(k) clearance from the FDA to market hemodialysis concentrates in both liquid and powder form. In addition, the Company has received 510(k) clearance for its Dri-Sate Dry Acid Concentrate Mixer. The Company's retention of such 510(k) clearances is also dependent upon its compliance with the FDA Act and related laws and regulations, including GMP regulations. There can be no assurance that the Company will maintain its 510(k) authority from the FDA to manufacture and distribute its products. Failure to do so could result in the need to cease manufacturing and/or distributing the Company's products, which would have a material adverse effect on the Company's business, financial condition and results of operations. If any of the Company's FDA clearances are denied or rescinded, sales of the Company's products in the United States would be prohibited during the period the Company does not have such clearances. TRADEMARKS & PATENTS The Company has several trademarks on its products and in its advertising of such products, and has applied for U.S. registration of such marks. The Company has applied for U.S. and international patents on its Dri-Sate Dry Acid Concentrate method and apparatus for preparing liquid dialysate. The Company has no other patents. SUPPLIERS The Company believes that the raw materials for the Company's hemodialysis concentrates, the components for the Company's hemodialysis kits and the ancillary hemodialysis products distributed by the Company are generally available from several potential suppliers. Principal suppliers include Morton Salt Company, Church & Dwight Co. Inc., and Ashland Inc. CUSTOMERS The Company operates in one market segment which involves the manufacture and distribution of hemodialysis concentrates, dialysis kits and ancillary products used in the dialysis process to hemodialysis clinics. For the year ended December 31, 2000, the Company had sales in excess of 10% of revenue with three customers representing 36% of total sales. For the year ended December 31, 1999, the Company had sales in excess of 10% of revenue with two customers representing approximately 25% of total sales. EMPLOYEES As of March 15, 2001, the Company had approximately 60 employees, of which three were salespeople, four were laboratory technicians, nine were truck drivers and ten were engaged in corporate management and administration. The remaining employees were hourly workers including clerical and plant employees. The Company's arrangements with its employees are not governed by any collective bargaining agreement. Employees are employed on an "at-will" basis with the exception of Mr. Robert L. Chioini, the Company's Chairman, President and Chief Executive Officer and certain other key managers. The employment agreement of Mr. Thomas E. Klema, the Company's Vice President, Chief Financial Officer and Secretary expired January 12, 2001 and he is currently in negotiation with the Company with respect to a new employment agreement. The Company intends to add personnel to staff a second manufacturing facility. In addition, if the Company's sales volumes increase, the Company expects to add additional production, distribution, and administrative resources. OTHER The Company does not engage in any significant research and development activity. The Company does not anticipate any significant cost or impact from compliance with environmental laws. 7 9 ITEM 2. DESCRIPTION OF PROPERTY. The Company occupies a 34,500 square foot facility located in Wixom, Michigan, which is comprised of manufacturing, warehouse, office and laboratory space. The Company is party to a lease (the "Lease") covering such facility that expired on December 6, 2000. The Company continues to rent the facility on a month to month basis at a rent cost of $29,656. In accordance with the assignment of a facility lease from the Predecessor Company, the landlord required a deposit in escrow. The escrow deposit was applied against lease payments of $59,313 in the year ended December 31, 2000 and $39,542 in the year ended December 31, 1999. The remaining escrow deposit of $79,082 is to be returned as a security deposit refundable at lease termination subject to certain conditions. The Company entered into a lease agreement in October 2000 to lease a new 51,000 square foot facility in Wixom, Michigan. The replacement facility lease is for a seven year term with occupancy of the new facility anticipated in the second quarter of 2001. The lease agreement requires a security deposit of $165,000 with $100,000 payable prior to occupancy. The Company anticipates that it will relocate its current manufacturing operation and administrative offices to the new facility in mid-2001. Base rent for the facility will be $31,786 per month. In addition, the Company will be responsible for all property taxes, insurance premiums and maintenance costs. On March 12, 2000 the Company entered into an agreement to lease a 51,000 square foot facility in Grapevine, Texas. The principal provisions under the five year lease term include base monthly rental payments of $17,521 and payment of common area maintenance costs by the lessee. The Company believes that these facilities are suitable and adequate to meet its production and distribution requirements. However, should the Company's business continue to expand, the Company may require additional capacity to meet its requirements. ITEM 3. LEGAL PROCEEDINGS. The Company filed a civil action on September 20, 2000 in the Circuit Court of Wayne County Michigan against Mr. Gary D. Lewis, individually and Wall Street Partners, Inc., a Michigan Corporation, jointly and severally. The Company has filed a breach of contract suit against Wall Street Partners, Inc. for breach of contract pertaining to consulting services provided the Company by Wall Street Partners, Inc. Also named in the suit was Mr. Gary D. Lewis, the principal of the consulting firm. Mr. Lewis is a former Chairman of the Company, a former director of the Company and is the beneficial owner of record of more than 5% of the Company's common shares. The Company has requested recovery of amounts paid to Wall Street Partners, Inc. and Mr. Lewis. A favorable outcome of this litigation may have a material impact on the Company. Wall Street Partners and Mr. Lewis have entered a counterclaim against the Company and its officers, alleging breach of fiduciary duty, aiding and abetting tortious conduct, indemnity from legal action and damages. On advice of counsel, the counterclaim does not appear to be of significant merit. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. Not Applicable. 8 10 PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS. The Company's Common Shares and Common Share Purchase Warrants are traded on the Nasdaq SmallCap Market under the symbols RMTI and RMTIW, respectively. The Common Shares and the Common Share Purchase Warrants began trading on the Nasdaq SmallCap Market on January 26, 1998 at an initial public offering price of $4.00 per Common Shares and $0.10 per Common Share Purchase Warrant. It is a requirement for continued listing of the Company's Common Shares and Common Share Purchase Warrants on the Nasdaq SmallCap Market that the Company either maintain a minimum of $2,000,000 in net tangible assets, have a $35,000,000 market capitalization or have earned $500,000 in net income for two of the three most recently completed fiscal years. The Company has relied on having net tangible assets in excess of $2,000,000 to meet this requirement. On December 1, 2000, Nasdaq notified the Company that it no longer meets this requirement. As of December 31, 2000, the Company had net tangible assets of $1,774,400. The Company is currently seeking additional equity funding in order to increase its net tangible assets. There can be no assurance that the Company will raise sufficient capital to meet the Nasdaq continued listing requirements or, even if it does raise such capital, that it will be able to avoid delisting. In addition, it is a requirement for continued listing on the Nasdaq SmallCap Market that the Company's Common Shares have a minimum bid price per share of at least $1. The minimum bid price per share of the Company's Common Shares has been below $1 for in excess of 30 consecutive days and is not currently in compliance with this requirement. While the Company is currently exploring alternatives to return to compliance with the Nasdaq listing requirements, including a reverse stock split, there can be no assurance that the Company will be successful in complying with the minimum bid price requirement or that the Company will be able to avoid delisting. If the Company's Common Shares and Common Share Purchase Warrants are delisted from the Nasdaq SmallCap Market, they would likely be quoted on the OTC Bulletin Board. Any delisting could cause the market price of the Common Shares and Common Share Purchase Warrants to decline and could make it much more difficult to buy or sell Common Shares or Common Share Purchase Warrants on the open market. The Prices below are the high and low bid prices as reported by Nasdaq in each quarter during 1999 and 2000. The below prices reflect inter-dealer prices, without retail mark-up, mark down or commission and may not represent actual transactions.
BID PRICE INFORMATION ---------------- QUARTER ENDED HIGH LOW ------------- ---- --- March 31,1999............................................... $3.625 $1.906 June 30, 1999............................................... 4.313 3.125 September 30, 1999.......................................... 4.750 2.625 December 31, 1999........................................... 4.063 1.938 March 31, 2000.............................................. 6.000 2.438 June 30, 2000............................................... 3.781 1.500 September 30, 2000.......................................... 2.219 1.000 December 31, 2000........................................... 1.563 .344
As of March 20, 2001, there were 33 record holders of the Common Shares and 28 record holders of the Common Share Purchase Warrants. The Company sold 76,843 unregistered Common Shares to an investor for $1.30 per share on August 11, 2000. The Company paid a commission to a broker of 10% of the gross proceeds on the transaction. The net proceeds to the Company were $78,336. The sale of the Common Shares pursuant to this offering was exempt from the registration requirements of the Securities and Exchange Act (the "Act") under Section 4(2) of the Act. The sale was subject to rescission rights because the Company failed to meet the minimum sale requirement of its offering. In consideration for the waiver of these rights, on March 29, 2001, the shareholder was issued an additional 41,641 Common Shares for no additional consideration. 9 11 On December 1, 2000, the Company issued 125,000 Common Shares in exchange for substantially all of the business and assets of a dialysis products manufacturer. The Common Shares had a fair market value of $125,000 on the date of issuance. The shareholder which acquired the Common Shares is required to hold the Common Shares for a period of one year from the date of issuance. The sale of the shares pursuant to this offering was exempt from the registration requirements of the Act under Section 4(2) of the Act. DIVIDENDS The payment of dividends by the Company is within the discretion of its Board of Directors and depends in part upon the Company's earnings, capital requirements, financial condition and requirements, future prospects, restrictions in future financing agreements, business conditions and other factors deemed relevant by the Board. Since its inception, the Company has not paid any cash dividends on its Common Shares and does not anticipate paying such dividends in the foreseeable future. The Company intends to retain earnings, if any, to finance the development and expansion of its operations. ITEM 6. MANAGEMENT'S DISCUSSIONS AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. OVERVIEW The Company was formed for the purpose of acquiring substantially all the assets of Rockwell Medical Supplies, L.L.C., and a related entity, Rockwell Transportation, L.L.C. (collectively the "Predecessor Company"). The Company acquired the Predecessor Company on February 19, 1997 for an adjusted purchase price of approximately $2.1 million. The Company funded the initial payment of $525,000 related to the purchase from the proceeds of a private placement of 495,000 of the Company's Common Shares (the "First Prior Financing"). The balance of the $1.2 million in net proceeds raised in the First Prior Financing was used to fund the Company's net losses and capital equipment purchases. In May through July, 1997, the Company sold 520,000 Common Shares and 520,000 Common Share Purchase Warrants (the "Second Prior Financing") for net proceeds of approximately $1.3 million of which $500,000 was used to further reduce the obligation related to the purchase of the Predecessor Company. The balance of the funds raised in the Second Prior Financing was used to fund the Company's continued net losses and for capital equipment expenditures. The remaining purchase obligation related to the Predecessor Company was converted into 1,095,915 Series A Preferred Shares. On January 26, 1998 the Company sold 1,800,000 Common Shares and 3,105,000 Common Share Purchase Warrants pursuant to a registration statement filed with the Securities and Exchange Commission (the "IPO") for net proceeds of $5.8 million. The proceeds were used to redeem all of the Series A Preferred Shares and reduce other liabilities as stated in the prospectus. The remaining cash of approximately $3.3 million was available to fund the future growth of the Company including working capital and capital expansion. RESULTS OF OPERATIONS For the year ended December 31, 2000 compared to the year ended December 31, 1999 For the year ended December 31, 2000, sales were $7.5 million as compared to sales of $6.7 million for 1998 representing an increase of 11.5%. Sales increased due to a variety of factors including new business development, and growth within existing customers. The Company realized substantial revenue increases in two key areas of strategic focus in 2000. The Company's Dry Acid product line sales increased 95% and its ancillary product sales increased 39% compared to 1999. The Company's concentrate sales, which represented 86% of the Company's 2000 revenue, increased by 9.5% in 2000 over 1999 due to new customers, increased product volumes at existing customers and higher actual average selling prices. During 2000, Rockwell increased its revenue with both regional and national clinic chains that have converted to the Company's dry acid product line. During 1999, the Company realized non-recurring liquid acid drum purchase volumes related to Year 2000 supply stocking and the termination of distributor relationships that together represented 8% of 1999 revenue. Despite these non-recurring sales in 1999, acid dialysate concentrate sales in 2000 were up 8% driven by strong dry acid product sales growth of 10 12 95%. The Company believes that both clinic chains and independent providers are attracted to its dry product offering due to the internal efficiencies and savings derived from dry products. In addition, the customers are attracted to Rockwell due to the Company's high product quality, its broad range of products and formulations and its high level of delivery and customer service. For the Company's other revenue sources, 2000 saw growth in its ancillary sales which was a key area of focus. The Company's sales of ancillary products rose 39% with an increased emphasis on the sale of fistula needles driving the majority of the ancillary product sales growth. The Company was also able to maintain its backhaul revenue at a level comparable to 1999. Largely as a result of the change of the Company's product mix to dry acid from liquid acid in drums, the Company was able to reduce the size of its truck fleet in 2000 over the course of the year, from twelve trucks to nine. Gross profit in 2000 increased $69,000 or 7.6% over 1999. The Company's gross profit margins were 13.1% in 2000 as compared to 13.6% in 1999. The Company's distribution costs rose during the year by approximately 2.5% of sales reflecting a combination of factors including higher fleet operating costs, fleet resources that were surplus to requirements as dry product sales increased and new clinic chain customers with clinics that were in more distant locations. Fleet operating costs rose significantly due mostly to higher fuel and maintenance costs. The Company took actions to reduce its fleet resources in 2000 to reflect its current business profile. Selling, General and Administrative Costs aggregated $2,024,000 in 2000 compared to $2,043,000 in 1999 or a decrease of $19,000. Cost increases were incurred primarily to support increased business activities and for the sales and marketing introduction of new product lines. The Company increased expenditures for marketing and advertising to develop customer and market awareness of its products. In addition, the Company added personnel to transact its business operations during 2000. However, the Company realized reduced expenditures for consulting services due to the termination of consulting fees paid to Wall Street Partners, Inc. in 2000. In 1999, the Company paid $240,000 to Wall Street Partners, Inc. for consulting services. Interest Income, net of expense aggregated $28,000 in 2000 compared to $61,000 in 1999. The decrease in interest income was primarily due to reduced funds available for investment. In addition, the Company incurred interest expense related to notes payable of $7,000. The Company incurred a loss of ($1,017,000) for 2000 which represented a reduction of $54,000 from its loss in 1999 which was ($1,071,000). The Company has not recorded a federal income tax benefit from its current or prior losses given a lack of assurance of realization of the carryforward benefit of those losses. Net Loss per share decreased to ($.21) in 2000 from ($.22) in 1999. The $.01 improvement in the loss per share was principally from improvement in operating results due to increased sales. The increase in shares outstanding had a negligible effect on earnings per share. For the year ended December 31, 1999 compared to the year ended December 31, 1998 For the year ended December 31, 1999, sales were $6.7 million as compared to sales of $5.3 million for 1998. The Company was successful in 1999 at attracting new customers with revenue increasing by 27% over 1998. Sales increased in 1999 due to combination of factors including new products, new business and improved pricing, which was partially offset by a reduction in lower margin distributor sales volume. The Company increased the sales revenue of its concentrate products by $1.4 million in 1999 compared to 1998. The Company's freight revenue which represented 4% of total revenue, increased by 17% in 1999 compared to 1998 while ancillary product sales decreased by 2%. New products sales represented a 20% increase over 1998. The Company's concentrate sales, which represented 88% of the Company's 1999 revenue, increased by 31% in 1999 over 1998 due to new products, improved customer mix and increased business volume. During 1999, Rockwell signed supply agreements with several multi-unit chains of hemodialysis providers that contributed to the Company's increased revenue. The Company successfully introduced two new product lines in 1999 which were its Dri-Sate Dry Acid Concentrate and its Sterilyte(TM) Liquid Bicarbonate product lines. New product sales represented 24% of the total 31% increase in concentrate revenue in 1999 over 1998. As a 11 13 result of changes to customer mix, changes to product mix and improved pricing, the Company's actual average selling prices on its concentrate products increased by 8.6% in 1999 over 1998. Dri-Sate Dry Acid Concentrate was the primary catalyst behind the Company's increased sales in 1999. Dri-Sate, which was rolled out to the market in early 1999, represented 25% of total acid sales in 1999. In addition to sales growth in its customer base, the Company also realized increased sales revenue in the fourth quarter of 1999 from customers electing to purchase and store product that was surplus to normal operating requirements as a risk management measure in anticipation of the possibility of a Year 2000 related disruption to their product supply chain. Subsequently, no such problems were experienced by the Company and the Company believes no such problems were experienced by its suppliers or its customers. The Company estimates that approximately 2-3% of its 1999 sales represented additional stocking by customers in excess of normal supply requirements. The Company's freight revenue, derived primarily from increased backhaul revenue on the Company's truck fleet, increased by $38,000 in 1999 over 1998. Ancillary product revenue consisting of a wide range of ancillary supply decreased approximately 2%. Ancillary sales represented 8% of revenue in 1999 compared to approximately 11% in 1998. Gross profit increased by $1.1 million on a sales increase of $1.4 million, reaching $911,000 in 1999 from a deficit of $171,000 in 1998. Contributing to the Company's improved profitability has been an increase in higher margin direct ship customers with a more favorable product mix. The Company has gained distribution efficiencies through the sale of its Dri-Sate Dry Acid Concentrate product line. Gross profit margins as a percentage of sales improved to 13.6% in 1999 from a deficit of 3.2% in 1998. The Company's gross profit margins increased by 16.6% to sales in 1999 over 1998 due to increased sales volumes, improving customer mix and improved product mix. Selling, General and Administrative Costs were $2,043,000 in 1999 compared to $1,871,000 in 1998 or an increase of $172,000. Cost increases were incurred primarily to support increased business activities and for the marketing introduction and sales of new product lines. The Company rolled out product launches in 1999 for its Dri-Sate Dry Acid Concentrate and Sterilyte(TM) Liquid Bicarbonate product. Sales and marketing expenses increased $80,000 over 1998. Personnel costs increased $100,000 compared to 1998. The Company paid consulting fees to the firm of Wall Street Partners, Inc. in both 1999 and 1998 aggregating $240,000 and $290,000 respectively. As of January 1, 2000, the Company elected not to renew its consulting agreement with Wall Street Partners, Inc. Interest Income aggregated $61,000 in 1999 compared to $113,600 in 1998. The decrease in interest income was due to reduced funds available for investment. The Company incurred a loss of ($1,071,000) for 1999 which represented a reduction of $857,000 from its loss in 1998 which was ($1,928,000). The Company has not recorded a federal income tax benefit from its current or prior losses given a lack of assurance of realization of the carryforward benefit of those losses. Net Loss per share decreased to ($.22) in 1999 from ($.41) in 1998. Of the $.19 improvement in the loss per share, nearly all of the improvement was from improvement in operating results due to increased sales and improving gross profit margins. An increase in average shares outstanding in 1999 contributed $.005, or less than one half of one cent, of the improvement in loss per share. LIQUIDITY & CAPITAL RESOURCES The Company has utilized cash since its inception and anticipates that it will continue to utilize cash to fund its development and operating requirements. The Company has incurred operating losses since inception. The initial purchase of a predecessor company coupled with subsequent operating losses have been primarily funded from the proceeds generated through the issuance of common shares and common share purchase warrants pursuant to two private equity financing arrangements and an initial public offering in January of 1998. 12 14 In 2000, the Company utilized approximately $882,000 in cash to fund its business development efforts, to fund operating losses and to expand its operations. As of December 31, 2000, the Company had cash on hand of approximately $211,000 and restricted cash of $150,000. In order to continue to operate its business and fund its growth strategy, the Company requires additional sources of financing. The Company's long term strategy is to expand its operations to serve its customers throughout North America. The Company anticipates that as a result of its existing supply agreements and customer relationships that it has the capability to capture sufficient new business to support additional manufacturing locations. The Company has plans to start-up its second manufacturing facility during the second quarter of 2001. The Company has received equipment lease financing commitments of $300,000 related to new equipment in its second facility. The Company has also entered into financing arrangements to support the development of its business and will continue to seek equity investments to develop the Company's business. As of March 28, 2001, the Company entered into a $2,000,000 revolving credit loan facility with a financial institution. Under the terms of the agreement, the loan has an initial sublimit of $1,000,000. The two year loan facility is secured by the Company's accounts receivable and other assets. The Company is obligated to pay interest at the rate of two points over the prime rate, plus other fees aggregating .25% of the loan balance. The Company is soliciting interest in a private placement of equity investments from accredited investors. As of March 28, 2001 the Company has not received a firm commitment for investment in its common shares. There can be no assurance that the Company will be successful in raising additional equity funds. If additional equity funds are not raised by the Company, the Company may be required to alter its growth strategy, curtail its expansion plans or take other measures to conserve its cash resources. There can be no assurance that the Company will be able to achieve the planned efficiencies and increase its sales levels and market share to sustain its operations. There can be no assurance that the Company has sufficient funds should the business plans not yield the expected results. These factors, among others, raise substantial doubt about the Company's ability to continue as a going concern. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount or classification of liabilities that might be necessary should the Company be unable to continue as a going concern. ITEM 7. FINANCIAL STATEMENTS The Consolidated Financial Statements of the Registrant and the Combined Financial Statements of the Predecessor Company required by this item are set forth on pages F-1 through F-15. ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. 13 15 PART III ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT. Incorporated herein by reference to Rockwell Medical Technologies, Inc. definitive proxy statement to be filed with the Securities and Exchange Commission within 120 days after the year covered by this Form 10-KSB with respect to its Annual Meeting of Shareholders to be held on May 16, 2001. ITEM 10. EXECUTIVE COMPENSATION. Incorporated herein by reference to Rockwell Medical Technologies, Inc. definitive proxy statement to be filed with the Securities and Exchange Commission within 120 days after the year covered by this Form 10-KSB with respect to its Annual Meeting of Shareholders to be held on May 16, 2001. ITEM 11. SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. Incorporated herein by reference to Rockwell Medical Technologies, Inc. definitive proxy statement to be filed with the Securities and Exchange Commission within 120 days after the year covered by this Form 10-KSB with respect to its Annual Meeting of Shareholders to be held on May 16, 2001. ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. Incorporated herein by reference to Rockwell Medical Technologies, Inc. definitive proxy statement to be filed with the Securities and Exchange Commission within 120 days after the year covered by this Form 10-KSB with respect to its Annual Meeting of Shareholders to be held on May 16, 2001. 14 16 ITEMS 13. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits 3(i).1 Articles of Incorporation of the Company, incorporated by reference to Exhibit 3(i).1 to the Company's Registration Statement on Form SB-2, File No. 333-31991. 3(i).2 Certificate of Amendment to Articles of Incorporation of the Company, incorporated by reference to Exhibit 3(i).2 to the Company's Registration Statement on Form SB-2, File No. 333-31991. 3(i).3 Certificate of Correction to Articles of Incorporation of the Company, incorporated by reference to Exhibit 3(i).3 to the Company's Registration Statement on Form SB-2, File No. 333-31991. 3(i).4 Certificate of Amendment to Articles of Incorporation of the Company, incorporated by reference to Exhibit 3(i).4 to the Company's Registration Statement on Form SB-2, File No. 333-31991. 3(ii) Bylaws of the Company, incorporated by reference to Exhibit 3(ii) to the Company's Registration Statement on Form SB-2, File No. 333-31991. 4.1 Form of Warrant Agreement, incorporated by reference to Exhibit 4.1 to the Company's Registration Statement on Form SB-2, File No. 333-31991. 4.2 Form of Underwriters Warrant Agreement, incorporated by reference to Exhibit 4.2 to the Company's Registration Statement on Form SB-2, File No. 333-31991. 4.3 Registration Rights Agreement among the Company and the holders of certain of the Company's Common Share Purchase Warrants, incorporated by reference to Exhibit 4.6 to the Company's Registration Statement on Form SB-2, File No. 333-31991. 4.4 Form of Lock-up Agreement, incorporated by reference to Exhibit 4.7 to the Company's Registration Statement on Form SB-2, File No. 333-31991. 10.1 Rockwell Medical Technologies, Inc. 1997 Stock Option Plan, incorporated by reference to Exhibit 10.1 to the Company's Registration Statement on Form SB-2, File No. 333-31991. 10.2 Employment Agreement dated as of February 19, 1997 between the Company and Robert L. Chioini, incorporated by reference to Exhibit 10.2 to the Company's Registration Statement on Form SB-2, File No. 333-31991. 10.3 Consulting and Financial Advisory Services Agreement dated as of February 19, 1997 between the Company and Wall Street Partners, Inc., incorporated by reference to Exhibit 10.3 to the Company's Registration Statement on Form SB-2, File No. 333-31991. 10.4 Asset Purchase Agreement dated as of November 1, 1996 by and among the Predecessor Company, the Family Partnerships (as defined therein), the Members (as defined therein) and the Company (formerly known as Acquisition Partners, Inc.), incorporated by reference to Exhibit 10.4 to the Company's Registration Statement on Form SB-2, File No. 333-31991. 10.5 First Amendment to Asset Purchase Agreement dated as of January 31, 1997 by and among the Predecessor Company, the Family Partnerships, the Members and the Company (formerly known as Acquisition Partners, Inc.), incorporated by reference to Exhibit 10.5 to the Company's Registration Statement on Form SB-2, File No. 333-31991. 10.6 Second Amendment to Asset Purchase Agreement dated as of February 19, 1997 by and among the Predecessor Company, the Family Partnerships, the Members and the Company (formerly known as Acquisition Partners, Inc.), incorporated by reference to Exhibit 10.6 to the Company's Registration Statement on Form SB-2, File No. 333-31991. 10.7 Letter Agreement dated April 4, 1997 among the parties to the Asset Purchase Agreement concerning the conversion of the promissory note payable to the Supply Company, incorporated by reference to Exhibit 10.7 to the Company's Registration Statement on Form SB-2, File No. 333-31991.
15 17 10.8 Lease Agreement dated as of September 5, 1995 between the Supply Company, as tenant, and Oakland Oaks, L.L.C., as landlord, incorporated by reference to Exhibit 10.9 to the Company's Registration Statement on Form SB-2, File No. 333-31991. 10.9 Assignment and First Amendment to Wixom Building Lease dated as of February 19, 1997 among the Supply Company, as assignor, the Company, as assignee, and Oakland Oaks, L.L.C., as landlord, incorporated by reference to Exhibit 10.10 to the Company's Registration Statement on Form SB-2, File No. 333-31991. 10.10 Letter Agreement dated November 21, 1997 among the parties to the Asset Purchase Agreement to confirm the reduction of the purchase price of the Asset Purchase Agreement, incorporated by reference to Exhibit 10.12 to the Company's Registration Statement on Form SB-2, File No. 333-31991. 10.11 Employment Agreement dated as of January 12, 1999 between the Company and Thomas E. Klema. 10.12 Lease Agreement dated March 12, 2000 between the Company and DFW Trade Center III Limited Partnership. 10.13 Employment Agreement dated as of January 12, 1999 between the Company and Robert L. Chioini. 10.14 Lease Agreement dated October 23, 2000 between the Company and International-Wixom, LLC. 10.15 Loan and Security Agreement dated March 28, 2001 between the Company and Heller Healthcare Finance, Inc. 21.1 List of Subsidiaries.
(b) Reports on Form 8-K None 16 18 SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereto duly authorized. ROCKWELL MEDICAL TECHNOLOGIES, INC. (Registrant) By: /s/ ROBERT L. CHIOINI ------------------------------------ Robert L. Chioini President and Chief Executive Officer In accordance with Section 13 or 15(d) of the Exchange Act, this report has been signed by the following persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ ROBERT L. CHIOINI President, Chief Executive Officer March 30, 2001 - --------------------------------------------- and Director (Principal Executive Robert L. Chioini Officer) /s/ THOMAS E. KLEMA Vice President of Finance, Chief March 30, 2001 - --------------------------------------------- Financial Officer, Treasurer and Thomas E. Klema Secretary (Principal Financial Officer and Principal Accounting Officer)
17 19 INDEX TO FINANCIAL STATEMENTS
PAGE ---- I. Consolidated Financial Statements for Rockwell Medical Technologies, Inc. and Subsidiary Report of Independent Accountants for the years ended December 31, 2000 and 1999............................. F-1 Consolidated Balance Sheets at December 31, 2000 and December 31, 1999...................................... F-2 Consolidated Income Statement for the years ended December 31, 2000 and 1999...................................... F-3 Consolidated Statement of Changes in Shareholders' Equity for the years ended December 31, 2000 and 1999......... F-4 Consolidated Statements of Cash Flow for the years ended December 31, 2000 and 1999............................. F-5 Notes to the Consolidated Financial Statements............ F-6-F-15
18 20 [PLANTE & MORAN, LLP LETTERHEAD] INDEPENDENT AUDITOR'S REPORT To the Board of Directors and Shareholders Rockwell Medical Technologies, Inc. and Subsidiary We have audited the consolidated balance sheet of Rockwell Medical Technologies, Inc. and Subsidiary as of December 31, 2000 and 1999 and the related consolidated statements of income, shareholders' equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above, present fairly, in all material respects, the financial position of Rockwell Medical Technologies, Inc. and Subsidiary as of December 31, 2000 and 1999, and the results of their operations and their cash flows for the years then ended, in conformity with generally accepted accounting principles. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 3 to the consolidated financial statements, the Company has incurred substantial losses from operations since inception that raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 3. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. Plante & Moran, LLP Auburn Hills, Michigan February 9, 2001, except for Notes 3 and 14 as to which the date is March 28, 2001 and Note 10 as to which the date is March 29, 2001. F-1 21 ROCKWELL MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2000 AND 1999 (WHOLE DOLLARS)
DECEMBER 31, DECEMBER 31, 2000 1999 ------------ ------------ ASSETS Cash and Cash Equivalents................................... $ 210,801 $ 1,093,293 Restricted Certificate of Deposit........................... 150,000 -- Accounts Receivable, net of a reserve of $63,000 in 2000 and $53,000 in 1999........................................... 926,879 980,689 Inventory................................................... 585,121 413,240 Other Current Assets........................................ 98,619 30,618 ----------- ----------- TOTAL CURRENT ASSETS................................... 1,971,420 2,517,840 Property and Equipment, net................................. 823,749 699,233 Other Noncurrent Assets..................................... 170,994 138,396 Excess of Purchase Price over Fair Value of Net Assets Acquired, net............................................. 1,085,770 1,118,437 ----------- ----------- TOTAL ASSETS........................................... $ 4,051,933 $ 4,473,906 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Notes Payable............................................... $ 10,637 $ -- Accounts Payable............................................ 740,888 527,290 Accrued Liabilities......................................... 419,375 341,022 ----------- ----------- TOTAL CURRENT LIABILITIES.............................. 1,170,900 868,312 Long Term Notes Payable..................................... 19,839 -- SHAREHOLDERS' EQUITY: Common Share, no par value, 5,256,948 and 4,854,397 shares issued and outstanding.................................... 9,035,345 8,762,941 Common Share Purchase Warrants, 3,625,000 shares issued and outstanding............................................... 251,150 251,150 Accumulated Deficit......................................... (6,425,301) (5,408,497) ----------- ----------- TOTAL SHAREHOLDER'S EQUITY............................. 2,861,194 3,605,594 ----------- ----------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY............. $ 4,051,933 $ 4,473,906 =========== ===========
The accompanying notes are an integral part of the consolidated financial statements. F-2 22 ROCKWELL MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARY CONSOLIDATED INCOME STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999 (WHOLE DOLLARS)
2000 1999 ---- ---- SALES....................................................... $ 7,457,001 $ 6,688,914 Cost of Sales............................................... 6,477,343 5,778,154 ----------- ----------- GROSS PROFIT........................................... 979,658 910,760 Selling, General and Administrative......................... 2,024,396 2,043,098 ----------- ----------- OPERATING LOSS......................................... (1,044,738) (1,132,338) Interest Income............................................. 27,934 61,068 ----------- ----------- LOSS BEFORE INCOME TAXES............................... (1,016,804) (1,071,270) Income Tax Expense.......................................... -- -- ----------- ----------- NET LOSS............................................... $(1,016,804) $(1,071,270) =========== =========== Basic And Diluted Loss Per Share............................ $ (.21) $ (.22)
The accompanying notes are an integral part of the consolidated financial statements. F-3 23 ROCKWELL MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999 (WHOLE DOLLARS)
COMMON SHARES PURCHASE WARRANTS TOTAL ----------------------- --------------------- ACCUMULATED SHAREHOLDERS' SHARES AMOUNT WARRANTS AMOUNT DEFICIT EQUITY ------ ------ -------- ------ ----------- ------------- Balance as of December 31, 1998............... 4,830,450 $8,652,175 3,625,000 $251,150 $(4,337,227) $ 4,566,098 Issuance of Common Shares................. 23,947 35,778 35,778 Compensation related to Stock Options.......... -- 74,988 74,988 Net Loss................. (1,071,270) (1,071,270) --------- ---------- --------- -------- ----------- ----------- Balance as of December 31, 1999............... 4,854,397 $8,762,941 3,625,000 $251,150 $(5,408,497) $ 3,605,594 Issuance of Common Shares................. 402,551 223,104 223,104 Compensation related to Stock Options.......... -- 49,300 49,300 Net Loss................. (1,016,804) (1,016,804) --------- ---------- --------- -------- ----------- ----------- Balance as of December 31, 2000............... 5,256,948 $9,035,345 3,625,000 $251,150 $(6,425,301) $ 2,861,194 ========= ========== ========= ======== =========== ===========
The accompanying notes are an integral part of the consolidated financial statements. F-4 24 ROCKWELL MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999 (WHOLE DOLLARS)
2000 1999 ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net Loss.................................................. $(1,016,804) $(1,071,270) Adjustments To Reconcile Net Loss To Net Cash Used In Operating Activities: Depreciation and Amortization.......................... 379,127 410,104 Compensation Recognized For Stock Options.............. 68,050 74,988 Changes in Working Capital: Decrease (Increase) in Accounts Receivable........... 53,810 (272,001) (Increase) Decrease in Inventory..................... (171,881) (191,145) Decrease (Increase) in Other Assets.................. (100,599) 34,399 Increase (Decrease) in Accounts Payable.............. 213,598 (1,418) Increase (Decrease) in Other Liabilities............. 78,353 167,674 ----------- ----------- Net change in Working Capital..................... 73,281 (262,491) ----------- ----------- CASH USED IN OPERATING ACTIVITIES................. (496,346) (848,669) CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of Equipment..................................... (304,530) (27,013) Purchase of Certificate of Deposit........................ (150,000) -- Purchase of Business...................................... (4,736) -- ----------- ----------- CASH USED IN INVESTING ACTIVITIES................. (459,266) (27,013) CASH FLOWS FROM FINANCING ACTIVITIES: Issuance of Common Shares and Purchase Warrants........... 79,354 35,778 Payments on Notes Payable................................. (6,234) -- ----------- ----------- CASH PROVIDED BY FINANCING ACTIVITIES............. 73,120 35,778 (DECREASE) IN CASH.......................................... (882,492) (839,904) CASH AT BEGINNING OF PERIOD................................. 1,093,293 1,933,197 ----------- ----------- CASH AT END OF PERIOD....................................... $ 210,801 $ 1,093,293 =========== =========== Supplemental Cash Flow disclosure: 2000 1999 ---- ---- Interest Paid............................................... $ 7,086 None
The accompanying notes are an integral part of the consolidated financial statements. F-5 25 ROCKWELL MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. DESCRIPTION OF BUSINESS Rockwell Medical Technologies, Inc.(the "Company") manufactures, sells and distributes hemodialysis concentrates and other ancillary medical products and supplies used in the treatment of patients with End Stage Renal Disease "ESRD". The Company supplies medical service providers who treat patients with kidney disease. The Company's products are used to cleanse patients' blood and replace nutrients lost during the kidney dialysis process. The Company primarily sells its products in the United States. The Company is regulated by the Federal Food and Drug Administration under the Federal Drug and Cosmetics Act, as well as by other federal, state and local agencies. Rockwell Medical Technologies, Inc. has received 510(k) approval from the FDA to market hemodialysis solutions and powders. The Company also has 510(k) approval to sell its Dri-Sate Dry Acid Concentrate product line and its Dri-Sate Mixer that were introduced during 1999. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION The consolidated financial statements of the Company include the accounts of Rockwell Medical Technologies, Inc. and its wholly owned subsidiary, Rockwell Transportation, Inc. All intercompany balances and transactions have been eliminated. REVENUE RECOGNITION The Company recognizes revenue at the time of transfer of title to the buyer of the Company's products consistent with generally accepted accounting principles. CASH AND CASH EQUIVALENTS The Company considers cash on hand, unrestricted certificates of deposit and short term marketable securities as cash and cash equivalents. RESTRICTED CASH The Company considers certificates of deposit securing letters of credit as restricted cash. INVENTORY Inventory is stated at the lower of cost or net realizable value. Cost is determined on the first-in first-out (FIFO) method. PROPERTY AND EQUIPMENT Property and Equipment are recorded at cost. Expenditures for normal maintenance and repairs are charged to expense as incurred. Property and equipment are depreciated using the straight-line method over their useful lives, which range from three to eight years. EXCESS OF PURCHASE PRICE OVER FAIR VALUE OF ASSETS ACQUIRED The excess of the price paid by the Company over the fair value of the net assets acquired in various business combinations has been recorded as an intangible asset and is being amortized on a straight line basis over an estimated useful lives of between 10 and 15 years. Accumulated amortization of this asset was $606,065 and $448,662 at December 31, 2000 and 1999, respectively. The Company assesses the recover- F-6 26 ROCKWELL MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) ability of the asset based on estimated future discounted cash flows of the business. Based upon the Company's analysis no impairment of the asset exists at December 31, 2000. INCOME TAXES A current tax liability or asset is recognized for the estimated taxes payable or refundable on tax returns for the year. Deferred tax liabilities or assets are recognized for the estimated future tax effects of temporary differences between book and tax accounting and operating loss and tax credit carryforwards. STOCK OPTIONS Options granted to employees are accounted for using the intrinsic value method, under which compensation expense is recorded at the amount by which the market price of the underlying stock at the date of the grant exceeds the exercise price of the option. Stock options granted to non-employees are recorded at the fair value of the awards at the date of the grant. ESTIMATES IN PREPARATION OF FINANCIAL STATEMENTS The preparation of financial statements in conformity with generally accepted accounting principles requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the period. Actual results could differ from those estimates. NET LOSS PER SHARE Basic and Diluted net loss per share for the years ended December 31, 2000 and December 31, 1999 were calculated based on the weighted average shares outstanding of 4,879,999 and 4,844,149, respectively The dilutive effect of stock options has not been included in the average shares outstanding for the calculation of diluted loss per share as the effect, considering the Company's net loss, would be antidilutive. At December 31, 2000 potentially dilutive securities comprised 668,693 stock options exercisable at prices from $1.00 to $3.00 per share, 3,625,000 Common Share Purchase Warrants exercisable at $4.50 per Common Share; and Underwriter's Warrants which are comprised of an option to purchase 95,000 Common Shares at a price of $6.60 per share and 142,500 warrants to purchase shares at $7.43 per share. At December 31, 1999 potentially dilutive securities comprised 619,401 stock options exercisable at prices from $1.44 to $3.00 per share; 3,625,000 Common Share Purchase Warrants exercisable at $4.50 per Common Share; and Underwriter's Warrants which are comprised of an option to purchase 95,000 Common Shares at a price of $6.60 per share and 142,500 warrants to purchase shares at $7.43 per share. RECLASSIFICATIONS Certain reclassifications have been made to the December 31, 1999 financial statements to conform to the current year presentation. 3. MANAGEMENT'S PLAN OF OPERATION Rockwell Medical Technologies, Inc. is engaged in the manufacture, sale and distribution of hemodialysis concentrates and kits to various clinics primarily in the United States. The Company provides hemodialysis solutions and supplies to leading national hemodialysis provider chains along with a number of independently operated regional and local clinics. The Company has established relationships with a number of the leading hemodialysis treatment providers to supply its hemodialysis solutions and other hemodialysis supplies. The F-7 27 ROCKWELL MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Company manufactures hemodialysis solutions and delivers those directly to its customers through its distribution subsidiary, Rockwell Transportation, Inc. The Company has followed a strategy of developing market share through a differentiated value proposition to its customers including new products, superior delivery and customer service, and tailoring product line offerings to match customer requirements, including offering a full line of formulations and supplies. In 2000, the Company's revenue increased $ 768,000 or 11.5% over 1999. In 1999, the Company successfully grew its revenue by $1.4 million or 27% over 1998. The Company anticipates that it will continue to increase its revenue and to increase its market share. The Company successfully introduced its dry acid concentrate product line in 1999. Dri-Sate revenue increased rapidly after introduction and represented 14% of total company sales in 1999 and grew to 24% of Company sales in 2000. The Company expects continued growth in its business. The Company anticipates that it will continue to require cash to fund the working capital requirements associated with future sales increases. STRATEGY The Company's long term objectives are to increase its market share, expand its product line offering, extend its geographical coverage and improve its profitability by implementing the following strategies: - Acting as a Single Source Supplier. The Company has positioned itself as an independent "one-stop-shop" to its customers for the concentrates, chemicals and supplies necessary to support a hemodialysis provider's operation. Some the Company's competitors for concentrates do not offer a full line of hemodialysis products requiring customers to do business with a number of suppliers in order to purchase necessary supplies. Rockwell offers a full line of hemodialysis supplies. - Increasing Revenue Through Sales of New Products. The Company introduced two new product lines in 1999; Dri-Sate Dry Acid Concentrate and SteriLyte(TM) Liquid Bicarbonate that it believes are superior to competitors' product offerings. The Company successfully introduced the Dri-Sate product line in 1999 and it has grown to represent a significant share of the Company's Acid Concentrate sales in its first two years. The Company anticipates Dri-Sate will continue to capture market share and will allow the Company to achieve its gross margin objectives. The Company also anticipates that its Sterilyte(TM) Liquid Bicarbonate product line will gain market share in the acute care market segment due to its higher quality and longer shelf life. - Increasing Revenue Through Ancillary Product Line Expansion. The Company believes that the market potential for ancillary products and supplies used by hemodialysis providers is equivalent to or greater than the market for dialysis concentrates. The Company's strategy is to offer cost effective ancillary products that include ancillary products such as specialized kits, fistula needles, gloves, chemicals, sterile dressings and blood lines. Many of these ancillary items are purchased based on price and are generally acquired from various suppliers. The Company believes that as it continues to gain market share that it will increasingly be able to procure these ancillary items on a cost effective basis and will provide its customers with both convenience from a single supply source and at a highly competitive price level. - Offering a Higher Level of Delivery/Customer Service. By using its own delivery vehicles and drivers, the Company believes that it can offer a higher level of customer service to hemodialysis providers than if it relied primarily on the use of common carriers to distribute its products. The Company's drivers perform services for customers that are generally not available from common carriers, such as stock rotation, non-loading-dock delivery and drum pump-offs. A drum pump-off requires the driver to pump hemodialysis concentrates from a 55 gallon drum into larger holding tanks within the hemodialysis clinic. The Company's main competitors generally use common carriers for delivery of their products. F-8 28 ROCKWELL MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Company believes it offers a higher level of distribution service to its customers through the use of its own delivery vehicles and drivers. - Expanding Market Share in Target Regions. Because of the costs associated with transporting and delivering hemodialysis concentrates, the Company believes that it has a competitive cost advantage with certain clinics that are located within a reasonable proximity to the Company's manufacturing facility over other manufacturers outside of such proximity. The Company also believes that it can add additional manufacturing sites in certain geographic regions that will provide it with a competitive cost advantage and with superior customer service levels due to their proximity to the customer. The Company intends to leverage its existing customer relationships to expand into geographic areas where it currently has a minor or negligible presence. LIQUIDITY & CAPITAL RESOURCES The Company has utilized cash since its inception and anticipates that it will continue to utilize cash to fund its development and operating requirements. The Company has incurred operating losses since inception. The initial purchase of a predecessor company coupled with subsequent operating losses have been primarily funded from the proceeds generated through the issuance of common shares and common share purchase warrants pursuant to two private equity financing arrangements and an initial public offering in January of 1998. In 2000, the Company utilized approximately $882,000 in cash to fund its business development efforts, to fund operating losses and to expand its operations. As of December 31, 2000, the Company had cash on hand of approximately $211,000 and restricted cash of $150,000. In order to continue to operate its business and fund its growth strategy, the Company requires additional sources of financing. The Company's long term strategy is to expand its operations to serve its customers throughout North America. The Company anticipates that as a result of its existing supply agreements and customer relationships that it has the capability to capture sufficient new business to support additional manufacturing locations. The Company has plans to start-up its second manufacturing facility during the second quarter of 2001. The Company has received equipment lease financing commitments of $300,000 related to new equipment in its second facility. The Company has also entered into financing arrangements to support the development of its business and will continue to seek equity investments to develop the Company's business. As of March 28, 2001, the Company entered into a $2,000,000 revolving credit loan facility with a financial institution. Under the terms of the agreement, the loan has an initial sublimit of $1,000,000. The two year loan facility is secured by the Company's accounts receivable and other assets. The Company is obligated to pay interest at the rate of two points over the prime rate, plus other fees aggregating .25% of the loan balance. The Company is soliciting interest in a private placement of equity investments from accredited investors. As of March 28, 2001 the Company has not received a firm commitment for investment in its common shares. There can be no assurance that the Company will be successful in raising additional equity funds. If additional equity funds are not raised by the Company, the Company may be required to alter its growth strategy, curtail its expansion plans or take other measures to conserve its cash resources. There can be no assurance that the Company will be able to achieve the planned efficiencies and increase its sales levels and market share to sustain its operations. There can be no assurance that the Company has sufficient funds should the business plans not yield the expected results. These factors, among others, raise substantial doubt about the Company's ability to continue as a going concern. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of asset carrying F-9 29 ROCKWELL MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) amounts or the amount or classification of liabilities that might be necessary should the Company be unable to continue as a going concern. 4. SIGNIFICANT MARKET SEGMENTS The Company operates in one market segment which involves the manufacture and distribution of hemodialysis concentrates, dialysis kits and ancillary products used in the dialysis process to hemodialysis clinics. For the year ended December 31, 2000, the Company had sales in excess of 10% of revenue with three customers representing 36% of total sales. For the year ended December 31, 1999, the Company had sales in excess of 10% of revenue with two customers representing approximately 25% of total sales 5. INVENTORY Components of inventory as of December 31, 2000 and 1999 are as follows:
2000 1999 ---- ---- Raw Materials............................................ $133,203 $124,233 Finished Goods........................................... 451,918 289,007 -------- -------- Total............................................... $585,121 $413,240 ======== ========
6. PROPERTY AND EQUIPMENT Major classes of Property and Equipment, stated at cost, as of December 31, 2000 and 1999 are as follows:
2000 1999 ---- ---- Leasehold Improvements................................ $ 193,720 $ 36,232 Machinery and Equipment............................... 1,030,288 908,715 Office Furniture and Equipment........................ 139,762 136,046 Laboratory Equipment.................................. 135,893 135,893 Vehicles, including trailers........................ 132,016 104,784 ---------- ---------- 1,631,679 1,321,670 Accumulated Depreciation............................ (807,930) (622,437) ---------- ---------- Net Property and Equipment............................ $ 823,749 $ 699,233 ========== ==========
7. NOTES PAYABLE The Company has two notes payable related to material handling equipment and a vehicle which secure the notes payable. The notes payable are payable in even monthly installments of principal and interest payable over a period of three years. Interest rates on the notes range from 10.4 -- 11.5%. Monthly payments aggregate $1,200. Future maturities of notes payables are $10,637 in 2001, $12,973 in 2002 and $5,846 in 2003. 8. LEASES The Company leases its production facilities and administrative offices as well as transportation equipment used by the Company's subsidiary, Rockwell Transportation, Inc. The lease terms are three to seven years. These leases have been accounted for as operating leases. Lease payments under all operating leases were $583,064 and $515,513 for the years ended December 31, 2000 and 1999, respectively. F-10 30 ROCKWELL MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) In accordance with the assignment of a facility lease from the Predecessor Company, the landlord required a deposit in escrow. The escrow deposit was applied against lease payments of $59,313 in the year ended December 31, 2000 and $39,542 in the year ended December 31, 1999. The remaining escrow deposit of $79,082 is to be returned as a security deposit refundable at lease termination subject to certain conditions. In the instance of early termination, the transportation equipment leases require the Company to pay the excess of the purchase price for such vehicles (determined in accordance with the terms of the lease) over the equipment's fair market value. In 2000, the Company entered into two lease agreements for new facilities both approximating 51,000 square feet. A five year lease arrangement for a second manufacturing facility was entered into by the Company on March 12, 2000. In addition, the Company entered into a lease agreement to lease a new manufacturing facility to replace its existing facility lease which expired December 5, 2000. The replacement facility lease is for a seven year term and was entered into in October 2000 with occupancy of the new facility anticipated in the second quarter of 2001. The lease agreement requires a $100,000 security deposit payable prior to occupancy. The Company will relocate its current manufacturing operation and administrative offices to the new facility. Future minimum rental payments under these lease agreements are as follows: Year ending December 31, 2001............................... $ 835,799 Year ending December 31, 2002............................... 825,113 Year ending December 31, 2003............................... 783,369 Year ending December 31, 2004............................... 677,991 Year ending December 31, 2005............................... 594,258 Thereafter.................................................. 894,212 ---------- Total..................................................... $4,610,742 ==========
9. INCOME TAXES The Company recorded no income tax expense or benefit for the years ended December 31, 2000 and 1999 due to the Company incurring net operating losses in each of those years. As a result, the Company has recorded a valuation allowance against its net deferred tax assets. A reconciliation of income tax expense at the statutory rate to income tax expense at the Company's effective tax rate is as follows:
2000 1999 ---- ---- Tax Recovery Computed at 34 % of Pretax Loss.............. $ (345,000) $ (364,000) Effect of Permanent Difference Principally Related to Stock Compensation Expense............................. 16,000 8,000 Effect of Change in Valuation Allowance................... 329,000 356,000 ----------- ----------- Total Income Tax Benefit.................................. $ -0- $ -0- =========== ===========
The details of the net deferred tax asset are as follows:
2000 1999 ---- ---- Total Deferred Tax Assets................................. $ 1,925,000 $ 1,580,000 Total Deferred Tax Liabilities............................ (41,000) (25,000) Valuation Allowance Recognized for Deferred Tax Assets.... (1,884,000) (1,555,000) ----------- ----------- Net Deferred Tax Asset.................................... $ -0- $ -0- =========== ===========
F-11 31 ROCKWELL MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Deferred income tax liabilities result primarily from the use of accelerated depreciation for tax reporting purposes. Deferred income tax assets result primarily from net operating loss carryforwards. For tax purposes, the Company has net operating loss carryforwards of approximately $5,287,000 that expire between 2012 and 2020. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion of all of the deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Due to the Company's history of operating losses, management has placed a full valuation allowance against the net deferred tax assets as of December 31, 2000 and as of December 31, 1999. 10. CAPITAL STOCK The authorized capital stock of the Company consists of 20,000,000 Common Shares, no par value per share, of which 5,256,948 shares were outstanding at December 31, 2000 and 4,854,397 shares were outstanding at December 31, 1999; 2,000,000 Preferred Shares, none issued or outstanding, and 1,416,664 of 8.5% non-voting cumulative redeemable Series A Preferred Shares, $1.00 par value (the "Series A Preferred Shares"), of which none were outstanding as of December 31, 2000. For the year ended December 31, 2000, the Company issued 76,843 Common Shares at a price of $1.30 per Common Share to an individual investor in a private placement of its Common Shares for net proceeds to the Company of $78,336. The sale was subject to rescission rights because the Company failed to meet the minimum sale requirement of its offering. In consideration for the waiver of these rights, on March 29, 2001, the shareholder was issued 41,641 Common Shares for no additional consideration. COMMON SHARES Holders of the Common Shares are entitled to one vote per share on all matters submitted to a vote of shareholders of the Company and are to receive dividends when and if declared by the Board of Directors. The Board is authorized to issue additional Common Shares within the limits of the Company's Articles of Incorporation without further shareholder action. WARRANTS Holders of the Common Share Purchase Warrants ("Warrants"), are entitled to purchase one Common Share at the exercise price of $4.50 per share for a period of three years commencing January 26, 1999 and expiring January 26, 2002. The exercise price and the number of Common Shares to be issued upon the exercise of each Warrant are subject to adjustment in the event of share split, share dividend, recapitalization, merger, consolidation or certain other events. At December 31, 2000 there were 3,625,000 Warrants issued and outstanding. Under certain conditions, the Warrants may be redeemed by the Company at a redemption price of $.10 per Warrant upon not less than 30 days prior written notice to the holders of such Warrants, provided the closing bid price of the Common Shares has been at least $7.00 for 20 consecutive trading days ending on the third day prior to the date the notice of redemption is given. UNDERWRITERS' WARRANTS In conjunction with the Company's Initial Public Offering in January 1998, the Underwriters' of the offering were entitled to warrants ("the Underwriters' Warrants") which provided them the option to purchase 180,000 Common Shares for a purchase price of $6.60 per share and 270,000 warrants for a purchase price of $.165 per warrant. Each underlying warrant entitled the Underwriter to purchase a Common share at a purchase price of $7.43 per share, exercisable at any time from January 26, 1999 to January 26, 2003. F-12 32 ROCKWELL MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) At December 31, 2000, 95,000 of the Underwriters' options to purchase Common Shares and 142,500 underlying warrants remained outstanding of the Underwriters' Warrants. 11. STOCK OPTIONS The Board of Directors approved the Rockwell Medical Technologies, Inc., 1997 Stock Option Plan on July 15, 1997 (the "Plan"). The Stock Option Committee as appointed by the Board of Directors administers the Plan, which provides for grants of nonqualified or incentive stock options to key employees, officers, directors, consultants and advisors to the Company. As of May 10, 1999, the Shareholders of the Company adopted an amendment to the stock option plan to increase the number of options available to be granted to 900,000 from 450,000. Under the amendment to the Plan, the Company may grant up to 900,000 options to purchase Common Shares. Exercise prices, subject to certain plan limitations, are at the discretion of the Committee. Options granted normally expire 10 years from the date of grant or upon termination of employment. The Committee determines vesting rights on the date of grant. Employee options typically vest over a three year period from the date of grant. Employee stock options awarded in July and November of 1997 had an exercise price of $3.00, which is less than the deemed fair market value of the stock at the date of grant as determined by the Company as $4.00. On April 13, 1998 these option holders, excluding the President and members of the Board of Directors, were offered the alternative of receiving new stock options in the same quantity as previously awarded but at an exercise price of $1.4375, the closing price on the Nasdaq SmallCap Market on the date of the offer. Vesting rights on the new options began to accrue on the date of the offer. Under the provisions of APB No. 25, compensation expense on these employee stock options is recognized over the vesting period and is determined as the difference between the IPO price of $4.00 per share (the deemed fair value of the shares on the date of the award), and the exercise price, as adjusted on April 13, 1998. Compensation expense related to employee stock options for the years ended December 31, 2000 and 1999 was $49,300 and $ 74,988, respectively. The Company also granted 202,020 stock options to a consultant on November 30, 2000 with an exercise price of $.01 per Common Share. The consultant immediately exercised their options which resulted in the issuance of 200,000 shares of common stock. These options had a fair market value of $ 225,000 on the date of grant. The fair market value is being amortized to expense over the one year term of the consulting agreement. F-13 33 ROCKWELL MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) A summary of the status of the Company's Employee Stock Option Plan excluding options granted to consultants is as follows:
SHARES PRICE ------ ----- Outstanding at December 31, 1998............................ 407,450 $2.14 Granted................................................... 336,250 $2.16 Exercised................................................. 23,947 1.49 Cancelled................................................. 100,352 2.10 ------- Outstanding at December 31, 1999............................ 619,401 $2.18 Granted................................................... 81,000 $1.56 Exercised................................................. 708 1.44 Cancelled................................................. 31,000 2.19 ------- Outstanding at December 31, 2000............................ 668,693 $2.11 =======
OPTIONS OUTSTANDING OPTIONS EXERCISABLE - --------------------------------------------------- -------------------- WEIGHTED NUMBER REMAINING WEIGHTED NUMBER AVERAGE RANGE OF OF CONTRACTUAL EXERCISE OF EXERCISE EXERCISE PRICES OPTIONS LIFE PRICE OPTIONS PRICE - --------------- ------- ----------- -------- ------- -------- $1.00 to $1.44 65,510 7.3-9.9 yrs $1.30 48,115 $1.26 $1.50 to $2.00 211,000 7.9-9.9 yrs $1.69 120,000 $1.67 $2.25 to $3.00 392,183 6.6-9.0 yrs $2.47 268,596 $2.59 ------- ------- Total 668,693 8.3 yrs $2.11 449,011 $2.19
Had compensation expense for the employee stock options been determined based on the fair value of the option at the grant dates of the awards, consistent with the provisions of SFAS No. 123, the Company's net loss and loss per share would have been increased to the pro forma amounts as follows:
2000 1999 ---- ---- Net loss As reported....................................... $(1,016,804) $(1,071,270) Pro forma......................................... $(1,292,069) $(1,315,833) Basic and Diluted loss per share As reported....................................... $ (.21) $ (.22) Pro forma......................................... $ (.27) $ (.27)
The per share weighted average fair values at the date of grant for the options granted to employees during the years ended December 31, 2000 and 1999 were $ 1.00 and $1.90 respectively. For the period ended December 31, 2000 the fair value was determined using the Black Scholes option pricing model using the following assumptions: dividend yield of 0.0 percent, risk free interest rate of 6.00 percent, volatility of 126% and expected lives of up to 3.0 years. For the year ended December 31, 1999, the fair value was estimated using the following assumptions: dividend yield of 0.0 percent, risk free interest rate of 6.25 percent, volatility of 133% and expected lives of 5.0 years. 12. RELATED PARTY TRANSACTIONS During the year ended December 31, 1999, the Company paid or accrued fees to the consulting firm of Wall Street Partners, Inc. for financial and management services of $240,000. Effective January 1, 2000, the consulting agreement with Wall Street Partners, Inc. was not renewed by the Company. Mr. Gary L. Lewis F-14 34 ROCKWELL MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) was the sole principal of Wall Street Partners, Inc. Mr. Lewis served as Chairman of the Board of Directors of the Company from its inception until March 14, 2000 and is also a shareholder. During the year ended December 31, 2000, the Company had revenue from companies in which its outside directors held an equity interest. Mr. Ronald D. Boyd, a director of the Company as of March 14, 2000, holds an equity interest in a distributor of the Company's products. Revenue from this distributor in 2000 was $ 62,000. Mr. Kenneth L. Holt, a director of the Company as of March 14, 2000, holds an equity interest in a customer of the Company. Revenue from this customer in 2000 was $ 53,000. 13. SUPPLEMENTAL CASH FLOW INFORMATION The Company entered into the below described non-cash transactions during the year ended December 31, 2000 which have not been included in the Consolidated Statement of Cash Flows. In the year ended December 31, 2000, the Company issued 125,000 shares of common stock valued at $125,000 and paid $ 4,736 to acquire the assets and business of a small company. The Company recorded fixed assets related to this acquisition of $ 5,000 with the remainder allocated to the excess of purchase price over net assets acquired. The Company issued 200,000 shares of common stock related to a stock option grant to a consultant in exchange for consulting services. The fair market value on the date of the grant was $ 225,000 which is being amortized to expense over the one year service period of the agreement. The Company acquired $ 36,710 of equipment during the year ended December 31, 2000 which was financed through the issuance of notes payable. 14. SUBSEQUENT EVENTS As of March 28, 2001, the Company entered into a $2,000,000 revolving credit loan facility with a financial institution. Under the terms of the agreement, the loan has an initial sublimit of $1,000,000. The two year loan facility is secured by the Company's accounts receivable and other assets. The Company is obligated to pay interest at the rate of two points over the prime rate, plus other fees aggregating .25% of the loan balance. F-15 35 EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION ------- ----------- 3(i).1 Articles of Incorporation of the Company, incorporated by reference to Exhibit 3(i).1 to the Company's Registration Statement on Form SB-2, File No. 333-31991. 3(i).2 Certificate of Amendment to Articles of Incorporation of the Company, incorporated by reference to Exhibit 3(i).2 to the Company's Registration Statement on Form SB-2, File No. 333-31991. 3(i).3 Certificate of Correction to Articles of Incorporation of the Company, incorporated by reference to Exhibit 3(i).3 to the Company's Registration Statement on Form SB-2, File No. 333-31991. 3(i).4 Certificate of Amendment to Articles of Incorporation of the Company, incorporated by reference to Exhibit 3(i).4 to the Company's Registration Statement on Form SB-2, File No. 333-31991. 3(ii) Bylaws of the Company, incorporated by reference to Exhibit 3(ii) to the Company's Registration Statement on Form SB-2, File No. 333-31991. 4.1 Form of Warrant Agreement, incorporated by reference to Exhibit 4.1 to the Company's Registration Statement on Form SB-2, File No. 333-31991. 4.2 Form of Underwriters Warrant Agreement, incorporated by reference to Exhibit 4.2 to the Company's Registration Statement on Form SB-2, File No. 333-31991. 4.3 Registration Rights Agreement among the Company and the holders of certain of the Company's Common Share Purchase Warrants, incorporated by reference to Exhibit 4.6 to the Company's Registration Statement on Form SB-2, File No. 333-31991. 4.4 Form of Lock-up Agreement, incorporated by reference to Exhibit 4.7 to the Company's Registration Statement on Form SB-2, File No. 333-31991. 10.1 Rockwell Medical Technologies, Inc. 1997 Stock Option Plan, incorporated by reference to Exhibit 10.1 to the Company's Registration Statement on Form SB-2, File No. 333-31991. 10.2 Employment Agreement dated as of February 19, 1997 between the Company and Robert L. Chioini, incorporated by reference to Exhibit 10.2 to the Company's Registration Statement on Form SB-2, File No. 333-31991. 10.3 Consulting and Financial Advisory Services Agreement dated as of February 19, 1997 between the Company and Wall Street Partners, Inc., incorporated by reference to Exhibit 10.3 to the Company's Registration Statement on Form SB-2, File No. 333-31991. 10.4 Asset Purchase Agreement dated as of November 1, 1996 by and among the Predecessor Company, the Family Partnerships (as defined therein), the Members (as defined therein) and the Company (formerly known as Acquisition Partners, Inc.), incorporated by reference to Exhibit 10.4 to the Company's Registration Statement on Form SB-2, File No. 333-31991. 10.5 First Amendment to Asset Purchase Agreement dated as of January 31, 1997 by and among the Predecessor Company, the Family Partnerships, the Members and the Company (formerly known as Acquisition Partners, Inc.), incorporated by reference to Exhibit 10.5 to the Company's Registration Statement on Form SB-2, File No. 333-31991. 10.6 Second Amendment to Asset Purchase Agreement dated as of February 19, 1997 by and among the Predecessor Company, the Family Partnerships, the Members and the Company (formerly known as Acquisition Partners, Inc.), incorporated by reference to Exhibit 10.6 to the Company's Registration Statement on Form SB-2, File No. 333-31991.
36
EXHIBIT NO. DESCRIPTION ------- ----------- 10.7 Letter Agreement dated April 4, 1997 among the parties to the Asset Purchase Agreement concerning the conversion of the promissory note payable to the Supply Company, incorporated by reference to Exhibit 10.7 to the Company's Registration Statement on Form SB-2, File No. 333-31991. 10.8 Lease Agreement dated as of September 5, 1995 between the Supply Company, as tenant, and Oakland Oaks, L.L.C., as landlord, incorporated by reference to Exhibit 10.9 to the Company's Registration Statement on Form SB-2, File No. 333-31991. 10.9 Assignment and First Amendment to Wixom Building Lease dated as of February 19, 1997 among the Supply Company, as assignor, the Company, as assignee, and Oakland Oaks, L.L.C., as landlord, incorporated by reference to Exhibit 10.10 to the Company's Registration Statement on Form SB-2, File No. 333-31991. 10.10 Letter Agreement dated November 21, 1997 among the parties to the Asset Purchase Agreement to confirm the reduction of the purchase price of the Asset Purchase Agreement, incorporated by reference to Exhibit 10.12 to the Company's Registration Statement on Form SB-2, File No. 333-31991. 10.11 Employment Agreement dated as of January 12, 1999 between the Company and Thomas E. Klema. 10.12 Lease Agreement dated March 12, 2000 between the Company and DFW Trade Center III Limited Partnership. 10.13 Employment Agreement dated as of January 12, 1999 between the Company and Robert L. Chioini. 10.14 Lease Agreement dated October 23, 2000 between the Company and International-Wixom, LLC. 10.15 Loan and Security Agreement dated March 28, 2001 between the Company and Heller Healthcare Finance, Inc. 21.1 List of Subsidiaries.
EX-10.14 2 k61245ex10-14.txt LEASE AGREEMENT, DATED 10/23/00 1 EXHIBIT 10.14 LEASE (1) THIS LEASE made this 23rd day of October , 2000, by and between: INTERNATIONAL-WIXOM, LLC a Michigan limited liability company 23179 Telegraph Road Southfield, MI 48034 the Lessor, hereinafter designated as Landlord, and: ROCKWELL MEDICAL TECHNOLOGIES, INC. a Michigan corporation 28025 Oakland Oak Court Wixom, MI 48393 the Lessee, hereinafter designated as Tenant. (2) DESCRIPTION/TERM/COMMENCEMENT. (A) PREMISES. Landlord, in consideration of the Rent to be paid and the covenants and agreements to be performed by Tenant, leases to Tenant the following described premises situated in the City of Wixom, County of Oakland, State of Michigan: a free standing building consisting of approximately Fifty Thousand Eight Hundred Fifty Eight (50,858) square feet commonly known as 30142 Wixom Road, Wixom, Michigan 48393 (the "Building"), which, together with the contiguous parking and landscaping areas used by and servicing the Building, are hereinafter referred to as the "Premises". The Premises are part of a larger complex which contains a total of five (5) industrial buildings, either constructed or to be constructed as shown on the site plan attached hereto as Exhibit A (the "Property"). The Property contains parking and common areas which are or will be shared by and used by all of the buildings which are located or will be located on the Property. (B) TERM. The Lease term shall begin on the Commencement Date and shall run for Eighty Four (84) full calendar months thereafter, unless sooner terminated as provided herein (the "Term"). In the event that the Commencement Date is other than the first day of a month, then the Term shall be extended by the number of days remaining in the first month after the Commencement Date, and the Rent shall be correspondingly increased as provided in Paragraph 3 below. (C) COMMENCEMENT. The Term shall commence on the earliest of the following (the "Commencement Date"): (i) May 1, 2001; or (ii) Occupancy of the Premises by Tenant in whole or in part. Provided, however, in the event that Tenant shall be unable to occupy the Premises due solely to the inability of Landlord to complete Landlord's work so as to ready the Premises for Tenant's occupancy and provided further that Tenant shall not have contributed to or caused in whole, or in part, the delay, then in that event, the Commencement Date shall be delayed until the date on which the City of Wixom issues either a conditional or final Certificate of Occupancy. Page 1 2 (3) RENT. Tenant agrees to pay to Landlord as rental for the Premises (the "Rent") during the Term, the sum of Two Million Six Hundred Seventy Thousand Forty Five ($2,670,045.00) Dollars payable in monthly installments in advance, on the first day of each month as follows: Thirty One Thousand Seven Hundred Eighty Six and 25/100 ($31,786.25) Dollars upon execution of this Lease, receipt of which is hereby acknowledged representing payment of Rent for May, 2001, and a like sum on the first day of each consecutive month thereafter during the Term of this Lease until a total of Eighty Four (84) consecutive monthly Rent payments of Thirty One Thousand Seven Hundred Eighty Six and 25/100 ($31,786.25) Dollars have been made. The Rent shall commence on the Commencement Date. If the Commencement Date is other than the first day of a month, the Rent and other payments due to Landlord shall be adjusted to reflect the addition of the days in the month of commencement, and in such case, the Rent due for the month of commencement shall be prorated based upon the number of days remaining in said month. (4) RENT/ADDITIONAL RENT. The purpose and intent of this Lease is that the Rent shall be an absolute net return to Landlord and shall continue unreduced and unabated throughout the entire Term. Tenant shall pay to and reimburse Landlord as additional rent Real Estate Taxes and expenses and charges of every kind and nature incurred in connection with the maintenance, upkeep and preservation of the Building and Tenant's pro rata share ("Pro Rate Share") of all Real Estate Taxes, insurance and other expenses and charges of every kind and nature incurred in connection with the maintenance, upkeep and preservation of the Property during the Term as follows: (A) REAL ESTATE TAXES. Tenant shall pay to and reimburse Landlord for: (i) all of the Real Estate Taxes which are levied against the Building during the Term, and (ii) Tenant's Pro Rata Share of all Real Estate Taxes which are levied against the land valuation portion of the Property during the Term. "Real Estate Taxes" as used herein shall mean all property taxes and assessments levied or imposed upon the Building and/or Property. For determining the valuation of the land portion of the Property (as opposed to the valuation of buildings constructed thereon), Landlord and Tenant will utilize the records and calculations of the Township Assessor as the same may be adjusted from time to time. If, due to a change in the method of taxation or the elimination of any Real Estate Tax now or previously in effect, any franchise or other tax shall be levied against Landlord in substitution for or in lieu of any tax which would otherwise constitute a Real Estate Tax, such franchise or other tax shall be deemed to be Real Estate Taxes for purposes hereof. (B) INSURANCE/UPKEEP/MAINTENANCE/REPAIRS. Tenant shall pay to and reimburse Landlord for: (i) Landlord's premiums for the insurance which Landlord maintains on the Building including Landlord's fire and extended casualty coverage, liability coverages and loss of rental income insurance, and (ii) any expenses which Landlord incurs for the maintenance, repair, upkeep, and preservation of the Building, and (iii) Tenant's Pro Rata Share of the maintenance, repair, upkeep, and preservation expenses attributable to the land portion of the Property. Landlord's maintenance expenses shall include, but not be limited to, any expense which Landlord incurs pursuant to Paragraph 15 of this Lease and in contracting with independent contractors for services attributable to the maintenance, repair, upkeep and preservation of the Building or Property including but not limited to snow removal, maintenance, repairs, upkeep, parking lot maintenance and upkeep (including striping, seal coating, etc.), repair, Page 2 3 preservation and replacement of landscaping, parking areas, driveways and other Building common areas, as well as the lighting, sprinkling systems, water and other utilities associated therewith. If Landlord, pursuant to the terms of this Lease, contracts for or undertakes to perform any maintenance, repair or upkeep, such undertaking shall not relieve Tenant of its obligations and responsibilities set forth in this Lease. Anything contained in this Paragraph 4(b) to the contrary notwithstanding, Tenant shall not be required to reimburse Landlord for Landlord's insurance premiums which are attributable to the primary personal liability insurance coverage in the amount which Tenant is required to obtain and carry pursuant to Paragraph 14. It is the intent of this provision to make certain that Tenant is not required to pay for duplicating the cost of personal liability insurance to the extent that Tenant is required to carry the same under Paragraph 14. (C) ESTIMATED MONTHLY PAYMENT. Tenant shall pay to Landlord on a monthly basis, in addition to Rent, an amount equal to one-twelfth (1/12th) of Tenant's anticipated annual liability for reimbursement to Landlord for Real Estate Taxes/insurance/upkeep/maintenance/repairs (set forth in subparagraphs (a) and (b) above). For computation purposes, Tenant shall pay $4,166.00 month as Tenant's anticipated expense for said reimbursements for the first year (ending December 31st). If the amount of Tenant's actual liability for any calendar year exceeds the amount which Tenant has paid for such year, Tenant shall pay Landlord an amount equal to the deficiency within thirty (30) days after receipt of a bill from Landlord. The amount of Tenant's monthly payment may be adjusted from time to time by Landlord to reasonably reflect Tenant's monthly anticipated liability under subparagraphs (a) and (b) above. Landlord shall give Tenant thirty (30) days written notice of any such adjustment. Tenant's payments shall be treated as Rent for the purposes of this Lease. As used herein, the term "Tenant's Pro Rata Share" shall mean thirty nine (39%) percent. Pro Rata Share has been derived pursuant to Exhibit A attached hereto. In the event that when all the buildings shown on Exhibit A have been constructed, the buildings contain either a greater or lesser amount of square feet than shown on Exhibit A, Landlord and Tenant agree to prepare an addendum modifying this Lease, increasing or decreasing the Pro Rata Share, so that Tenant's Pro Rata Share will be the ratio the square footage contained in the Building bears to the total square footage of all buildings constructed on the Property. (5) INSURANCE/HAZARD. In addition to the Rent hereinbefore specified, Tenant agrees to pay as additional Rent any increase on premiums for insurance against loss by fire that may be charged during the Term on the amount of insurance carried by the Landlord resulting from the business carried on in the Premises by the Tenant or the character of Tenant's occupancy, whether or not Landlord has consented to the same. (6) LANDLORD PAYMENT. If Tenant shall default in any payment or expenditure other than Rent required to be paid or expended by Tenant under the terms hereof, Landlord may at its option, make such payment or expenditure, in which event the amount thereof shall be payable as Rent to Landlord by Tenant on the next ensuing Rent day together with interest at 15% per annum from the date of such payment or expenditure by Landlord and on default in such payment Landlord shall have the same remedies as on default in payment of Rent. Landlord and Tenant acknowledge that the charge set forth herein is a reasonable estimate of the expense and inconvenience which Landlord will be put to if payments are not made on time, and acknowledge that the actual damages which Landlord will or may suffer in such case are difficult or impossible to ascertain and measure. (7) PLACE OF PAYMENT. All payments of Rent or other sums to be made to Landlord shall be made at such a place as Landlord shall designate in writing from time to time. Page 3 4 (8) ASSIGNMENT. Tenant covenants not to assign or transfer this Lease or hypothecate or mortgage the same or sublet said Premises or any part thereof without the written consent of Landlord. Any assignment, transfer, hypothecation, mortgage, or subletting without said written consent shall give Landlord the right to terminate its Lease and to reenter and repossess the Premises. (9) BANKRUPTCY AND INSOLVENCY. Tenant agrees that if the estate created hereby shall be taken in execution, or by other process of law, or if Tenant shall be declared bankrupt or insolvent, according to law, or any receiver be appointed for the business and property of Tenant, or if any assignment shall be made of Tenant's property for the benefit of creditors, then and in such event this Lease may be canceled at the option of Landlord. (10) RIGHT TO MORTGAGE. Tenant shall at any time upon not less than seven (7) days prior written notice from Landlord, execute, acknowledge and deliver to landlord a statement in writing (i) certifying that this Lease is unmodified and in full force and effect (or, if modified, stating the nature of such modification, and certifying that this Lease, as so modified, is in full force and effect) and the date to which the Rent and other charges are paid in advance, if any; (ii) acknowledging that there are not, to Tenant's knowledge, any uncured defaults on the part of Landlord hereunder, or specifying such defaults if any are claimed; and (iii) any additional information, statements or certifications that may be reasonably required by any actual or prospective purchaser or mortgagee of the Building. This Lease, at Landlord's option, shall be subordinate to any mortgage, now or hereafter placed upon the Property of which the Premises are a part and to any and all advances made on the security thereof and to all renewals, modifications, consolidations, replacements and extensions thereof. Notwithstanding such subordination, Tenant's right to quiet possession of the Premises shall not be disturbed if Tenant is not in default and so long as Tenant shall pay the Rent and observe and perform all of the provisions of this Lease, unless this Lease is otherwise terminated pursuant to its terms. If any mortgagee shall elect to have this Lease prior to the lien of its mortgage, and shall give written notice thereof to Tenant, this Lease shall be deemed prior to such mortgage, whether this Lease is dated prior or subsequent to the date of said mortgage. (11) USE AND OCCUPANCY. It is understood and agreed between the parties hereto that the Premises during the continuance of this Lease shall be used and occupied for any lawful use and for no other purpose or purposes. Tenant will not use the Premises for any purpose in violation of any law, municipal ordinance, or regulation, and that on any breach of this agreement Landlord may, at its option, terminate this Lease forthwith and reenter and repossess the Premises. (12) FIRE. It is understood and agreed that if the Premises hereby leased be damaged or destroyed in whole or in part by fire or other casualty during the Term, Landlord will, upon collection, use its insurance proceeds for the repair and restoration of the Premises to good and tenantable condition with reasonable dispatch, and that the Rent herein provided for shall abate entirely in case the entire premises are untenantable and pro rata for the portion rendered untenantable, in case a part only is untenantable, until the same shall be restored to a tenantable condition; provided, however, that if Tenant shall fail to adjust its own insurance or to remove its damaged goods, wares, equipment or property within a reasonable time, and as a result thereof the repairing and restoration is delayed, there shall be no abatement of Rent during the period of such delay, and provided further there shall be no abatement of Rent if such fire or other cause damaging or destroying the Premises shall result from the negligence or willful act of Tenant, its agents or employees, and provided further that if Tenant shall use any part of the Premises for storage during the period of repair a reasonable charge shall be made therefor against Tenant, and provided further that in case the Premises, or the Building shall be destroyed to the extent of more than one-half (1/2) of the value thereof, Landlord Page 4 5 may, at its option, terminate this Lease forthwith by a written notice to Tenant. Landlord's duty to restore shall at all times be conditioned upon collection of insurance proceeds. (13) GLASS. Tenant agrees to keep any glass, including glass windows which are part of the Premises insured with a responsible insurance company in the name of Landlord and to deliver the policy or policies to Landlord and upon its failure to do so, Landlord may place such insurance and charge the same to Tenant as additional Rent as provided in Paragraph 6; but the failure on the part of Landlord to place such insurance does not release Tenant for any liability. (14) INSURANCE/INDEMNIFICATION. Tenant, at its sole cost and expense, will procure and keep in effect during the Term personal liability and property damage insurance on an occurrence basis (and not on a "claims made" basis) for the benefit of Landlord in the sum of One Million and no/100 ($1,000,000.00) Dollars for damages resulting to one person and One Million and no/100 ($1,000,000.00) Dollars for damages resulting from one casualty, and Two Million and no/100 ($2,000,000.00) Dollars property damage insurance resulting from any one occurrence. The policies shall be written by insurance companies or carriers licensed to do business in the State of Michigan which are reasonably acceptable to Landlord. Tenant shall deliver said policies to Landlord and upon Tenant's failure to do so Landlord may at its option obtain such insurance and charge the same to Tenant as additional Rent as provided in Paragraph 6; but the failure on the part of Landlord to place such insurance does not release Tenant for any liability. Tenant agrees, at its sole cost and expense, during the entire Term, to procure, pay, and keep in full force and effect business interruption insurance and all risk property insurance, insuring against loss of income and Tenant's personal property (and the property of its customers, if applicable) located on or in the Premises. Tenant hereby releases and discharges Landlord and its members, officers, shareholders, partners, agents, employees, and representatives from any liability whatsoever arising from the interruption of Tenant's business or loss, damage, or injury to Tenant's property or to the property of others in or on the Premises, Building, or Property from any cause whatsoever, including fire or other casualty. Tenant agrees to indemnify and hold harmless Landlord from and against any and all claims, actions, damages, liabilities, costs and expenses in connection with all losses, including loss of life, personal injury and/or property damage from any cause whatsoever arising or occurring on or about the Property, Building or Premises arising out of or attributable to Tenant's use of the Property, Building or Premises. Landlord and Tenant hereby release and discharge each other and any officer, directors, shareholder, partner, member, or employee of each other of and from any liability whatsoever arising from loss, damage, or injury to property caused by fire or other casualty (irrespective of the cause of such fire or casualty and irrespective of whether or not insurance coverage is in effect) upon the expressed proviso that if at any time their respective insurers shall refuse to permit waivers of subrogation, Landlord or Tenant may in each instance revoke this waiver of subrogation effective thirty (30) days from the date of notice to the other, unless within such thirty (30) days period, the other is able to secure and furnish without additional expense insurance in other companies with such waiver of subrogation, or if such waiver can be obtained at additional expense, if the other agrees to pay such additional expense. The foregoing release shall not be deemed to impair Landlord's rights under Paragraph 39 below. (15) REPAIRS/ALTERATIONS. Landlord, after receiving written notice from Tenant or independently discovering a condition on its own, and having reasonable opportunity thereafter to obtain the necessary workmen therefor, agrees to provide for the repair of the roof and the four outer walls of the Building but not the doors, door frames, the window glass, window casings, window frames, windows or any of the appliances or appurtenances of said doors or window casings, window frames Page 5 6 and windows, or any attachment thereto or attachments to Premises used in connection therewith. Landlord's expenses hereunder shall be part of Landlord's maintenance expenses under Paragraph 4(b) hereof. Except as provided in the paragraph above, Tenant covenants and agrees that Tenant will, at Tenant's own expense, during the continuation of this Lease, properly maintain and keep Premises and every part and component thereof including the doors, windows, fixtures, gutters, downspouts, HVAC system (heating and cooling), plumbing (including pipes), electric, other utility systems and all other appliances, appurtenances and equipment belonging or used in connection therewith in good repair and at the expiration of the Term yield and deliver up the same in like condition as when taken. All repairs and replacements shall be made in a quality manner and in a class at least equal to the original work. As part of Tenant's obligations hereunder, Tenant agrees to obtain a maintenance contract on the HVAC system with a qualified, reputable, competent firm which provides for maintenance and servicing of the HVAC system at least quarterly, such maintenance to include changing of filters and/or fuses and servicing of components of said system which are normally and customarily serviced. In the event that Tenant, after receiving notice from Landlord that a repair to the Premises is necessary to keep the same in good repair and condition, and fails to do so within a reasonable time, Landlord may at its option enter the Premises and make said repair and charge the same to Tenant as Additional Rent as provided in paragraph 6; but the failure on the part of Landlord to make said repair shall not release Tenant from any liability. Tenant shall not make any alterations, additions, or improvements to said Premises without the Landlord's written consent, and all alterations, additions, or improvements made by either of the parties thereto upon the Premises, except movable office furniture and trade fixtures put in at the expense of the Tenant, shall be the property of Landlord and shall remain upon and be surrendered with the premises at the termination of this Lease, without molestation or injury. Provided, however, Landlord may, at any time, designate by written notice to Tenant those alterations, additions, or improvements to the Premises which, upon termination of the Lease, Tenant must remove. Tenant shall promptly remove, when requested, the alteration, additions, and improvements and repair any damage to the Premises caused by such removal or caused by the removal of Tenant's movable office furniture and trade fixtures. Tenant will, during the Term of this Lease, replace all light bulbs and fixtures located in the Building and keep the same in good working condition throughout the Term of this Lease. Upon vacating, Tenant will broom clean the shop area and clean the carpeting located in the Building. (16) EMINENT DOMAIN. If the whole or any substantial part of the Premises are taken under the power of eminent domain, then the Term shall cease on the part so taken and the Rent shall be paid up to the date of such taking, and from that day the Tenant shall have the right to either cancel this Lease and declare the same null and void or to continue in possession of the remainder of Premises under the terms of this Lease, except that the Rent shall be reduced in proportion to the amount of the Premises taken. All damages awarded for such taking shall belong to and be the property of Landlord, whether such damages shall be awarded as compensation for diminution in value to the leasehold or to the fee of the Premises provided, however, that Landlord shall not be entitled to any portion of the award made to Tenant for loss of business. (17) RESERVATIONS. Landlord shall have free access at all times to the roof of the Premises. Tenant shall not erect any structures for storage or any aerial, or use the roof for any purpose without the written consent of Landlord. If the Premises consist of only part of a Building owned or controlled by Landlord, Landlord may enter the Premises at any reasonable time and install or repair pipes, wires, Page 6 7 and other Building systems and components or make any repairs deemed by Landlord essential for the use and occupancy of the other parts or portions of the Building. Tenant agrees that Landlord may enter the Premises at reasonable times and install or repair pipes, wires, and other appliances or make any repairs deemed by Landlord essential to the use and occupancy of the other parts of the Building. (18) CARE OF PREMISES. Tenant shall not perform any acts or carry on any practices which may injure the Property or Building or be a nuisance or menace to the tenants in adjoining buildings and shall keep the Building and Property (including adjoining drives, streets, sidewalks, alleys, or yard) clean and free from rubbish and dirt at all times. In addition, Tenant shall use reasonable care to keep the Premises free from snow and ice at such times as they accumulate prior to Landlord's normal and customary snow and ice removal service. In the event Tenant shall not comply with these provisions, Landlord may enter upon the Premises and have rubbish and dirt removed and the Building cleaned, in which event Tenant agrees to pay all charges that Landlord shall pay including the cost of administration as provided in Paragraph 6. (19) LEGAL COMPLIANCES. Tenant shall at its own expense under penalty of forfeiture and damages promptly comply with all lawful laws, orders, regulations or ordinances of all municipal, County and State authorities affecting the Premises and the cleanliness, safety, occupation and use of same. (20) CONDITION OF PREMISES/IMPROVEMENTS AT TIME OF LEASE. Tenant acknowledges that Tenant has examined the Premises prior to the execution of this Lease and knows the condition thereof, and that no representations as to the condition or state of repairs thereof have been made by Landlord or its agents which are not herein expressed. Tenant hereby accepts the Premises in their present condition. Landlord shall complete any improvements subject to architectural and engineering plans attached hereto required to be made by Landlord pursuant to the terms of this Lease with reasonable diligence unless prevented therefrom by labor disputes, fire, usual delay in transportation, unavoidable casualty or other cause beyond Landlord's control. When Landlord has completed any improvements Landlord is required to make and the Premises are delivered to Tenant, if Tenant shall take occupancy of the Premises, then Tenant shall be deemed to have accepted the improvements in the condition delivered by Landlord without further representations or warranties from Landlord. (21) TENANT'S LOSSES. Landlord shall not be responsible or liable to Tenant for any loss or damage to Tenant's property or business from any cause whatsoever including, but not limited to, loss or damage that may be occasioned by or through the acts or omissions of persons occupying adjoining premises or any other portion of the Building, or for any loss or damage resulting to Tenant or its property from interruption of electric service or bursting, stoppage or leaking of water, gas, sewer or steam pipes, or any other cause whatsoever. (22) RE-RENTING. Tenant hereby agrees that for a period commencing ninety (90) days prior to the termination of this Lease, Landlord may show the Premises to prospective tenants, and display in and about the Premises "TO RENT" signs. (23) HOLDING OVER. If Tenant remains in possession of the Premises after the termination of this Lease and without execution of a new Lease or other written agreement signed by Landlord, Tenant shall be deemed to be occupying the Premises as a tenant from month-to-month and shall be subject to the provisions of this Lease in effect on the day before the expiration of this Lease, except those terms relating to the Term and except that the monthly Rent shall be increased by One Hundred Fifty (150%) percent of the monthly Rent payable during the last month prior to the Page 7 8 termination of this Lease, without prejudice to any claim or damages which Landlord may have against Tenant for the failure of Tenant to vacate the Premises upon the termination of this Lease. If Tenant holds over, Tenant shall be required to give Landlord written notice of its intention to vacate the Premises no less than two (2) months prior to the first day of the month in which Tenant intends to vacate and Tenant shall vacate by the end of that month and shall be liable to Landlord for the Rent payment (as well as the additional payments/rent required to be made pursuant to paragraph 4 of this Lease for said month. (24) GAS, WATER, HEAT, ELECTRICITY. Tenant will pay all charges made against the Premises for gas, water, heat, and electricity during the continuance of this Lease, as the same shall become due. (25) SIGNS. No sign or awning shall be installed or displayed by Tenant on or about the Premises except as shall be approved in writing by Landlord and in accordance with all City building codes, including the obtaining to the extent necessary and required City approval, permits or licenses. (26) ACCESS TO PREMISES. Landlord shall have the right to enter upon the Premises at all reasonable hours for the purpose of inspecting the same. If Landlord deems any repairs necessary Landlord may demand that Tenant make the same and if Tenant refuses or neglects forthwith to commence such repairs and complete the same with reasonable dispatch Landlord may make or cause to be made such repairs. Landlord shall not be responsible to Tenant for any loss or damage that may occur to Tenant's property or business by reason of the repairs made or ordered to be made by Landlord. If Landlord makes or causes to be made repairs or replacements, Tenant agrees that it will forthwith on demand pay to Landlord the cost thereof including administration with interest as provided in Paragraph 6 hereof. (27) DEFAULT/REENTRY. In case any Rent shall be due and unpaid or if default be made in any of the covenants herein contained, or if the Premises shall be deserted or vacated, then it shall be lawful for Landlord, its agents, representatives and assigns to reenter into and repossess the Premises, provided that Landlord shall have first given Tenant the notice which Landlord is required to give pursuant to subparagraphs (a) or (b) below, whichever shall be applicable. In addition to any other remedies that Landlord may have under this Lease or pursuant to law, in the event of default: (A) In the event Tenant shall fail to pay the Rent or make any of the other payments required by Tenant to be made pursuant to paragraph 4 hereof when due, Landlord may give Tenant written notice of such default and if Tenant shall fail to cure such default within seven (7) days, Landlord shall, in addition to its other remedies provided by law, have the remedies set forth in subparagraph 27(c) hereof. (B) If Tenant shall be in default in performing any of the terms of this Lease (other than those specified in Paragraph 27(a) above), Landlord may at its option (i) give Tenant written notice of such default, and if Tenant shall fail to cure such default within thirty (30) days, then Landlord shall, in addition to all other remedies provided by law, have the remedies set forth in subparagraph 27(c) hereof, or (ii) Landlord may cure such default for the account of Tenant and any sum so expended by Landlord shall be paid by Tenant with interest as provided in Paragraph 6. (C) If any Rent shall be due and unpaid or Tenant shall be in default upon any of the other terms of this Lease, and such default has not been cured within the time provided in Paragraph 27(a) or Paragraph 27(b) above, whichever shall apply, or if the Premises are wrongfully abandoned or vacated, then Landlord, in addition to its other remedies provided by law, shall have the immediate right of re-entry. Should Landlord elect to re-enter or take possession pursuant to legal proceedings or any notice provided by law, Landlord may either terminate Page 8 9 this Lease or from time to time, without terminating this Lease, relet the Premises or any part thereof on such terms and conditions as Landlord shall in its sole discretion deem advisable. The proceeds of such reletting shall be applied: first, to the payment of any indebtedness of Tenant to Landlord other than Rent due hereunder; second, to the payment of any costs of such reletting, including the cost of alterations and repairs to the Premises, brokerage fees, etc.; third, to the payment of Rent due and unpaid hereunder, and the residue, if any, shall be held by Landlord and applied in payment of future Rent as the same may become due and payable hereunder. Should the proceeds of such reletting during any month be less than the monthly Rent reserved hereunder, then Tenant shall during each such month promptly pay any such deficiency to Landlord. Landlord reserves the right to bring any action or legal proceeding for the recovery of any deficiency remaining unpaid from time to time, without being obligated to wait until the end of the Term hereof. (28) EXPENSES, DAMAGES, RE-ENTRY. In the event that Landlord shall, during the Term, obtain possession of the Premises by re-entry, summary proceedings, or otherwise, Tenant hereby agrees to pay Landlord the expense incurred in obtaining possession of the Premises and also all expenses and commissions which maybe paid in and about the letting of the same, and all other damages. (29) REMEDIES NOT EXCLUSIVE. It is agreed that each and every of the rights and benefits provided by this Lease shall be cumulative, and shall not be exclusive of any other of said rights, remedies and benefits, or of any other rights, remedies and benefits allowed by law or in equity. (30) QUIET ENJOYMENT. Landlord covenants that Tenant, on payment of all the aforesaid installments and performing all the covenants aforesaid, shall and may peacefully and quietly have, hold and enjoy the Premises for the Term aforesaid. (31) WAIVER. One or more waivers of any covenant or condition by Landlord shall not be construed as a waiver of a further breach of the same covenant or condition. (32) DELAY OF POSSESSION. It is understood that if Tenant shall be unable to enter into and occupy the Premises at the time above provided, by reason of the Premises not being ready for occupancy, or by reason of the holding over of any previous occupancy of the Premises, or as a result of any cause or reason, Landlord shall not be liable in damages to Tenant therefor, but during the period Tenant shall be unable to occupy said premises as hereinbefore provided, the Rent therefor shall be abated and Landlord is to be the sole judge as to when the Premises are ready for occupancy. (33) NOTICES. Any notice or other communication required or permitted to be given under this Lease must be given in writing and sent by certified mail, return receipt requested. Notices shall be deemed given when deposited in the U.S. mail with proper postage affixed and addressed to Tenant to its last known address or to the Premises and if to Landlord, to its last known address. Notice need be sent to only one Tenant where Tenant is more than one individual. (34) GENDER. The gender of any word contained in this Lease shall not affect the meaning of this Lease, and whenever herein the singular number is used, the same shall include the plural, and any gender shall be deemed to include the masculine, feminine, or neuter genders. (35) BINDING. The covenants, conditions and agreements made and entered into by the parties hereto are declared binding on their respective heirs, successors, representatives and assigns. (36) LATE FEES. If any installment of Rent is unpaid for ten (10) days after Tenant receives written notice that the Rent is due, Tenant shall pay, in addition to all other charges, a charge of ten (10%) percent of the amount of such overdue installment to compensate Landlord for the cost and expense Page 9 10 of said delay. Tenant agrees to pay a Fifty ($50.00) Dollar fee for any check returned for non-sufficient funds. (37) WINDOW TREATMENTS. Tenant shall not install any shades, blinds or other window treatments in the Premises without the written consent of Landlord. (38) RULES AND REGULATIONS. Tenant agrees to keep and use the Premises in a manner which shall be in compliance with all applicable laws, rules, regulations, orders and ordinances which relate to the Premises or which are imposed by reason of law and/or Tenant's use of the Premises, and further agrees not to suffer or permit the Premises to be used for any unlawful purpose, and to protect, defend and hold Landlord harmless from and against any and all liabilities, costs, expenses or damages that may result from or be due to or arise out of any infractions of or non-compliance with any of said laws, rules, regulations, orders or ordinances. (39) ENVIRONMENTAL LAWS. Tenant, its agents, employees, invitees, contractors, sublessees or assignees, shall not do, or cause to be done, any work or activity upon or at the Premises which may cause the Premises, or any parts thereof, to be in violation of any federal, state or local environmental health or safety law, statute, ordinance, rule, regulation, order or decree, relating to the environment, or imposing liability or standards concerning or in connection with hazardous, dangerous or toxic materials, waste or substances, including any common law theories based on nuisance, negligence or strict liability (collectively the "Environmental Laws"). Tenant shall not cause or permit the Premises to be used to generate, manufacture, refine, transport, treat, store, handle, dispose, transfer, produce or process Hazardous Substances (as hereinafter defined) or any other dangerous or toxic substances, or waste materials, except in compliance with all applicable Environmental Laws and shall not cause or permit the release of any Hazardous Substances upon the Premises or off site of the Premises. "Hazardous Substances" shall mean and include, without limitation, any flammable substances, explosives, radioactive materials, solid and liquid wastes, contaminants, pollutants or toxic matter or any substance regulated by any or defined as a hazardous substance or hazardous material by any law, statute, ordinance, rule, regulation, or order of any federal, state or local government body or entity or other governmental body or agency or organization. Tenant shall defend and indemnify Landlord from and against any losses, claims, damages, penalties, liabilities, costs (including clean-up costs) and expenses (including reasonable attorney's fees) resulting from Tenant, its agents, employees, invitees, contractors, sublessees or assignees breach or violation of this paragraph of this Lease or any Environmental Laws. The obligations and liabilities contained in this paragraph shall survive and continue in full force and effect and shall not be terminated, discharged or released irrespective of the termination or expiration of this Lease. (40) ATTORNEY REVIEW. This Lease has been prepared for submission to your attorney for approval. No representation or recommendation is made as to the legal sufficiency, legal effect or tax consequences of this Lease or the transaction relating thereto; the parties shall rely solely upon the advice of their own legal counsel as to the legal and tax consequences of this Lease. (41) LANDLORD'S IMPROVEMENTS. Landlord shall make the following improvements to the Premises at Landlord's expense in accordance with the architectural and engineering plans attached hereto as Exhibit B (which are incorporated herein and made a part of this Lease), using Landlord's Standard finishes. (All dimensions are plus or minus and are to be adjusted in the field.): (a) Parking - Parking areas will be completed with painted striping to city code. (See Site Plan Exhibit "A"). Page 10 11 (b) Finishes: o All perimeter walls of the office area will be furred out with metal furring strips and 1/2" thickness drywall, nine (9) feet to height. Floors shall be standard concrete construction per Exhibit B. o Ceiling tiles 2' x 4' with metal grid. 2' x 2' ceiling tiles as shown on Exhibit "B". o Standard ceilings of 2'0" x 4'0" fissured white acoustical panels will be used in the office area. (c) Resilient Flooring & Carpet: o Floors in the toilet areas will be finished with standard grade vinyl composition tile. o All areas which are to be finished with Resilient Tile and Carpet will be trimmed out and completed with a standard 4" high curved or straight vinyl base. o Floors in the General Office area of approximately 7,224 square feet will be finished with a commercial grade carpet (Allowance of $10 per sq. yd.) Includes cove base and V.C.T. tile, labor and material installation. Color to be chosen by Tenant. (d) Painting - Interior drywall surfaces are to be finished with one (1) application of primer and one (1) finish coat of white paint. (e) Miscellaneous Specialties: o Grab bars are to be provided in each handicap accessible toilet compartment. o Mirrors are to be provided at each vanity. o Toilet paper dispensers are to be provided within each toilet compartment. o Sink and cabinets to be installed in the lunchroom. Counter countertop with upper and lower cabinets and a disposal. (f) Heating, Ventilating & Air Conditioning: o The Office area heating and cooling shall be a ducted system designed as follows: Heat to 72 degrees Fahrenheit (F) inside when 0 degrees F outside. Cool to 75 degrees dry bulb inside at 90 degrees F outside. Standard thermostats. o The HVAC equipment and materials will be selected from the following: o Ceiling diffusers shall be adjustable pattern and lay-in with volume control dampers. o The packaged roof-top conditioning units with accessories shall be Lennox or "Trane" or equal. o The Warehouse heating system shall be per Mechanical Contractor layout and spec. Page 11 12 (g) Electrical: (1) Service and Distribution: o The incoming, secondary electrical service work will include conduit, panel, switchgear, and cable work or per Edison code. o One (1) 1000-amp, three phase Edison service, per Edison code. o Location on masonry wall/west wall. (2) Lighting - In the General Office (private offices, open office area) area we are providing 2'0" x 4'0" recessed, commercial fluorescent fixtures, lay-in type lens fixtures. (3) Shop Lights - Plugs for 47-fixtures tenant will supply. (4) Exit Lights - Emergency and exit lights per code. In the event Tenant's racks require additional emergency lights/or exits Tenant will supply per fire marshal's requirements. (5) General Notes - This proposal does not include provision for an alarm system, a smoke detection system, a clock system, an intrusion alarm system, a sound system, a paging system, or other miscellaneous electrical signal systems, fax, dedicated lines. (6) The interior of the Building will have a fire suppression system. (7) All electrical to code. (42) SECURITY DEPOSIT. Landlord herewith acknowledges the receipt of Sixty Three Thousand Five Hundred Seventy Two and 50/100 ($63,572.50) Dollars (the "Security Deposit"), which it is to retain as security for the faithful performance of all of the covenants, conditions and agreements of this Lease, but in no event shall Landlord be obliged to apply the same upon Rents or other charges in arrears or upon damages for Tenant's failure to perform the said covenants, conditions and agreements; Landlord may so apply the Security Deposit at its option; and Landlord's right to possession of the Premises for non-payment of Rent or for any other reason shall not in any event be affected by reason of the fact that Landlord holds this security. The Security Deposit if not applied toward the payment of Rent in arrears or toward the payment of damages suffered by Landlord by reason of Tenant's breach of the covenants, conditions and agreements of this Lease is to be returned to Tenant when this Lease is terminated, according to these terms, and in no event is the Security Deposit to be returned until Tenant has vacated the Premises and delivered possession to Landlord. In the event that Landlord repossesses itself of the said Premises because of Tenant's default or because of Tenant's failure to carry out the covenants, conditions and agreements of this Lease, Landlord may apply the Security Deposit upon all damages suffered to the date of said repossession and may retain the Security Deposit to apply upon such damages as may be suffered or shall accrue thereafter by reason of Tenant's default or breach. Landlord shall not be obliged to keep the Security Deposit as a separate fund, but may mix the Security Deposit with its own funds. Page 12 13 In addition to the Security Deposit set forth above, Tenant herewith deposits with Landlord as additional security the sum of One Hundred Thousand ($100,000.00) Dollars (the "Additional Security Deposit"). The Additional Security Deposit shall be held, used and applied by Landlord upon the same terms and conditions and for the same purposes as is the Security Deposit. Tenant shall be permitted to request the return of the Additional Security Deposit any time after six (6) months after the Commencement Date, and provided that Tenant shall not have been in default under the terms of the Lease, Landlord shall, upon such request, return the Additional Security Deposit to Tenant within ten (10) days of receipt of such request. (43) RECORDING. Tenant shall not record this Lease or a Memorandum of this Lease without the written consent of Landlord. In the event that Tenant records this Lease or a Memorandum without the written consent of Landlord, Tenant grants Landlord a limited power of attorney in Tenant's name to discharge the instrument which was recorded without Landlord's consent. IN WITNESS WHEREOF, the parties have hereunto set their hands and seals the day and year first above written. WITNESSES: LANDLORD: INTERNATIONAL-WIXOM, LLC By: - ---------------------- --------------------------------------------------- Darryl S. Rogers Its: Member TENANT: ROCKWELL MEDICAL TECHNOLOGIES, INC. By: - ---------------------- --------------------------------------------------- Its: - ---------------------- ------------------------------------------------- Print Name and Title Attachments: Exhibit A - Site Plan Exhibit B - Floor Plan Page 13 14 In addition to the Security Deposit set forth above, Tenant herewith deposits with Landlord as additional security the sum of One Hundred Thousand ($100,000.00) Dollars (the "Additional Security Deposit"). The Additional Security Deposit shall be held, used and applied by Landlord upon the same terms and conditions and for the same purposes as is the Security Deposit. Tenant shall be permitted to request the return of the Additional Security Deposit any time after six (6) months after the Commencement Date, and provided that Tenant shall not have been in default under the terms of the Lease, Landlord shall, upon such request, return the Additional Security Deposit to Tenant within ten (10) days of receipt of such request. (43) RECORDING. Tenant shall not record this Lease or a Memorandum of this Lease without the written consent of Landlord. In the event that Tenant records this Lease or a Memorandum without the written consent of Landlord, Tenant grants Landlord a limited power of attorney in Tenant's name to discharge the instrument which was recorded without Landlord's consent. IN WITNESS WHEREOF, the parties have hereunto set their hands and seals the day and year first above written. WITNESSES: LANDLORD: INTERNATIONAL-WIXOM, LLC By: /s/ Darryl S. Rogers - ---------------------- --------------------------------------------------- Darryl S. Rogers Its: Member TENANT: ROCKWELL MEDICAL TECHNOLOGIES, INC. By: /s/ Robert L. Chioini - ---------------------- --------------------------------------------------- Its: Robert L. Chioini Chairman & CEO - ---------------------- ------------------------------------------------- Print Name and Title Attachments: Exhibit A - Site Plan Exhibit B - Floor Plan Page 13 EX-10.15 3 k61245ex10-15.txt LOAN & SECURITY AGREEMENT 1 EXHIBIT 10.15 $2,000,000.00 LOAN AND SECURITY AGREEMENT by and among ROCKWELL MEDICAL TECHNOLOGIES, INC. AND ROCKWELL TRANSPORTATION, INC. (collectively, "Borrower") and HELLER HEALTHCARE FINANCE, INC. ("Lender") March 28 , 2001 2 LOAN AND SECURITY AGREEMENT THIS LOAN AND SECURITY AGREEMENT (the "Agreement") is made as of March 28, 2001, by and among ROCKWELL MEDICAL TECHNOLOGIES, INC. a Michigan corporation, and ROCKWELL TRANSPORTATION, INC., a ____________ Michigan corporation, (collectively, "Borrower"), and HELLER HEALTHCARE FINANCE, INC., a Delaware corporation ("Lender"). RECITALS A. Borrower desires to establish certain financing arrangements with and borrow funds from Lender, and Lender is willing to establish such arrangements for and make loans and extensions of credit to Borrower, on the terms and conditions set forth below. B. The parties desire to define the terms and conditions of their relationship and to reduce their agreements to writing. NOW, THEREFORE, in consideration of the promises and covenants contained in this Agreement, and for other consideration, the receipt and sufficiency of which are acknowledged, the parties agree as follows: ARTICLE I DEFINITIONS As used in this Agreement, unless otherwise specified, all references to "Sections" shall be deemed to refer to Sections of this Agreement, and the following terms shall have the meanings set forth below: SECTION 1.1. ACCOUNT. "Account" means any right to payment for goods sold or leased or services rendered, whether or not evidenced by an instrument or chattel paper, and whether or not earned by performance, including, without limitation, the right to payment of management fees. SECTION 1.2. ACCOUNT DEBTOR. "Account Debtor" means any Person obligated on any Account of Borrower. SECTION 1.3. AFFILIATE. "Affiliate" means, with respect to a specified Person, any Person directly or indirectly controlling, controlled by, or under common control with the specified Person, including without limitation their controlling stockholders and any Affiliates thereof. A Person shall be deemed to control a corporation or other entity if the Person 1 3 possesses, directly or indirectly, the power to direct or cause the direction of the management and business of the corporation or other entity, whether through the ownership of voting securities, by contract, or otherwise. SECTION 1.4. AGREEMENT. "Agreement" means this Loan and Security Agreement, as it may be amended or supplemented from time to time. SECTION 1.5. BASE RATE. "Base Rate" means a rate of interest equal to two percent (2.0%) above the "Prime Rate of Interest". SECTION 1.6. BORROWED MONEY. "Borrowed Money" means any obligation to repay money, any indebtedness evidenced by notes, bonds, debentures or similar obligations, any obligation under a conditional sale or other title retention agreement and the net aggregate rentals under any lease which under GAAP would be capitalized on the books of Borrower or which is the substantial equivalent of the financing of the property so leased. SECTION 1.7. BORROWER. "Borrower" has the meaning set forth in the Preamble. SECTION 1.8. BORROWING BASE. "Borrowing Base" has the meaning set forth in Section 2.1(d). SECTION 1.9. BUSINESS DAY. "Business Day" means any day on which financial institutions are open for business in the State of Maryland, excluding Saturdays and Sundays. SECTION 1.10 CHANGE IN CONTROL. "Change of Control" means Robert Chioni's termination or resignation as an officer of Borrower or the sale of all or substantially all of Robert Chioni's' stock in the Borrower. SECTION 1.11. CLOSING; CLOSING DATE. "Closing" and "Closing Date" have the meanings set forth in Section 5.3. SECTION 1.12. COLLATERAL. "Collateral" has the meaning set forth in Section 3.1. SECTION 1.13. COMMITMENT FEE. "Commitment Fee" has the meaning set forth in Section 2.4(a). SECTION 1.14. CONCENTRATION ACCOUNT. "Concentration Account" has the meaning set forth in Section 2.3. SECTION 1.15. CONTROLLED GROUP. "Controlled Group" means all businesses that would be treated as a single employer under Section 4001(b) of ERISA. SECTION 1.16. DEFAULT RATE. "Default Rate" means a rate per annum equal to five percent (5%) above the then applicable Base Rate, excluding any non-compliance fee. 2 4 SECTION 1.17. ERISA. "ERISA" has the meaning set forth in Section 4.12. SECTION 1.18. EVENT OF DEFAULT. "Event of Default" and "Events of Default" have the meanings set forth in Section 8.1. SECTION 1.19. GAAP. "GAAP" means generally accepted accounting principles applied in a consistent manner. SECTION 1.20. GOVERNMENTAL AUTHORITY. "Governmental Authority" means and includes any federal, state, District of Columbia, county, municipal, or other government and any department, commission, board, bureau, agency or instrumentality thereof, whether domestic or foreign. SECTION 1.21. HAZARDOUS MATERIAL. "Hazardous Material" means any substances defined or designated as hazardous or toxic waste, hazardous or toxic material, hazardous or toxic substance, or similar term, by any environmental statute, rule or regulation or any Governmental Authority applicable to Borrower or its business, operations or assets. SECTION 1.22. HIGHEST LAWFUL RATE. "Highest Lawful Rate" means the maximum lawful rate of interest referred to in Section 2.7 that may accrue pursuant to this Agreement. SECTION 1.23. INTENTIONALLY DELETED. SECTION 1.24. LENDER. "Lender" means Heller Healthcare Finance, Inc., a Delaware corporation. SECTION 1.25. LOAN. "Loan" has the meaning set forth in Section 2.1(a). SECTION 1.26. LOAN DOCUMENTS. "Loan Documents" means and includes this Agreement, the Note, the Certificate of Validity, and each and every other document now or hereafter delivered in connection with this Agreement, as any of them may be amended, modified, or supplemented from time to time. SECTION 1.27. LOAN MANAGEMENT FEE. "Loan Management Fee" has the meaning set forth in Section 2.4(c). SECTION 1.28. LOCKBOX. "Lockbox" has the meaning set forth in Section 2.3. SECTION 1.28 a. LOCKBOX ACCOUNT. "Lockbox Account" means an account maintained by Borrower at the Lockbox Bank into which all collections of Accounts are paid directly. SECTION 1.29. LOCKBOX BANK. "Lockbox Bank" has the meaning set forth in Section 2.3. 3 5 SECTION 1.29a. MATERIAL ADVERSE EFFECT. "Material Adverse Effect" shall mean any event or condition which, alone or when taken with other events or conditions occurring or existing concurrently with such event or condition (i) has or is reasonably expected to have a material adverse effect on the business, operations, condition (financial or otherwise), assets, liabilities, prospects, or properties of Borrower; (ii) has or is reasonably expected to have any material adverse effect on the validity or enforceability of this Agreement or any Loan Document; (iii) materially impairs or is reasonably expected to materially impair the ability of Borrower to pay and perform the Obligations; (iv) materially impairs or is reasonably expected to materially impair the ability of Lender to enforce its rights and remedies under this Agreement or any of the Loan Documents; or (v) has or is reasonably expected to have any material adverse effect on the Collateral, the liens of Lender in the Collateral or the priority of such liens. SECTION 1.31. MAXIMUM LOAN AMOUNT. "Maximum Loan Amount" has the meaning set forth in Section 2.1(a). SECTION 1.32. NOTE. "Note" has the meaning set forth in Section 2.1(c). SECTION 1.33. OBLIGATIONS. "Obligations" has the meaning set forth in Section 3.1. SECTION 1.34. PERMITTED LIENS. "Permitted Liens" means: (i) deposits or pledges to secure obligations under workmen's compensation, social security or similar laws, or under unemployment insurance; (ii) deposits or pledges to secure bids, tenders, contracts (other than contracts for the payment of money), leases, statutory obligations, surety and appeal bonds and other obligations of like nature arising in the ordinary course of business; (iii) mechanic's, workmen's, materialmen's, tax or other like liens arising in the ordinary course of business with respect to obligations which are not delinquent, or which are being contested in good faith by appropriate proceedings which suspend the collection thereof and in respect of which adequate reserves have been made (provided that such proceedings do not, in Lender's sole and reasonable discretion, involve any substantial risk of the sale, loss or forfeiture of such property or assets or any interest therein); (iv) liens and encumbrances in favor of Lender; (v) Liens granted in connection with the lease or purchase of property or assets financed by borrowings permitted by Section 7.1(iv) (provided, however, that no such borrowings permitted by Section 7.1(iv) may be secured by Liens on any Accounts); and (vi) liens set forth on Schedule 1.34. SECTION 1.35. PERSON. "Person" means an individual, partnership, corporation, trust, joint venture, joint stock company, limited liability company, association, unincorporated organization, Governmental Authority, or any other entity. SECTION 1.36. PLAN. "Plan" has the meaning set forth in Section 4.12. SECTION 1.37. PREMISES. "Premises" has the meaning set forth in Section 4.14. 4 6 SECTION 1.38. PRIME RATE OF INTEREST. "Prime Rate of Interest" means that rate of interest designated as such by Citibank, N.A., or any successor thereto, as the same may from time to time fluctuate. SECTION 1.39. PROHIBITED TRANSACTION. "Prohibited Transaction" means a "prohibited transaction" within the meaning of Section 406 of ERISA or Section 4975(c)(1) of the Internal Revenue Code that is not exempt under Section 407 or Section 408 of ERISA or Section 4975(c)(2) or (d) of the Internal Revenue Code or under a class exemption granted by the U.S. Department of Labor. SECTION 1.40. QUALIFIED ACCOUNT. "Qualified Account" means an Account of Borrower generated in the ordinary course of Borrower's business from the sale of goods, which Lender, in its sole and reasonable credit judgment, deems to be a Qualified Account. Without limiting the generality of the foregoing, no Account shall be a Qualified Account if: (a) the Account or any portion of the Account is payable by an individual beneficiary, recipient or subscriber individually and not directly to Borrower by a commercial entity; (b) the Account remains unpaid more than ninety (90) days past the claim or invoice date (but in no event more than one hundred twenty (120) days after the applicable goods have been sold; (c) the Account is subject to any defense, set-off, counterclaim, deduction, discount, credit, chargeback, freight claim, allowance, or adjustment of any kind, but only to such extent; (d) any part of any goods the sale of which has given rise to the Account has been returned, rejected, lost, or damaged, but only to such extent; (e) if the Account arises from the sale of goods by Borrower, the sale was not an absolute sale, or the sale was made on consignment or on approval or on a sale-or-return basis, or the sale was made subject to any other repurchase or return agreement, or the goods have not been shipped to the Account Debtor or its designee; (f) the Account is subject to a lien other than a Permitted Lien; (g) Borrower knows or should have known of the bankruptcy, receivership, reorganization, or insolvency of the Account Debtor; (h) the Account is evidenced by chattel paper or an instrument of any kind which has not been delivered as security to Lender, or has been reduced to judgment; (i) the Account is an Account of an Account Debtor having its principal place of business or executive office outside the United States; (j) the Account Debtor is an Affiliate or Subsidiary of Borrower; (k) more than ten percent (10%) of the aggregate balance of all Accounts owing from the Account Debtor obligated on the Account to Borrower are outstanding more than one hundred twenty (120) days past their invoice date; (l) fifty percent (50%) or more of the aggregate unpaid Accounts from any single Account Debtor are not deemed Qualified Accounts under this Agreement; (m) the total unpaid Accounts of the Account Debtor exceed twenty-five percent (25%) of the net amount of all Qualified Accounts; provided, however, that if the Account Debtor is either (1) a Governmental Authority, or (2) an entity who has a corporate debt rating of B+ or better as rated by Standard and Poor, then the limitation set forth in this subsection (m) shall be increased to 40%; (n) any covenant, representation or warranty contained in the Loan Documents with respect to such Account has been breached; or (o) the Account fails to meet such other specifications and requirements which may from time to time be reasonably established by Lender. 5 7 SECTION 1.41. REPORTABLE EVENT. "Reportable Event" means a "reportable event" as defined in Section 4043(c) of ERISA for which the notice requirements of Section 4043(a) of ERISA are not waived. SECTION 1.42. REVOLVING CREDIT LOAN. "Revolving Credit Loan" has the meaning set forth in Section 2.1(b). SECTION 1.43. TERM. "Term" has the meaning set forth in Section 2.8. SECTION 1.44 TERMINATION FEE. "Termination Fee " shall mean a fee payable upon termination of the Agreement, as yield maintenance for the loss of bargain and not as a penalty, equal to the Yield Maintenance Amount. SECTION 1.45 YIELD MAINTENANCE AMOUNT. "Yield Maintenance Amount" shall mean the product obtained by multiplying (a) the difference between (i) the all in effective yield (measured as a percentage per annum) earned by Lender under this Agreement during the three (3) full calendar months immediately preceding the Termination Date minus (ii) Heller Financial Inc.'s weighted average cost of capital (measured as a percentage per annum) for the most recent publicly disclosed quarterly financial period; TIMES (b) the average principal amount of outstanding Revolving Credit Loans for the three (3) calendar months immediately preceding the Termination Date; TIMES (c) the quotient of (i) the number of months (full or partial) then-remaining in the Term divided by (ii) twelve (12). ARTICLE II LOAN SECTION 2.1. TERMS. (a) The maximum aggregate principal amount of credit extended by Lender to Borrower under this Agreement (the "Loan") that will be outstanding at any time is Two Million and No/100 Dollars ($2,000,000.00) (the "Maximum Loan Amount"). Notwithstanding anything in this Loan Agreement to the contrary, the Maximum Loan Amount will be subject to the sublimit of $1,000,000 unless and until Borrower requests an increase. If an Event of Default exists at the time Borrower requests funding above such increase, such increase shall be subject to approval of Lender's Credit Committee exercising its sole credit judgment. (b) The Loan shall be in the nature of a revolving line of credit, and shall include sums advanced and other credit extended by Lender to or for the benefit of Borrower from time to time under this Article II (each a "Revolving Credit Loan") up to the Maximum Loan Amount depending upon the availability in the Borrowing Base, the requests of Borrower pursuant to the terms and conditions of Section 2.2, and on such other basis as Lender may reasonably determine. The outstanding principal balance of the Loan may fluctuate from time to time, to be reduced by repayments made by Borrower (which may be made without penalty or 6 8 premium), and to be increased by future Revolving Credit Loans, advances and other extensions of credit to or for the benefit of Borrower, and shall be due and payable in full upon the expiration of the Term. For purposes of this Agreement, any determination as to whether there is availability within the Borrowing Base for advances or extensions of credit shall be made by Lender in its sole and reasonable discretion and is final and binding upon Borrower absent manifest error. (c) At Closing, Borrower shall execute and deliver to Lender a promissory note evidencing Borrower's unconditional obligation to repay Lender for Revolving Credit Loans, advances, and other extensions of credit made under the Loan, in the form of Exhibit A to this Agreement (as amended, modified, restated or replaced from time to time, the "Note"), dated the date of this Agreement, payable to the order of Lender in accordance with the terms thereof. The Note shall bear interest on the outstanding principal balance of the Note from the date of the Note until repaid, with interest payable monthly in arrears on the first Business Day of each month, at a rate per annum (on the basis of the actual number of days elapsed over a year of 360 days) equal to the Base Rate, provided that after the occurrence and during the continuance of an Event of Default such rate shall be equal to the Default Rate. Upon Borrower's failure to comply with the terms of this Agreement, Lender will be entitled, in addition to exercising any other rights and remedies available to it, but in lieu of charging the Default Rate, to assess a non-compliance fee which shall operate to increase the Base Rate by two percent (2%) per annum during any period of non-compliance. Lender shall be entitled to assess such fee whether or not an Event of Default is declared or otherwise occurs. Each Revolving Credit Loan, advance and other extension of credit shall be deemed evidenced by the Note, which is deemed incorporated into and made a part of this Agreement by this reference. (d) Subject to the terms and conditions of this Agreement, advances under the Loan shall be made against a borrowing base equal to eighty percent (80%) of Qualified Accounts (the "Borrowing Base"). Lender, in its sole credit judgment may further adjust the Borrowing Base by applying percentages (known as "liquidity factors") to Qualified Accounts based upon Borrower's actual recent collection history in a manner consistent with Lender's underwriting practices and procedures. Such liquidity factors may be adjusted by Lender throughout the Term as warranted by Lender's underwriting practices and procedures in its sole credit judgment. SECTION 2.2. LOAN ADMINISTRATION. Borrowings under the Loan shall be as follows: (a) A request for a Revolving Credit Loan shall be made, or shall be deemed to be made, in the following manner: (i) Borrower may give Lender notice of its intention to borrow, in which notice Borrower shall specify the amount of the proposed borrowing and the proposed borrowing date, not later than 2:00 p.m. Eastern time two (2) Business Days before the proposed borrowing date; provided, however, that no such request may be made at a time when there exists an Event of Default; and (ii) the becoming due of any amount required to be paid under this Agreement, whether as interest or for any other Obligation, shall be deemed irrevocably to be a request for a Revolving Credit Loan on the day following the due date in the 7 9 amount required to pay such interest or other Obligation if such was not paid by Borrower on the due date. (b) Borrower hereby irrevocably authorizes Lender, and Lender agrees, subject to the terms and conditions of this Agreement, to disburse the proceeds of each Revolving Credit Loan requested, or deemed to be requested, as follows: (i) the proceeds of each Revolving Credit Loan requested under subsection 2.2(a)(i) shall be disbursed by Lender by wire transfer to such bank account as may be agreed upon by Borrower and Lender from time to time or elsewhere if pursuant to written direction from Borrower; and (ii) the proceeds of each Revolving Credit Loan deemed to be requested under subsection 2.2(a)(ii) shall be disbursed by Lender by way of direct payment of the relevant interest or other Obligation. (c) All Revolving Credit Loans, advances and other extensions of credit to or for the benefit of Borrower shall constitute one general Obligation of Borrower, and shall be secured by Lender's lien upon all of the Collateral. (d) Lender shall enter all Revolving Credit Loans as debits to a loan account in the name of Borrower and shall also record in said loan account all payments made by Borrower on any Obligations and all proceeds of Collateral which are indefeasibly paid to Lender, and may record therein, in accordance with customary accounting practice, other debits and credits, including interest and all charges and expenses properly chargeable to Borrower. All collections into the Concentration Account pursuant to Section 2.3 shall be applied first to fees, costs and expenses due and owing under the Loan Documents, then to interest due and owing under the Loan Documents, and then to principal outstanding with respect to Revolving Credit Loans. (e) Lender will account to Borrower monthly with a statement of Revolving Credit Loans, charges and payments made pursuant to this Agreement, and such accounting rendered by Lender shall be deemed final, binding and conclusive upon Borrower, absent manifest error, unless Lender is notified by Borrower in writing to the contrary within thirty (30) days of the date each accounting is mailed to Borrower. Such notice shall be deemed an objection to those items specifically objected to in the notice. SECTION 2.3. COLLECTIONS, DISBURSEMENTS, BORROWING AVAILABILITY, AND LOCKBOX ACCOUNT. (a) Lender shall establish and maintain a lockbox and a lockbox account (the "Lockbox" and the "Lockbox Account", respectively) with BANK ONE, N.A. (the "Lockbox Bank"), and Borrower shall execute with Lender and the Lockbox Bank a Provider Account Agreement in substantially the form attached hereto as Exhibit B (the "Lockbox Agreement"), together with any other agreements or documents necessary to effectuate the intent of the parties as set forth in this Section 2.3 or in the Lockbox Agreement as Lender may require. Borrower shall ensure that all collections of Accounts are paid directly from Account Debtors to the Lockbox. Borrower hereby irrevocably makes, constitutes and appoints the Lockbox Bank (and all persons designated by the Lockbox Bank for such purpose) as Borrower's true and lawful attorney and agent-in-fact to endorse Borrower's name on all checks, items of payment or other 8 10 cash items that are acceptable for collection through the Federal Reserve System (collectively, "Checks") payable to Rockwell Medical Technologies, Inc. and Rockwell Transportation (or any reasonable variation of such names) with the endorsement "CREDIT TO THE ACCOUNT OF HELLER HEALTHCARE FINANCE, INC. XXXXXXXXXXXX"). Borrower agrees not to change the foregoing irrevocable instructions to the Lockbox Bank prior to the termination of this Agreement without the prior written consent of Lender. Notwithstanding anything in the Lockbox Agreement to the contrary, Borrower agrees that it shall be liable for any fees and charges in effect from time to time and charged by the Lockbox Bank in connection with the Lockbox and the Lockbox Account, and that Lender shall have no liability therefor. Borrower further acknowledges and agrees that, to the extent such fees and charges are not paid by Borrower directly but are satisfied using collections in the Lockbox Account, if applicable, such fees and charges shall be deemed to be Revolving Credit Loans made by Lender hereunder and, to the extent that the payment of such fees or charges by Borrower as provided herein results in any overadvance under this Agreement, Borrower agrees to immediately (upon notice) repay to Lender the amount of such overadvance. It is understood that Lender's actions pursuant to this Section 2.3 are provided as a convenience to Borrower and, in consideration thereof, Borrower agrees to indemnify and hold Lender harmless from any and all liabilities, claims, losses and demands whatsoever, including reasonable attorney's fees and expenses, arising from or relating to Lender's or the Lockbox Bank's actions pursuant to this Section 2.3. (b) Borrower agrees that all collections paid to the Lockbox and deposited by Lender into the Lockbox Account under the Lockbox Agreement will be immediately transferred by Lender into a depository account maintained by Lender at Bank One, N.A., or such other financial institution as determined by Lender in its sole discretion, by written notice to Borrowers and the Lockbox Bank (the "Concentration Account"). Lender shall apply, on a daily basis, all funds transferred into the Concentration Account pursuant to this Section 2.3 to reduce the outstanding indebtedness under the Loan (in accordance with Section 2.2(d)), and all future Revolving Credit Loans, advances and other extensions of credit to be made by Lender under the conditions set forth in this Article II. To the extent that any collections of Accounts or proceeds of other Collateral are not sent directly to the Lockbox but are received by Borrower, such collections shall be held in trust for the benefit of Lender and immediately remitted, in the form received, to the Lockbox Bank for transfer to the Concentration Account immediately upon receipt by Borrower. (c) Borrower acknowledges and agrees that its compliance with the terms of this Section 2.3 is essential, and that Lender will suffer immediate and irreparable injury and have no adequate remedy at law, if Borrower, through its acts or omissions, causes or permits Account Debtors to send payments other than to the Lockbox, or if Borrower fails to immediately deposit collections of Accounts or proceeds of other Collateral in the Lockbox Account as herein required. Upon Borrower's failure to comply with the terms of this Section 2.3, Lender will be entitled, in addition to exercising any other rights and remedies available to it, to assess a non-compliance fee which shall operate to increase the Base Rate by two percent (2%) per annum during any period of non-compliance. Lender shall be entitled to assess such fee whether or not an Event of Default is declared or otherwise occurs. All funds transferred from the 9 11 Concentration Account for application to Borrower's indebtedness to Lender shall be applied to reduce the Loan balance, but for purposes of calculating interest shall be subject to a seven Business Day clearance period. If as the result of collections of Accounts pursuant to the terms and conditions of this Section 2.3 a credit balance exists with respect to the Concentration Account, such credit balance shall not accrue interest in favor of Borrower, but shall be available to Borrower at any time or times for so long as no Event of Default, and no event or circumstance which, with notice or the passage of time (or both), would constitute an Event of Default, exists. SECTION 2.4. FEES. (a) Upon execution of this Agreement, Borrower shall unconditionally pay to Lender a commitment fee equal to one percent (1.0%) of the Maximum Loan Amount (the "Commitment Fee"), payable in installments if and when aggregate outstanding Revolving Credit Loans exceed the following thresholds:
Outstanding Revolving Credit and Term Loans Portion of Commitment Fee Due - ------------------------------------------- ----------------------------- $0 to $1,000,000 $10,000 $1,000,000 to $2,000,000 Additional $10,000
By way of clarification, the maximum aggregate Commitment Fee due under this Agreement is $20,000. (b) For so long as the Loan is available to Borrower, Borrower unconditionally shall pay to Lender a monthly usage fee (the "Usage Fee") equal to 0.0425% of the average amount by which the sublimit under the Maximum Loan Amount exceeds the average amount of the outstanding principal balance of the Revolving Credit Loans during the preceding month. The Usage Fee shall be payable monthly in arrears on the first Business Day of each successive calendar month. (c) For so long as the Loan is available to Borrower, Borrower unconditionally shall pay to Lender a monthly loan management fee (the "Loan Management Fee") equal to one-quarter of one percent (0.25%) of the average amount of the outstanding principal balance of the Revolving Credit Loans during the preceding month. The Loan Management Fee shall be payable monthly in arrears on the first day of each successive calendar month. (d) Borrower shall pay to Lender all out-of-pocket audit and appraisal fees in connection with audits and appraisals of Borrower's books and records and such other matters as Lender shall deem reasonably appropriate, which shall be due and payable on the first Business Day of the month following the date of issuance by Lender of a request for payment thereof to Borrower, but not less than ten (10) days after such request in the event that there is not 10 12 sufficient availability in the Borrowing Base to pay such fees as of such first Business Day of the month. Absent the existence of an Event of Default, Borrower shall not be required to pay to Lender the costs of more than four (4) audit or appraisals per year. (e) Borrower shall pay to Lender, on demand, any and all reasonable out-of pocket fees, costs or expenses which Lender or any participant pays to a bank or other similar non-affiliated institution (including, without limitation, any fees paid by Lender to any non-affiliated participant) arising out of or in connection with (i) the forwarding to Borrower or any other Person on behalf of Borrower, by Lender, of proceeds of Revolving Credit Loans made by Lender to Borrower pursuant to this Agreement, and (ii) the depositing for collection, by Lender or any participant, of any check or item of payment received or delivered to Lender or any participant on account of Obligations up to a maximum of $5,000.00 per year. SECTION 2.5. PAYMENTS. Principal payable on account of Revolving Credit Loans shall be payable by Borrower to Lender immediately upon the earliest of (i) the receipt by Borrower or Lender of any payments on or proceeds from any of the Collateral, to the extent of such proceeds, (ii) the occurrence of an Event of Default if the Loan and the maturity of the payment of the Obligations are accelerated prior to cure of such Event of Default, or (iii) the termination of this Agreement pursuant to Section 2.8 of this Agreement; provided, however, that if any advance made by Lender in excess of the Borrowing Base shall exist at any time, Borrower shall, immediately upon demand, repay such overadvance. Interest accrued on the Revolving Credit Loans shall be due on the earliest of (i) the first Business Day of each month (for the immediately preceding month), computed on the last calendar day of the preceding month, (ii) the occurrence of an Event of Default if the Loan and the maturity of the payment of the Obligations are accelerated prior to cure of such Event of Default, or (iii) the termination of this Agreement pursuant to Section 2.8. Except to the extent otherwise set forth in this Agreement, all payments of principal and of interest on the Loan, all other charges and any other obligations of Borrower under this Agreement, shall be made to Lender to the Concentration Account, in immediately available funds. SECTION 2.6. USE OF PROCEEDS. The proceeds of Lender's advances under the Loan shall be used solely for working capital and for other costs of Borrower arising in the ordinary course of Borrower's business. SECTION 2.7. INTEREST RATE LIMITATION. The parties intend to conform strictly to the applicable usury laws in effect from time to time during the term of the Loan. Accordingly, if any transaction contemplated by this Agreement would be usurious under such laws, then notwithstanding any other provision of this Agreement: (i) the aggregate of all interest that is contracted for, charged, or received under this Agreement or under any other Loan Document shall not exceed the maximum amount of interest allowed by applicable law (the "Highest Lawful Rate"), and any excess shall be promptly credited to Borrower by Lender (or, to the extent that such consideration shall have been paid, such excess shall be promptly refunded to Borrower by Lender); (ii) neither Borrower nor any other Person now or hereafter liable under this Agreement shall be obligated to pay the amount of such interest to the extent that it is in 11 13 excess of the Highest Lawful Rate; and (iii) the effective rate of interest shall be reduced to the Highest Lawful Rate. All sums paid, or agreed to be paid, to Lender for the use, forbearance, and detention of the debt of Borrower to Lender shall, to the extent permitted by applicable law, be allocated throughout the full term of the Note until payment is made in full so that the actual rate of interest does not exceed the Highest Lawful Rate in effect at any particular time during the full term thereof. If at any time the rate of interest under the Note exceeds the Highest Lawful Rate, the rate of interest to accrue pursuant to this Agreement shall be limited, notwithstanding anything to the contrary in this Agreement, to the Highest Lawful Rate, but any subsequent reductions in the Base Rate shall not reduce the interest to accrue pursuant to this Agreement below the Highest Lawful Rate until the total amount of interest accrued equals the amount of interest that would have accrued if a varying rate per annum equal to the interest rate under the Note had at all times been in effect. If the total amount of interest paid or accrued pursuant to this Agreement under the foregoing provisions is less than the total amount of interest that would have accrued if a varying rate per annum equal to the interest rate under the Note had been in effect, then Borrower agrees to pay to Lender an amount equal to the difference between (x) the lesser of (A) the amount of interest that would have accrued if the Highest Lawful Rate had at all times been in effect, or (B) the amount of interest that would have accrued if a varying rate per annum equal to the interest rate under the Note had at all times been in effect, and (y) the amount of interest accrued in accordance with the other provisions of this Agreement. SECTION 2.8. TERM. (a) Subject to Lender's right to cease making Revolving Credit Loans to Borrower upon or during the continuance of any Event of Default, this Agreement shall be in effect for a period of two (2) years from the Closing Date, unless terminated as provided in this Section 2.8 (the "Term"), and this Agreement shall be renewed for one-year periods thereafter upon the mutual written agreement of the parties. (b) Notwithstanding anything in this Agreement to the contrary, Lender may terminate this Agreement without notice upon and during the continuance of an Event of Default. (c) Upon at least thirty (30) days prior written notice to Lender (the "Termination Notice Period"), Borrower may terminate this Agreement at any time, provided however, at the effective date of any termination prior to the end of the Term, Borrower shall pay to Lender (in addition to the then outstanding principal, accrued interest and other Obligations owing under the terms of this Agreement and any other Loan Documents) as yield maintenance for the loss of bargain and not as a penalty, the Termination Fee. Notwithstanding the foregoing, the Termination Fee will be waived in the event that Borrower terminates this Agreement following a 20% reduction in the Borrowing Base resulting from Lender's unreasonable (i.e. lacking reasonable factual and economic basis) disqualification of Accounts as Qualified Accounts pursuant to the discretionary authority granted to Lender under Section 1.40(o) above. The Termination Fee will not be waived in the event that the 20% Borrowing Base reduction results from the occurrence of any of the events set forth in Sections 1.40(a) 12 14 through 1.40(n) or upon the Lender's reasonable disqualification of Accounts as Qualified Accounts pursuant to Section 1.40(o) above. (d) All of the Obligations shall be immediately due and payable upon the termination date stated in any notice of termination of this Agreement (the "Termination Date"). All undertakings, agreements, covenants, warranties, and representations of Borrower contained in the Loan Documents shall survive any such termination until Borrower has paid the Obligations to Lender, in full, in immediately available funds and Lender shall retain its liens in the Collateral and all of its rights and remedies under the Loan Documents notwithstanding such termination until Borrower has paid the Obligations to Lender, in full, in immediately available funds. (e) Notwithstanding any provision of this Agreement which makes reference to the continuance of an Event of Default, nothing in this Agreement shall be construed to permit Borrower to cure an Event of Default following the lapse of the applicable cure period, and Borrower shall have no such right in any instance unless specifically granted in writing by Lender. SECTION 2.9. JOINT AND SEVERAL LIABILITY; BINDING OBLIGATIONS. Each entity constituting Borrower shall be jointly and severally liable for all of the obligations of Borrower under the Note and this Agreement. Each Borrower, individually, expressly understands, agrees and acknowledges, that the loan would not be made available on the terms herein in the absence of the collective credit of all of the Borrowers, the joint and several liability of all Borrowers, and the cross collateralization of the collateral of all Borrowers. Accordingly, each Borrower, individually acknowledges that the benefit to each of the participants in the facility as a whole constitutes reasonably equivalent value, regardless of the amount of the loan actually borrowed by, advanced to, or the amount of collateral provided by, any individual Borrower. In addition, each entity comprising Borrower hereby acknowledges and agrees that all of the representations, warranties, covenants, obligations, conditions, agreements and other terms contained in this Agreement shall be applicable to and shall be binding upon each entity comprising Borrower, and shall be binding upon all such entities when taken together. 13 15 ARTICLE III COLLATERAL SECTION 3.1. GENERALLY. As security for the payment of all liabilities of Borrower to Lender, including without limitation: (i) indebtedness evidenced under the Note, repayment of Revolving Credit Loans, advances and other extensions of credit, all fees and charges owing by Borrower, (including without limitation the Termination Fee) and all other liabilities and obligations of every kind or nature whatsoever of Borrower to Lender, whether now existing or hereafter incurred, joint or several, matured or unmatured, direct or indirect, primary or secondary, related or unrelated, due or to become due, including but not limited to any extensions, modifications, substitutions, increases and renewals thereof, (ii) the payment of all amounts advanced by Lender to preserve, protect, defend, and enforce its rights under this Agreement and in the following property in accordance with the terms of this Agreement, and (iii) the payment of all expenses incurred by Lender in connection therewith (collectively, the "Obligations"), Borrower hereby assigns and grants to Lender a continuing first priority lien on and security interest in, upon, and to the following property (the "Collateral"): (a) All of Borrower's now-owned and hereafter acquired or arising Accounts, accounts receivable and rights to payment of every kind and description, and all of Borrower's contract rights, chattel paper, documents and instruments with respect thereto, and all of Borrower's rights, remedies, security and liens, in, to and in respect of the Accounts, including, without limitation, rights of stoppage in transit, replevin, repossession and reclamation and other rights and remedies of an unpaid vendor, lienor or secured party, guaranties or other contracts of suretyship with respect to the Accounts, deposits or other security for the obligation of any Account Debtor, and credit and other insurance; (b) All Borrower's money, securities and other property and the proceeds thereof, including but not limited to any money, securities or other property from or for Borrower that are now or hereafter held or received by, in transit to, in possession of, or under the control of Lender or a bailee or Affiliate of Lender, whether for safekeeping, pledge, custody, transmission, collection or otherwise, and all of Borrower's deposits (general or special), balances, sums and credits, whether or not with Lender in each case, at any time existing; (c) All of Borrower's right, title and interest in, to and in respect of all goods relating to, or which by sale have resulted in, Accounts, including, without limitation, all goods described in invoices or other documents or instruments with respect to, or otherwise representing or evidencing, any Account, and all returned, reclaimed or repossessed goods; (d) All of Borrower's now owned or hereafter acquired deposit accounts into which Accounts are deposited, including the Lockbox Account; 14 16 (e) All of Borrower's now owned and hereafter acquired or arising general intangibles and other property of every kind and description with respect to, evidencing or relating to its Accounts, accounts receivable and other rights to payment, including, but not limited to, all existing and future customer lists, choses in action, claims, books, records, ledger cards, contracts, licenses, formulae, tax and other types of refunds, returned and unearned insurance premiums, rights and claims under insurance policies, and computer programs, information, software, records, and data, as the same relates to the Accounts; (f) All of Borrower's other general intangibles (including, without limitation, any proceeds from insurance policies after payment of prior interests), patents, unpatented inventions, trade secrets, copyrights, contract rights, goodwill, literary rights, rights to performance, rights under licenses, choses-in-action, claims, information contained in computer media (such as data bases, source and object codes, and information therein), things in action, trademarks and trademarks applied for (together with the goodwill associated therewith) and derivatives thereof, trade names, including the right to make, use, and vend goods utilizing any of the foregoing, and permits, licenses, certifications, authorizations and approvals, and the rights of Borrower thereunder, issued by any governmental, regulatory, or private authority, agency, or entity whether now owned or hereafter acquired, together with all cash and non-cash proceeds and products thereof; provided, however, that nothing herein shall restrict Borrower's right to license its intangible assets to third parties pursuant to arm's length licensing transactions; (g) All of Borrower's now owned or hereafter acquired inventory of every description which is held by Borrower for sale or lease or is furnished by Borrower under any contract of service or is held by Borrower as raw materials, work in process or materials used or consumed in a business, wherever located, and as the same may now and hereafter from time to time be constituted, together with all cash and non-cash proceeds and products thereof; (h) All of Borrower's now owned or hereafter acquired machinery, equipment, computer equipment, tools, tooling, furniture, fixtures, goods, supplies, materials, work in process, whether now owned or hereafter acquired, together with all additions, parts, fittings, accessories, special tools, attachments, and accessions now and hereafter affixed thereto and/or used in connection therewith, all replacements thereof and substitutions therefor, and all cash and non-cash proceeds and products thereof; and (i) The proceeds (including, without limitation, insurance proceeds) of all of the foregoing. Notwithstanding the foregoing, upon (a) Borrower's sale in the ordinary course of business of any assets set forth in subsection 3.1(h) above, or (b) Borrower's sale of furniture, fixtures and equipment from its facility located in Wixom, Michigan, Lender agrees to release its lien on such assets subject to sale by executing any documents necessary to formally effectuate such release. Moreover, upon Borrower's achieving positive EBTDA (i.e. earnings before taxes, depreciation and amortization, as determined in accordance with GAAP, consistently applied) for two consecutive fiscal quarters as reported by Borrower in its quarterly reporting to the 15 17 Securities and Exchange Commission (10 Qs), then Lender agrees to release its lien on all assets set forth in subsections 3.1(f)(g) and (h) above. SECTION 3.2. LIEN DOCUMENTS. At Closing and thereafter as Lender deems necessary in its sole discretion, Borrower shall execute and deliver to Lender, or have executed and delivered (all in form and substance satisfactory to Lender in its sole discretion): (a) UCC-1 Financing Statements pursuant to the Uniform Commercial Code in effect in the jurisdiction(s) in which Borrower operates, which Lender may file in any jurisdiction where any Collateral is or may be located and in any other jurisdiction that Lender deems appropriate; provided that a carbon, photographic, or other reproduction or other copy of this Agreement or of a financing statement is sufficient as and may be filed in lieu of a financing statement; and (b) Any other agreements, documents, instruments, and writings deemed necessary by Lender or as Lender may otherwise request from time to time in its sole and reasonable discretion to evidence, perfect, or protect Lender's lien and security interest in the Collateral required under this Agreement. SECTION 3.3. COLLATERAL ADMINISTRATION. (a) All Collateral (except deposit accounts) will at all times be kept by Borrower at its principal office(s) as set forth on Schedule 4.15 and shall not be moved from such locations without the prior written consent of Lender, which consent shall not be unreasonably withheld. (b) Borrower shall keep accurate and complete records of its Accounts and all payments and collections thereon and shall submit to Lender on such periodic basis as Lender shall request, but not more often than monthly, a sales and collections report for the preceding period, in form satisfactory to Lender. In addition, if Accounts in an aggregate face amount in excess of $50,000.00 become ineligible because they fall within one of the specified categories of ineligibility set forth in the definition of Qualified Accounts or otherwise, Borrower shall notify Lender of such occurrence on the first Business Day following the date it became aware of such occurrence and the Borrowing Base shall thereupon be adjusted to reflect such occurrence. If requested by Lender, Borrower shall execute and deliver to Lender formal written assignments of all of its Accounts monthly (or more frequently upon and during the continuance of an Event of Default), which shall include all Accounts that have been created since the date of the last assignment, together with copies of claims, invoices or other information related thereto. (c) Whether or not an Event of Default has occurred, any of Lender's officers, employees or agents shall have the right, at any time or times hereafter, in the name of Lender or any designee of Lender or Borrower, to verify the validity, amount or any other matter relating to any Accounts by mail, telephone, telegraph or otherwise. Borrower shall cooperate fully with Lender in an effort to facilitate and promptly conclude such verification process. 16 18 (d) To expedite collection, Borrower shall endeavor in the first instance to make collection of its Accounts for Lender. Lender retains the right at all times after the occurrence and during the continuance of an Event of Default, to notify Account Debtors that Accounts have been assigned to Lender and to collect Accounts directly in its own name and to charge reasonable collection costs and expenses, including attorneys' fees, to Borrower. SECTION 3.4. OTHER ACTIONS. In addition to the foregoing, Borrower (i) shall provide prompt written notice to each entity that is currently an Account Debtor or who becomes an Account Debtor at any time following the date of this Agreement that Lender has been granted a first priority lien and security interest in, upon and to all Accounts applicable to such Account Debtor and directs each Account Debtor to make payments into the Lockbox, and hereby authorizes Lender, upon Borrower's failure to send such notices within fifteen (15) days after the date of this Agreement (or fifteen (15) days after the entity becomes an Account Debtor), to send any and all similar notices to such Account Debtors, and (ii) shall do anything further that may be lawfully required by Lender to secure Lender and effectuate the intentions and objects of this Agreement, including but not limited to the execution and delivery of lockbox agreements, continuation statements, amendments to financing statements, and any other documents required under this Agreement. At Lender's request, Borrower shall also immediately deliver to Lender all items for which Lender must receive possession to obtain a perfected security interest. Borrower shall, on Lender's demand, deliver to Lender all notes, certificates, and documents of title, chattel paper, warehouse receipts, instruments, and any other similar instruments constituting Collateral. SECTION 3.5. SEARCHES. Before Closing, and thereafter (as and when determined by Lender in its sole discretion, but not more often than quarterly absent the existence of an Event of Default or an event reasonably giving rise to an Event of Default following the expiration of any applicable cure periods), Lender will perform the searches described in clauses (a) and (b) below against Borrower (the results of which are to be consistent with Borrower's representations and warranties under this Agreement), all at Borrower's expense: (a) Uniform Commercial Code searches with the Secretary of State and local filing offices of each jurisdiction where Borrower maintains its executive offices, a place of business, or assets; (b) Judgment, federal tax lien and corporate and partnership tax lien searches, in each jurisdiction searched under clause (a) above; and In addition, prior to Closing, at Borrower's expense, Borrower shall obtain and deliver to Lender good standing certificates showing Borrower to be in good standing in its state of formation and in each other state in which it is doing and currently intends to do business for which qualification is required. 17 19 SECTION 3.6. POWER OF ATTORNEY. Each of the officers of Lender is hereby irrevocably made, constituted and appointed the true and lawful attorney for Borrower (without requiring any of them to act as such) with full power of substitution, during an Event of Default or following an event which, through the passage of time, would become an Event of Default, to do the following: (i) endorse the name of Borrower upon any and all checks, drafts, money orders, and other instruments for the payment of money that are payable to Borrower and constitute collections on Borrower's Accounts; (ii) execute in the name of Borrower any financing statements, schedules, assignments, instruments, documents, and statements that Borrower is obligated to give Lender under this Agreement; and (iii) do such other and further acts and deeds in the name of Borrower that Lender may deem necessary or desirable to enforce any Account or other Collateral or perfect Lender's security interest or lien in any Collateral. In addition, if Borrower breaches its obligation to direct payments of the proceeds of the Collateral to the Lockbox Account, Lender, as the irrevocably made, constituted and appointed true and lawful attorney for Borrower pursuant to this paragraph, may, by the signature or other act of any of Lender's officers (without requiring any of them to do so), direct any federal, state or private payor or fiscal intermediary to pay proceeds of the Collateral to Borrower by directing payment to the Lockbox Account. ARTICLE IV REPRESENTATIONS AND WARRANTIES Except as specifically disclosed to Lender in writing to the contrary, each entity comprising Borrower represents and warrants to Lender, and shall be deemed to represent and warrant on each day on which any Obligations shall be outstanding under this Agreement, that: SECTION 4.1. SUBSIDIARIES. Except as set forth in Schedule 4.1, Borrower has no subsidiaries. SECTION 4.2. ORGANIZATION AND GOOD STANDING. Borrower is a corporation duly organized, validly existing, and in good standing under the laws of its state of formation, is in good standing as a foreign corporation in each jurisdiction in which the character of the properties owned or leased by it therein or the nature of its business makes such qualification necessary except where the failure to be so qualified would not have a Material Adverse Effect, has the corporate power and authority to own its assets and transact the business in which it is engaged, and has obtained all material certificates, licenses and qualifications required under all laws, regulations, ordinances, or orders of public authorities necessary for the ownership and operation of all of its properties and transaction of all of its business, except for certificates, licenses and qualifications which the failure to obtain would not have a Material Adverse Effect. 18 20 SECTION 4.3. AUTHORITY. Borrower has full corporate power and authority to enter into, execute, and deliver this Agreement and to perform its obligations under this Agreement, to borrow the Loan, to execute and deliver the Note, and to incur and perform the obligations provided for in the Loan Documents, all of which have been duly authorized by all necessary corporate action. No consent or approval of shareholders of, or lenders to, Borrower and no consent, approval, filing or registration with any Governmental Authority is required as a condition to the validity of the Loan Documents or the performance by Borrower of its obligations under the Loan Documents. SECTION 4.4. BINDING AGREEMENT. This Agreement and all other Loan Documents constitute, and the Note, when issued and delivered pursuant to this Agreement for value received, will constitute, the valid and legally binding obligations of Borrower, enforceable against Borrower in accordance with their respective terms. SECTION 4.5. LITIGATION. Except as disclosed in Schedule 4.5, there are no actions, suits, proceedings or investigations pending or threatened against Borrower before any court or arbitrator or before or by any Governmental Authority which, in any one case or in the aggregate, if determined adversely to the interests of Borrower, could have a Material Adverse Effect. Borrower is not in default with respect to any order of any court, arbitrator, or Governmental Authority applicable to Borrower or its properties. SECTION 4.6. NO CONFLICTS. The execution and delivery by Borrower of this Agreement and the other Loan Documents do not, and the performance of its obligations under the Loan Documents will not, violate, conflict with, constitute a material default under, or result in the creation of a lien or encumbrance upon the property of Borrower (other than for the benefit of Lender) under: (i) any provision of Borrower's articles of incorporation, (ii) any provision of any law, rule, or regulation applicable to Borrower, or (iii) any of the following: (A) any indenture or other agreement or instrument to which Borrower is a party or by which Borrower or its property is bound; or (B) any judgment, order or decree of any court, arbitration tribunal, or Governmental Authority having jurisdiction over Borrower which is applicable to Borrower. SECTION 4.7. FINANCIAL CONDITION. The annual financial statements of Borrower as of and for the period ending December 31, 2000 audited by Plante & Moran and the unaudited financial statements of Borrower as of and for the period ending February 28, 2001, certified by the chief financial officer of Borrower on behalf of Borrower, which have been delivered to Lender, fairly present the financial condition of Borrower and the results of its operations and changes in financial condition as of the dates and for the periods referred to, and have been prepared in accordance with GAAP. There are no material unrealized or anticipated liabilities, direct or indirect, fixed or contingent, of Borrower as of the dates of such financial statements which are not reflected in such financial statements or in the notes to such financial statements. There has been no material adverse change in the business, properties, or operations of Borrower since December 31, 2000. Borrower's fiscal year ends on December 31. The federal tax identification number of each entity comprising Borrower is as described on Schedule 4.7. 19 21 SECTION 4.8. NO DEFAULT. Except as set forth in Schedule 4.8, Borrower is not in default under or with respect to any obligation in any respect which has had a Material Adverse Effect, or which would reasonably be expected to materially adversely affect the ability of Borrower to perform its obligations under the Loan Documents. No Event of Default or event which, with the giving of notice or lapse of time, or both, would become an Event of Default, has occurred and is continuing. SECTION 4.9. TITLE TO PROPERTIES. Borrower has good and marketable title to its properties and assets, including the Collateral and the properties and assets reflected in the financial statements described in Section 4.7, subject to no lien, mortgage, pledge, encumbrance or charge of any kind, other than Permitted Liens. Borrower has not agreed or consented to cause any of its properties or assets whether owned now or hereafter acquired to be subject in the future (upon the happening of a contingency or otherwise) to any lien, mortgage, pledge, encumbrance or charge of any kind other than Permitted Liens. SECTION 4.10. TAXES. Borrower has filed, or has obtained extensions for the filing of, all federal, state and other tax returns which are required to be filed, and has paid all taxes shown as due on those returns and all assessments, fees and other amounts due as of the date of this Agreement. To the best of Borrower's knowledge, all tax liabilities of Borrower were, as of December 31, 2000 and are now, adequately provided for on Borrower's books. No tax liability has been asserted by the Internal Revenue Service or other taxing authority against Borrower for taxes in excess of those already paid. SECTION 4.11. SECURITIES AND BANKING LAWS AND REGULATIONS. (a) The use of the proceeds of the Loan and Borrower's issuance of the Note will not directly or indirectly violate or result in a violation of the Securities Act of 1933 or the Securities Exchange Act of 1934, as amended, or any regulations issued pursuant thereto, including without limitation Regulations U, T or X of the Board of Governors of the Federal Reserve System. Borrower is not engaged in the business of extending credit for the purpose of the purchasing or carrying "margin stock" within the meaning of those regulations. No part of the proceeds of the Loan under this Agreement will be used to purchase or carry any margin stock or to extend credit to others for such purpose. (b) Borrower is not an investment company within the meaning of the Investment Company Act of 1940, as amended, nor is it, directly or indirectly, controlled by or acting on behalf of any Person which is an investment company within the meaning of that Act. SECTION 4.12. ERISA. No employee benefit plan (a "Plan") subject to the Employee Retirement Income Security Act of 1974 ("ERISA") and regulations issued pursuant to ERISA that is maintained by Borrower or under which Borrower could have any material liability under ERISA (i) has failed to meet minimum funding standards established in Section 302 of ERISA, (ii) has failed to substantially comply with all applicable requirements of ERISA and of the Internal Revenue Code, including all applicable rulings and regulations thereunder, or (iii) has 20 22 engaged in or been involved in a prohibited transaction (as defined in ERISA) under ERISA or under the Internal Revenue Code. Neither Borrower nor any member of a Controlled Group that includes Borrower has assumed, or received notice of a claim asserted against Borrower or another member of the Controlled Group for, withdrawal liability (as defined in the Multi-Employer Pension Plan Amendments Act of 1980, as amended) with respect to any multi-employer pension plan. Borrower has timely made when due all contributions with respect to any multi-employer pension plan in which it participates and no event has occurred triggering a material claim against Borrower for withdrawal liability with respect to any multi-employer pension plan in which Borrower participates. SECTION 4.13. COMPLIANCE WITH LAW. Except as described in Schedule 4.13, Borrower is not in violation of any statute, rule or regulation of any Governmental Authority (including, without limitation, any statute, rule or regulation relating to employment practices or to environmental, occupational and health standards and controls) the failure to comply with which has had a Material Adverse Effect. Borrower has obtained all licenses, permits, franchises, and other governmental authorizations necessary for the ownership of its properties and the conduct of its business. Borrower is current with all reports and documents required to be filed with any state or federal securities commission or similar Governmental Authority and is in full compliance with all applicable rules and regulations of such commissions. SECTION 4.14. ENVIRONMENTAL MATTERS. No use, exposure, release, generation, manufacture, storage, treatment, transportation or disposal of Hazardous Material has occurred or is occurring on or from any real property on which the Collateral is located or which is owned, leased or otherwise occupied by Borrower (the "Premises"), or off the Premises as a result of any action of Borrower, except as described in Schedule 4.14. All Hazardous Material used, treated, stored, transported to or from, generated or handled on the Premises, or off the Premises by Borrower, has been disposed of on or off the Premises by or on behalf of Borrower in a lawful manner. To Borrower's knowledge, there are no underground storage tanks present on or under the Premises owned or leased by Borrower. To Borrower's knowledge, no other environmental, public health or safety hazards exist with respect to the Premises. SECTION 4.15. PLACES OF BUSINESS. As of the Closing Date, the only places of business of Borrower, and the places where it keeps and intends to keep the Collateral and records concerning the Collateral, are at the addresses set forth in Schedule 4.15. Schedule 4.15 also lists the owner of record of each such property. SECTION 4.16. INTELLECTUAL PROPERTY. Borrower exclusively owns or possesses all the patents, patent applications, trademarks, trademark applications, service marks, trade names, copyrights, franchises, licenses, and rights with respect to the foregoing necessary for the current and planned future conduct of its business, without any conflict with the rights of others. A list of all such intellectual property (indicating the nature of Borrower's interest), as well as all outstanding franchises and licenses given by or held by Borrower, is attached as Schedule 4.16. Borrower is not in default of any obligation or undertaking with respect to such intellectual property or rights. Borrower is not infringing on any patents, patent applications, trademarks, 21 23 trademark applications, service marks, trade names, copyrights, franchises, licenses, any rights with respect to the foregoing, or any other intellectual property rights of others and the Borrower is not aware of any infringement by others of any such rights owned by Borrower. SECTION 4.17. INTENTIONALLY DELETED SECTION 4.18. MATERIAL FACTS. To Borrower's knowledge, neither this Agreement nor any other Loan Document nor any other agreement, document, certificate, or statement furnished to Lender by or on behalf of Borrower in connection with the transactions contemplated by this Agreement contains any untrue statement of material fact or omits to state a material fact necessary to make the statements contained in this Agreement or other Loan Document not misleading. There is no fact known to Borrower that would have a Material Adverse Effect on the financial condition or business prospects of Borrower. SECTION 4.19. INVESTMENTS, GUARANTEES, AND CERTAIN CONTRACTS. Borrower does not own or hold any equity or long-term debt investments in, have any outstanding advances to, have any outstanding guarantees for the obligations of, or have any outstanding borrowings from, any Person, except as described on Schedule 4.19. Borrower is not a party to any contract or agreement, or subject to any corporate restriction, which materially adversely affects its business. SECTION 4.20. BUSINESS INTERRUPTIONS. Within five years before the date of this Agreement, neither the business, property or assets, or operations of Borrower has been adversely affected in any way by any casualty, strike, lockout, combination of workers, or order of the United States of America or other Governmental Authority, directed against Borrower. There are no pending or threatened labor disputes, strikes, lockouts, or similar occurrences or grievances against Borrower or its business. SECTION 4.21. NAMES. Within five years before the date of this Agreement, Borrower has not conducted business under or used any other name (whether corporate, partnership or assumed) other than as shown on Schedule 4.21. Borrower is the sole owner of all names listed on that Schedule and any and all business done and invoices issued in such names are Borrower's sales, business, and invoices. Each trade name of Borrower represents a division or trading style of Borrower and not a separate Person or independent Affiliate. SECTION 4.22 JOINT VENTURES. Borrower is not engaged in any joint venture or partnership with any other Person, except as set forth on Schedule 4.22. SECTION 4.23 ACCOUNTS. Lender may rely, in determining which Accounts are Qualified Accounts, on all statements and representations made by Borrower with respect to any Account or Accounts. Unless otherwise indicated in writing to Lender, with respect to each Qualified Account, Borrower represents that: (a) The Account is genuine and in all respects what it purports to be, and is not evidenced by a judgment; 22 24 (b) The Account arises out of a completed, bona fide sale and delivery of goods by Borrower in the ordinary course of its business and in accordance with the terms and conditions of all purchase orders, contracts, certification, participation, certificate of need, or other documents relating thereto and forming a part of the contract between Borrower and the Account Debtor; (c) The Account is for a liquidated amount maturing as stated in a duplicate claim or invoice covering such sale of goods, a copy of which has been furnished or is available to Lender; (d) The Account, and Lender's security interest in such Account, is not, and will not (by voluntary act or omission by Borrower), be in the future, subject to any offset, lien, deduction, defense, dispute, counterclaim or any other adverse condition, and each such Account is absolutely owing to Borrower and is not contingent in any respect or for any reason; (e) To the best of Borrower's knowledge, there are no facts, events or occurrences which in any way impair the validity or enforceability of any Accounts or tend to reduce the amount payable thereunder from the face amount of the claim or invoice and statements delivered to Lender with respect thereto; (f) To the best of Borrower's knowledge, (i) the Account Debtor under the Account had the capacity to contract at the time any contract or other document giving rise to the Account was executed and (ii) such Account Debtor is solvent; (g) To the best of Borrower's knowledge, there are no proceedings or actions which are threatened or pending against any Account Debtor under the Account which might result in any material adverse change in such Account Debtor's financial condition or the collectibility of such Account; (h) The Account has been billed and forwarded to the Account Debtor for payment in accordance with applicable laws and compliance and conformance with any and requisite procedures, requirements and regulations governing payment by such Account Debtor with respect to such Account, and such Account is properly payable directly to Borrower; and (i) Borrower has obtained and currently has all licenses, permits and authorizations that are necessary in the generation of such Accounts. SECTION 4.24. SOLVENCY. Both before and after giving effect to the transactions contemplated by the terms and provisions of this Agreement, Borrower (taken as a whole) (i) owns property whose fair saleable value is greater than the amount required to pay all of Borrower's Indebtedness (including contingent debts), (ii) was and is able to pay all of its Indebtedness as such Indebtedness matures, and (iii) had and has capital sufficient to carry on its business and transactions and all business and transactions in which it about to engage. For 23 25 purposes of this Agreement, the term "Indebtedness" means, without duplication (x) all items which in accordance with GAAP would be included in determining total liabilities as shown on the liability side of a balance sheet of such Borrower as of the date on which Indebtedness is to be determined, (y) all obligations of any other person or entity which such Borrower has guaranteed, and (z) the Obligations. ARTICLE V CLOSING AND CONDITIONS OF LENDING SECTION 5.1. CONDITIONS PRECEDENT TO AGREEMENT. The obligation of Lender to enter into and perform this Agreement and to make Revolving Credit Loans is subject to the following conditions precedent: (a) Lender shall have received two (2) originals of this Agreement, the Certificate of Validity, and all other Loan Documents required to be executed and delivered at or before Closing (other than the Note, as to which Lender shall receive only one original), executed by Borrower and any other required Persons, as applicable. (b) Lender shall have received all searches and good standing certificates required by Section 3.5. (c) Borrower shall have complied in all material respects and shall then be in compliance in all material respects with all the terms, covenants and conditions of the Loan Documents. (d) There shall have occurred and be continuing no Event of Default and no event which, with the giving of notice or the lapse of time, or both, would constitute such an Event of Default. (e) The representations and warranties contained in Article IV shall be true and correct in all material respects. (f) Lender shall have received copies of all board of directors resolutions of Borrower, and other action taken by Borrower to authorize the execution, delivery and performance of the Loan Documents and the borrowing of the Loan under the Loan Documents, as well as the names and signatures of the officers of Borrower authorized to execute documents on its behalf in connection with the Loan, all as also certified as of the date of this Agreement by Borrower's chief financial officer, or equivalent, and such other papers as Lender may require. (g) Lender shall have received copies, certified as true, correct and complete by a corporate officer of each Borrower, of the certificate of incorporation of each Borrower, with any amendments to any of the foregoing, and all other documents necessary for 24 26 performance of the obligations of Borrower under this Agreement and the other Loan Documents. (h) Lender shall have received a written opinion of counsel for Borrower, dated the date of this Agreement, substantially in the form of Exhibit C. (i) Lender shall have received such financial statements, reports, certifications, and other operational information required to be delivered under this Agreement, including without limitation an initial borrowing base certificate calculating the Borrowing Base. (j) Lender shall have received the Commitment Fee. (k) The Lockbox, Lockbox Account and the Concentration Account shall have been established. (l) Lender shall have received a copy of the lease agreements with respect to Borrower's current facility located at 28025 Oakland Oaks, Wixom, MI facility, as well as the new facility currently under construction in Dallas, Texas. (m) Lender shall have received a certificate of Borrower's chief financial officer on behalf of Borrower, dated the Closing Date, certifying that all of the conditions specified in this Section have been fulfilled. SECTION 5.2. CONDITIONS PRECEDENT TO ADVANCES. Notwithstanding any other provision of this Agreement, no Loan proceeds, Revolving Credit Loans, advances or other extensions of credit under the Loan shall be disbursed under this Agreement unless the following conditions have been satisfied or waived immediately before such disbursement: (a) The representations and warranties on the part of Borrower contained in Article IV of this Agreement shall be true and correct in all material respects at and as of the date of disbursement or advance, as though made on and as of such date (except to the extent that such representations and warranties expressly relate solely to an earlier date and except that the references in Section 4.7 to financial statements shall be deemed to be a reference to the then most recent annual and interim financial statements of Borrower furnished to Lender pursuant to Section 6.1). (b) No Event of Default or event which, with the giving of notice of the lapse of time, or both, would become an Event of Default shall have occurred and be continuing or would result from the making of the disbursement or advance. (c) No adverse change in the condition (financial or otherwise), properties, business, or operations of Borrower shall have occurred and be continuing with respect to Borrower since the date of this Agreement. 25 27 SECTION 5.3. CLOSING. Subject to the conditions of this Article V, the Loan shall be made available on the date of execution of this Agreement (the "Closing Date") at such time at such place as may be requested by Lender (the "Closing"). SECTION 5.4. WAIVER OF RIGHTS. By completing the Closing under this Agreement, or by making advances under the Loan, Lender does not waive a breach of any representation or warranty of Borrower under this Agreement or under any other Loan Document, and all of Lender's claims and rights resulting from any breach or misrepresentation by Borrower are specifically reserved by Lender. ARTICLE VI AFFIRMATIVE COVENANTS Each entity comprising Borrower covenants and agrees that for so long as Borrower may borrow under this Agreement and until payment in full of the Note and performance of all other obligations of Borrower under the Loan Documents: SECTION 6.1. FINANCIAL STATEMENTS AND COLLATERAL REPORTS. Borrower will furnish to Lender (i) a sales and collections report and accounts receivable aging schedule on a form acceptable to Lender within fifteen (15) days after the end of each calendar month, which shall include, but not be limited to, a report of sales, credits issued, and collections received; (ii) payables aging schedules within fifteen (15) days after the end of each calendar month; (iii) internally prepared monthly financial statements for Borrower, certified by the chief financial officer of Borrower, within forty-five (45) days of the end of each calendar month, accompanied quarterly by management analysis and actual vs. budget variance reports; (iv) to the extent prepared by Borrower, annual projections, profit and loss statements, balance sheets, and cash flow reports (prepared on a monthly basis) for the succeeding fiscal year within thirty (30) days before the end of each of Borrower's fiscal years; (v) internally prepared annual financial statements for Borrower within sixty (60) days after the end of each of Borrower's fiscal years; (vi) annual audited financial statements for Borrower prepared by Plante & Moran, or another firm of independent public accountants reasonably satisfactory to Lender, within one hundred thirty-five (135) days after the end of each of Borrower's fiscal years; (vii) promptly upon receipt thereof, copies of any reports submitted to Borrower by the independent accountants in connection with any interim audit of the books of Borrower and copies of each management control letter provided to Borrower by independent accountants; (viii) as soon as available, copies of all financial statements and notices provided by Borrower to all of its stockholders; (ix) on the last business day of every month, evidence satisfactory to Lender that all federal and state taxes, including, without limitation payroll taxes, that are due have been paid in full; and (x)such additional information, reports or statements as Lender may from time to time request. Annual financial statements shall set forth in comparative form figures for the corresponding periods in the prior fiscal year. All financial statements shall include a balance sheet and statement of earnings and shall be prepared in accordance with GAAP. 26 28 SECTION 6.2. PAYMENTS UNDER THIS AGREEMENT. Borrower will make all payments of principal, interest, fees, and all other payments required under this Agreement and under the Loan, and under any other agreements with Lender to which Borrower is a party, as and when due. SECTION 6.3. EXISTENCE, GOOD STANDING, AND COMPLIANCE WITH LAWS. Borrower will do or cause to be done all things necessary (i) to obtain and keep in full force and effect all corporate existence, rights, licenses, privileges, and franchises of Borrower necessary to the ownership of its property or the conduct of its business, and comply with all applicable current and future laws, ordinances, rules, regulations, orders and decrees of any Governmental Authority having or claiming jurisdiction over Borrower; and (ii) to maintain and protect the properties used or useful in the conduct of the operations of Borrower, in a prudent manner, including without limitation the maintenance at all times of such insurance upon its insurable property and operations as required by law or by Section 6.7. SECTION 6.4. LEGALITY. The making of the Loan and each disbursement or advance under the Loan shall not be subject to any penalty or special tax, shall not be prohibited by any governmental order or regulation applicable to Borrower, and shall not violate any rule or regulation of any Governmental Authority, and necessary consents, approvals and authorizations of any Governmental Authority to or of any such disbursement or advance shall have been obtained. SECTION 6.5. LENDER'S SATISFACTION. All instruments and legal documents and proceedings in connection with the transactions contemplated by this Agreement shall be satisfactory in form and substance to Lender and its counsel, and Lender shall have received all documents, including records of corporate proceedings and opinions of counsel, which Lender may have requested in connection therewith. SECTION 6.6. TAXES AND CHARGES. Borrower will timely file all tax reports and pay and discharge all taxes, assessments and governmental charges or levies imposed upon Borrower, or its income or profits or upon its properties or any part thereof, before the same shall be in default and before the date on which penalties attach thereto, as well as all lawful claims for labor, material, supplies or otherwise which, if unpaid, might become a lien or charge upon the properties or any part thereof of Borrower; provided, however, that Borrower shall not be required to pay and discharge or cause to be paid and discharged any such tax, assessment, charge, levy or claim so long as the validity or amount thereof shall be contested in good faith and by appropriate proceedings by Borrower, and Borrower shall have set aside on their books adequate reserve therefor; and provided further, that such deferment of payment is permissible only so long as Borrower's title to, and its right to use, the Collateral is not adversely affected thereby and Lender's lien and priority on the Collateral are not adversely affected, altered or impaired thereby. 27 29 SECTION 6.7. INSURANCE. Borrower will carry adequate public liability and professional liability insurance with responsible companies reasonably satisfactory to Lender in such amounts and against such risks as is customarily maintained by similar businesses and by owners of similar property in the same general area. SECTION 6.8. GENERAL INFORMATION. Borrower will furnish to Lender such information as Lender may, from time to time, reasonably request with respect to the business or financial affairs of Borrower, and permit any officer, employee or agent of Lender to visit and inspect any of the properties, to examine the minute books, books of account and other records, including management letters prepared by Borrower's auditors, of Borrower, and make copies thereof or extracts therefrom, and to discuss its and their business affairs, finances and accounts with, and be advised as to the same by, the accountants and officers of Borrower, all at such times and as often as Lender may reasonably require. SECTION 6.9. MAINTENANCE OF PROPERTY. Borrower will maintain, keep and preserve all of its properties in good repair, working order and condition and from time to time make all necessary repairs, renewals, replacements, betterments and improvements thereto, so that the business carried on in connection therewith may be properly conducted at all times. SECTION 6.10. NOTIFICATION OF EVENTS OF DEFAULT AND ADVERSE DEVELOPMENTS. Borrower promptly will notify Lender upon the occurrence of: (i) any Event of Default; (ii) any event which, with the giving of notice or lapse of time, or both, could constitute an Event of Default; (iii) any event, development or circumstance whereby the financial statements previously furnished to Lender fail in any material respect to present fairly, in accordance with GAAP, the financial condition and operational results of Borrower; (iv) any judicial, administrative or arbitration proceeding pending against Borrower, and any judicial or administrative proceeding known by Borrower to be threatened against it which, if adversely decided, could adversely affect its condition (financial or otherwise) or operations (current or prospective) or which may expose Borrower to uninsured liability of $50,000.00 or more; (v) any default claimed by any other creditor for Borrowed Money of Borrower other than Lender; and (vi) any other development in the business or affairs of Borrower which would have a Material Adverse Effect; in each case describing the nature of the event or development. In the case of notification under clauses (i) and (ii)), Borrower should set forth the action Borrower proposes to take with respect to such event. SECTION 6.11. EMPLOYEE BENEFIT PLANS. Borrower will (i) comply with the funding requirements of ERISA with respect to the Plans for its employees, or will promptly satisfy any accumulated funding deficiency that arises under Section 302 of ERISA; (ii) furnish Lender, promptly after filing the same, with copies of all reports or other statements filed with the United States Department of Labor, the Pension Benefit Guaranty Corporation, or the Internal Revenue Service with respect to all Plans, or which Borrower, or any member of a Controlled Group, may receive from such Governmental Authority with respect to any such Plans, and (iii) promptly advise Lender of the occurrence of any Reportable Event or Prohibited Transaction with respect to any such Plan and the action which Borrower proposes to take with respect thereto. Borrower 28 30 will make all contributions when due with respect to any multi-employer pension plan in which it participates and will promptly advise Lender: (x) upon its receipt of notice of the assertion against Borrower of a claim for withdrawal liability; (y) upon the occurrence of any event which could trigger the assertion of a claim for withdrawal liability against Borrower; and (z) upon the occurrence of any event which would place Borrower in a Controlled Group as a result of which any member (including Borrower) thereof may be subject to a claim for withdrawal liability, whether liquidated or contingent. SECTION 6.12. FINANCING STATEMENTS. Borrower shall provide to Lender evidence satisfactory to Lender as to the due recording of termination statements, releases of collateral, and Forms UCC-3, and shall cause to be recorded financing statements on Form UCC-1, duly executed by Borrower and Lender, in all places necessary to release all existing security interests and other liens in the Collateral (other than as permitted by this Agreement) and to perfect and protect Lender's first priority lien and security interest in the Collateral, as Lender may request. SECTION 6.13. FINANCIAL RECORDS. Borrower shall keep current and accurate books of records and accounts in which full and correct entries will be made of all of its business transactions, and will reflect in its financial statements adequate accruals and appropriations to reserves, all in accordance with GAAP subject to ordinary audit adjustments. SECTION 6.14. COLLECTION OF ACCOUNTS. Borrower shall continue to collect its Accounts in the ordinary course of business. SECTION 6.15. PLACES OF BUSINESS. Borrower shall give thirty (30) days' prior written notice to Lender of any change in the location of any of its places of business, of the places where its records concerning its Accounts are kept, of the places where the Collateral is kept, or of the establishment of any new, or the discontinuance of any existing, places of business. SECTION 6.16. BUSINESS CONDUCTED. Borrower shall continue in the business currently conducted by it using its best efforts to maintain its customers and goodwill. Borrower shall not engage, directly or indirectly, in any line of business substantially different from the business conducted by it immediately before the Closing Date, or engage in business or lines of business which are not reasonably related thereto. SECTION 6.17. LITIGATION AND OTHER PROCEEDINGS. Borrower shall give prompt notice to Lender of any litigation, arbitration, or other proceeding before any Governmental Authority against or affecting Borrower if the amount claimed is more than $50,000.00. SECTION 6.18. BANK ACCOUNTS. Borrower shall assign to Lender all of its depository and disbursement accounts into which collections of Accounts are deposited. SECTION 6.19. SUBMISSION OF COLLATERAL DOCUMENTS. Borrower will, on demand of Lender, make available to Lender copies of shipping and delivery receipts evidencing the shipment of goods that gave rise to an Account, medical records, insurance verification forms, 29 31 assignment of benefits, in-take forms or other proof of the satisfactory performance of services that gave rise to an Account, a copy of the claim or invoice for each Account and copies of any written contract or order from which the Account arose. Borrower shall promptly notify Lender if an Account becomes evidenced or secured by an instrument or chattel paper and upon request of Lender, will promptly deliver any such instrument or chattel paper to Lender. SECTION 6.20. LICENSURE. Borrower will maintain all material licenses necessary to conduct its business as currently conducted, and/or take any steps required to comply with any such new or additional requirements that may be imposed on providers of similar goods and services. SECTION 6.21. OFFICER'S CERTIFICATES. Together with the monthly financial statements delivered pursuant to clause (iii) of Section 6.1, and together with the audited annual financial statements delivered pursuant to clause (vi) of that Section, Borrower shall deliver to Lender a certificate of its chief financial officer on behalf of Borrower, in form and substance reasonably satisfactory to Lender: (a) Setting forth the information (including detailed calculations) required to establish whether Borrower is in compliance with the requirements of Articles VI and VII as of the end of the period covered by the financial statements then being furnished; and (b) Stating that the signer has reviewed the relevant terms of this Agreement, and has made (or caused to be made under his supervision) a review of the transactions and conditions of Borrower from the beginning of the accounting period covered by the income statements being delivered to the date of the certificate, and that such review has not disclosed the existence during such period of any condition or event which constitutes an Event of Default or which is then, or with the passage of time or giving of notice or both, could become an Event of Default, and if any such condition or event existed during such period or now exists, specifying the nature and period of existence thereof and what action Borrower has taken or proposes to take with respect thereto. SECTION 6.22. VISITS AND INSPECTIONS. Borrower agrees to permit representatives of Lender, from time to time, as often as may be reasonably requested, but only during normal business hours, to visit and inspect the properties of Borrower, and to inspect, audit and make extracts from its books and records, and discuss with its officers, its employees and its independent accountants, Borrower's business, assets, liabilities, financial condition, business prospects and results of operations. SECTION 6.23. NET WORTH. Borrower will not at any time allow its net worth, as computed in accordance with GAAP, to fall below $500,000. 30 32 ARTICLE VII NEGATIVE COVENANTS Each entity comprising Borrower covenants and agrees that so long as Borrower may borrow under this Agreement and until payment in full of the Note and performance of all other obligations of Borrower under the Loan Documents: SECTION 7.1. BORROWING. Borrower will not create, incur, assume or suffer to exist any liability for Borrowed Money except: (i) indebtedness to Lender; (ii) indebtedness of Borrower secured by mortgages, encumbrances or liens expressly permitted by Section 7.3; (iii) accounts payable to trade creditors and current operating expenses (other than for borrowed money) which are not aged more than one hundred twenty (120) days from the billing date or more than thirty (30) days from the due date, in each case incurred in the ordinary course of business and paid within such time period, unless the same are being contested in good faith and by appropriate and lawful proceedings, and Borrower shall have set aside such reserves, if any, with respect thereto as are required by GAAP and deemed adequate by Borrower and its independent accountants; (iv) equipment leases and/or purchase money indebtedness not to exceed $1,000,000 per facility; (v) subordinated borrowing not to exceed $5,000,000 in the aggregate; (vi) subordinated convertible debt instruments not to exceed $5,000,000, subject to the prior written consent of Lender and to the execution of a Subordination Agreement satisfactory to Lender in its sole discretion; and (vii) borrowings incurred in the ordinary course of its business and not exceeding $50,000.00 in the aggregate outstanding at any one time. Borrower will not make prepayments on any existing or future indebtedness for Borrowed Money to any Person (other than Lender, to the extent permitted by this Agreement or any subsequent agreement between Borrower and Lender). SECTION 7.2. JOINT VENTURES. Borrower will not invest directly or indirectly in any joint venture for any purpose without the prior written notice to, and the prior written consent of, Lender, which consent shall not be unreasonably withheld or delayed. SECTION 7.3. LIENS AND ENCUMBRANCES. Borrower will not create, incur, assume or suffer to exist any mortgage, pledge, lien or other encumbrance of any kind (including the charge upon property purchased under a conditional sale or other title retention agreement) upon, or any security interest in, any of its Collateral, whether now owned or hereafter acquired, except for Permitted Liens. SECTION 7.4. RESTRICTION ON FUNDAMENTAL CHANGES. Borrower will not: (i) enter into any transaction of merger or consolidation without the prior written consent of Lender, which consent shall not be unreasonably withheld or delayed and if not given or withheld in writing within 30 days, shall be deemed given; (ii) liquidate, wind-up or dissolve itself (or suffer any liquidation or dissolution); (iii) convey, sell, lease, sublease, transfer or otherwise dispose of, in one transaction or a series of transactions, any of its assets other than inventory in the ordinary course of business and old, obsolete or replaced equipment, or the capital stock of any subsidiary 31 33 of Borrower, whether now owned or hereafter acquired; or (iv) acquire by purchase or otherwise all or any substantial part of the business or assets of, or stock or other evidence of beneficial ownership of, any Person without the prior written consent of Lender, which consent shall not be unreasonably withheld or delayed and if not given or withheld in writing within 20 days, shall be deemed given. Borrower agrees that compliance with this Section 7.4 is a material inducement to Lender's advancing credit under this Agreement. Borrower further agrees that in addition to all other remedies available to Lender, Lender shall be entitled to specific enforcement of the covenants in this Section 7.4, including injunctive relief. SECTION 7.5. SALE AND LEASEBACK. Borrower will not, directly or indirectly, enter into any arrangement whereby Borrower sells or transfers all or any part of its assets and thereupon and within one year thereafter rents or leases the assets so sold or transferred without prior written notice to and the prior written consent of Lender, which consent shall not be unreasonably withheld or delayed. SECTION 7.6. DIVIDENDS, DISTRIBUTIONS AND MANAGEMENT FEES. Upon notice from Lender to Borrower of the existence of an Event of Default under this Agreement, Borrower will not declare or pay any dividends or other distributions with respect to, purchase, redeem or otherwise acquire for value any of its outstanding stock now or hereafter outstanding, or return any capital of its stockholders, nor shall Borrower pay management fees or fees of a similar nature to any Person. SECTION 7.7. LOANS. Borrower will not make loans or advances to any Person, other than (i) trade credit extended in the ordinary course of its business, and (ii) advances for business travel and similar temporary advances made in the ordinary course of business to officers, stockholders, directors, and employees. SECTION 7.8. CONTINGENT LIABILITIES. Borrower will not assume, guarantee, endorse, contingently agree to purchase or otherwise become liable upon the obligation of any Person, except by the endorsement of negotiable instruments for deposit or collection or similar transactions in the ordinary course of business. SECTION 7.9. SUBSIDIARIES. Borrower will not form any subsidiary, or make any investment in or any loan in the nature of an investment to, any other Person without the prior written consent of Lender which consent will not be unreasonably withheld or delayed. SECTION 7.10. COMPLIANCE WITH ERISA. Borrower will not permit with respect to any Plan covered by Title IV of ERISA any Prohibited Transaction or any Reportable Event. SECTION 7.11. TRANSACTIONS WITH AFFILIATES. Borrower will not enter into any transaction, including without limitation the purchase, sale, or exchange of property, or the loaning or giving of funds to any Affiliate or subsidiary, except in the ordinary course of business and pursuant to the reasonable requirements of Borrower's business and upon terms substantially the same and no less favorable to Borrower as it would obtain in a comparable 32 34 arm's length transaction with any Person not an Affiliate or subsidiary, and so long as the transaction is not otherwise prohibited under this Agreement. For purposes of the foregoing, Lender consents to the transactions described on Schedule 7.12. SECTION 7.12. USE OF LENDER'S NAME. Borrower will not use Lender's name (or the name of any of Lender's affiliates) in connection with any of its business operations. Borrower may disclose to third parties that Borrower has a borrowing relationship with Lender. Nothing contained in this Agreement is intended to permit or authorize Borrower to make any contract on behalf of Lender. SECTION 7.13. CHANGE IN CONTROL. There shall occur no Change in Control. SECTION 7.14. CONTRACTS AND AGREEMENTS. Borrower will not become or be a party to any contract or agreement which would breach this Agreement, or breach any other instrument, agreement, or document to which Borrower is a party or by which it is or may be bound. SECTION 7.15. MARGIN STOCK. Borrower will not carry or purchase any "margin security" within the meaning of Regulations U, T or X of the Board of Governors of the Federal Reserve System. SECTION 7.16. TRUTH OF STATEMENTS AND CERTIFICATES. Borrower will not furnish to Lender any certificate or other document that contains any known untrue statement of a material fact or knowingly omits to state a material fact necessary to make it not misleading in light of the circumstances under which it was furnished. SECTION 7.17. DISCLOSURE OF AGREEMENT. Borrower will not disclose the contents of this Loan Agreement and the other Loan Documents to any third party (including, without limitation, any financial institution or intermediary) without Lender's prior written consent. ARTICLE VIII EVENTS OF DEFAULT SECTION 8.1. EVENTS OF DEFAULT. Each of the following (individually, an "Event of Default" and collectively, the "Events of Default") shall constitute an event of default under this Agreement: (a) A default in the payment of any installment of principal of, or interest upon, the Note when due and payable, whether at maturity or otherwise, or any breach of Section 2.3, which default or breach, as applicable, shall have continued unremedied for a period of five (5) days after written notice of the default or breach from Lender to Borrower; (b) A default in the payment of any other charges, fees, or other monetary obligations owing to Lender arising out of or incurred in connection with this Agreement when 33 35 such payment is due and payable, which default shall have continued unremedied for a period of five (5) days after written notice of the default from Lender to Borrower; (c) A default in the due observance or performance by Borrower or any guarantor of the Obligations of any other term, covenant or agreement contained in any of the Loan Documents, which default shall have continued unremedied for a period of twenty (20) days after written notice of the default from Lender to Borrower; (d) Any representation or warranty made by Borrower in this Agreement or in any of the other Loan Documents, any financial statement, or any statement or representation made in any other certificate, report or opinion delivered in connection with this Agreement or the other Loan Documents proves to have been incorrect or misleading in any material respect when made, which default shall have continued unremedied for a period of twenty (20) days after written notice of the default from Lender to Borrower; (e) Any obligation of Borrower (other than its Obligations under this Agreement) for the payment of Borrowed Money is not paid when due or within any applicable grace period, or such obligation becomes or is declared to be due and payable before the expressed maturity of the obligation, or there shall have occurred an event which, with the giving of notice or lapse of time, or both, would cause any such obligation to become, or allow any such obligation to be declared to be, due and payable; (f) Borrower makes an assignment for the benefit of creditors, offers a composition or extension to creditors, or makes or sends notice of an intended bulk sale of any business or assets now or hereafter conducted by Borrower; (g) (i) Borrower files a petition in bankruptcy, (ii) Borrower is adjudicated insolvent or bankrupt, petitions or applies to any tribunal for any receiver of or any trustee for itself or any substantial part of its property, (iii) Borrower commences any proceeding relating to itself under any reorganization, arrangement, readjustment or debt, dissolution or liquidation law or statute of any jurisdiction, whether now or hereafter in effect, (iv) any such proceeding is commenced against Borrower and such proceeding remains undismissed for a period of sixty (60) days, (v) Borrower by any act indicates its consent to, approval of, or acquiescence in, any such proceeding or the appointment of any receiver of or any trustee for a Borrower or any substantial part of its property, or suffers any such receivership or trusteeship to continue undischarged for a period of sixty (60) days; (h) One or more (i) final judgments against Borrower or attachments against its property shall be rendered by a court, arbitrator, arbitration panel, mediator or any individual(s) or entity with the authority to issue binding judgments against Borrower or (ii) final settlements by or on behalf of Borrower of any pending litigation, arbitration or other claim or otherwise disputed matter, in any event not fully and unconditionally covered by insurance, shall remain unpaid, unstayed on appeal, undischarged, unbonded and undismissed for a period of ten (10) days; 34 36 (i) A Reportable Event which might constitute grounds for termination of any Plan covered by Title IV of ERISA or for the appointment by the appropriate United States District Court of a trustee to administer any such Plan or for the entry of a lien or encumbrance to secure any deficiency, has occurred and is continuing thirty (30) days after its occurrence, or any such Plan is terminated, or a trustee is appointed by an appropriate United States District Court to administer any such Plan, or the Pension Benefit Guaranty Corporation institutes proceedings to terminate any such Plan or to appoint a trustee to administer any such Plan, or a lien or encumbrance is entered to secure any deficiency or claim; (j) There shall occur a Change of Control without the consent of Lender; (k) There shall occur any uninsured damage to or loss, theft or destruction of any portion of the Collateral that exceeds $75,000 in the aggregate; (l) INTENTIONALLY DELETED (m) Upon the issuance of any execution or distraint process against Borrower or a material portion of its property and assets; (n) Borrower ceases any material portion of its business operations as currently conducted; (o) Any indication or evidence is received by Lender that Borrower may have directly or indirectly been engaged in any type of activity which, in Lender's discretion, may result in the forfeiture of any property of Borrower to any Governmental Authority, which default shall have continued unremedied for a period of ten (10) days after written notice from Lender; (p) Borrower or any Affiliate of Borrower, shall challenge or contest, in any action, suit or proceeding, the validity or enforceability of this Agreement, or any of the other Loan Documents, the legality or the enforceability of any of the Obligations or the perfection or priority of any Lien granted to Lender; (q) Borrower shall be criminally indicted or convicted under any law that could lead to a forfeiture of any Collateral; (r) There shall occur a change having a Material Adverse Effect on the financial condition or business prospects of Borrower, which default shall have continued unremedied for a period of forty-five (45) days after written notice from Lender; or (s) A default or event of default occurs under any other note, instrument, deed of trust, mortgage, loan agreement, security agreement, letter agreement or other document 35 37 executed and delivered by Borrower, or any Affiliate of Borrower, in connection with any financing provided by Lender or Lender's Affiliate to any such parties; SECTION 8.2. ACCELERATION. Upon the occurrence and during the continuance of any of the foregoing Events of Default, the Obligations under the Note shall become and be immediately due and payable upon declaration to that effect delivered by Lender to Borrower during the continuance of an Event of Default; provided that, upon the happening of any event specified in Section 8.1(g),all Obligations including, without limitation the Termination Fee, shall be immediately due and payable without declaration or other notice to Borrower. SECTION 8.3. REMEDIES. (a) Upon the occurrence of and during the continuance of an Event of Default under this Agreement or the other Loan Documents, Lender, in addition to all other rights, options, and remedies granted to Lender under this Agreement or at law or in equity, may take any of the following steps (which list is given by way of example and is not intended to be an exhaustive list of all such rights and remedies): (i) Terminate the Loan, whereupon all outstanding Obligations (including without limitation the Termination Fee) shall be immediately due and payable; (ii) Exercise all other rights granted to it under this Agreement and all rights under the UCC in effect in the applicable jurisdiction(s) and under any other applicable law; and (iii) Exercise all rights and remedies under all Loan Documents now or hereafter in effect, including but not limited to: (A) The right to take possession of, send notices regarding, and collect directly the Collateral, with or without judicial process; (B) The right to (by its own means or with judicial assistance) enter any of Borrower's premises and take possession of the Collateral or dispose of the Collateral on such premises in compliance with subsection (C) below, without any liability for rent, storage, utilities, or other sums, and Borrower shall not resist or interfere with such action; and (C) The right to require Borrower at Borrower's expense to assemble all or any part of the Collateral and make it available to Lender at any place designated by Lender; and (D) The right to reduce the Maximum Loan Amount or to use the Collateral and/or funds in the Concentration Account in amounts up to the Maximum Loan Amount for any reason. 36 38 (b) Borrower agrees that a notice received by it at least fifteen (15) days before the time of any intended public sale, or the time after which any private sale or other disposition of the Collateral is to be made, shall be deemed to be reasonable notice of such sale or other disposition. If permitted by applicable law, any perishable Collateral which threatens to speedily decline in value or which is sold on a recognized market may be sold immediately by Lender without prior notice to Borrower. At any sale or disposition of Collateral, Lender may (to the extent permitted by applicable law) purchase all or any part of the Collateral, free from any right of redemption by Borrower, which right is hereby waived and released. Borrower covenants and agrees not to interfere with or impose any obstacle to Lender's exercise of its rights and remedies with respect to the Collateral. SECTION 8.4. NATURE OF REMEDIES. Lender shall have the right to proceed against all or any portion of the Collateral to satisfy the liabilities and Obligations of Borrower to Lender in any order. All rights and remedies granted Lender under this Agreement and under any agreement referred to in this Agreement, or otherwise available at law or in equity, shall be deemed concurrent and cumulative, and not alternative remedies, and Lender may proceed with any number of remedies at the same time until the Loans, and all other existing and future liabilities and obligations of Borrower to Lender, are satisfied in full. The exercise of any one right or remedy shall not be deemed a waiver or release of any other right or remedy, and Lender, upon the occurrence of an Event of Default, may proceed against Borrower, and/or the Collateral, at any time, under any agreement, with any available remedy and in any order. ARTICLE IX MISCELLANEOUS SECTION 9.1. EXPENSES AND TAXES. (a) Borrower agrees to pay, whether or not the Closing occurs, a reasonable documentation preparation fee, together with actual audit and appraisal fees and all other out-of-pocket charges and expenses incurred by Lender in connection with the negotiation, preparation, legal review and execution of each of the Loan Documents, including but not limited to UCC and judgment lien searches and UCC filings and fees for post-Closing UCC and judgment lien searches. In addition, Borrower shall pay all such fees associated with any amendments to the Loan Documents following Closing. (b) Borrower also agrees to pay all reasonable out-of-pocket charges and expenses incurred by Lender (including the fees and expenses of Lender's counsel) in connection with the enforcement, protection or preservation of any right or claim of Lender, the termination of this Agreement, the termination of any liens of Lender on the Collateral, or the collection of any amounts due under the Loan Documents. If Lender uses in-house counsel for any of these purposes (i.e., for any task in connection with the enforcement, protection or preservation of any 37 39 right or claim of Lender and the collection of any amounts due under its Loan Documents), Borrower further agrees that its Obligations under the Loan Documents include reasonable charges for such work commensurate with the fees that would otherwise be charged by outside legal counsel selected by Lender for the work performed. (c) Borrower shall pay all taxes (other than taxes based upon or measured by Lender's income or revenues or any personal property tax), if any, in connection with the issuance of the Note and the recording of the security documents therefor. The obligations of Borrower under this clause (c) shall survive the payment of Borrower's indebtedness under this Agreement and the termination of this Agreement. SECTION 9.2. ENTIRE AGREEMENT; AMENDMENTS. This Agreement and the other Loan Documents constitute the full and entire understanding and agreement among the parties with regard to their subject matter and supersede all prior written or oral agreements, understandings, representations and warranties made with respect thereto. No amendment, supplement or modification of this Agreement nor any waiver of any provision thereof shall be made except in writing executed by the party against whom enforcement is sought. SECTION 9.3. NO WAIVER; CUMULATIVE RIGHTS. No waiver by any party to this Agreement of any one or more defaults by the other party in the performance of any of the provisions of this Agreement shall operate or be construed as a waiver of any future default or defaults, whether of a like or different nature. No failure or delay on the part of any party in exercising any right, power or remedy under this Agreement shall operate as a waiver of such right, power or remedy nor shall any single or partial exercise of any such right, power or remedy preclude any other or further exercise of such right, power or remedy or the exercise of any other right, power or remedy. The remedies provided for in this Agreement are cumulative and are not exclusive of any remedies that may be available to any party to this Agreement at law, in equity or otherwise. SECTION 9.4. NOTICES. Any notice or other communication required or permitted under this Agreement shall be in writing and personally delivered, mailed by registered or certified mail (return receipt requested and postage prepaid), sent by telecopier (with a confirming copy sent by regular mail), or sent by prepaid overnight courier service, and addressed to the relevant party at its address set forth below, or at such other address as such party may, by written notice, designate as its address for purposes of notice under this Agreement: 38 40 (a) If to Lender, at: Heller Healthcare Finance, Inc. 2 Wisconsin Circle, 4th Floor Chevy Chase, Maryland 20815 Attention: Pascale Bissainthe, Esq., Chief Counsel Telephone: (301) 961-1640 Telecopier: (301) 664-9866 (b) If to Borrower, at: Rockwell Medical Technologies, Inc. 28025 Oakland Oaks Court Wixom, Michigan 48393 Attention: Mr. Thomas E. Klema Telephone: (248) 449-3353 Telecopier: (248) 449-3363 If mailed, notice shall be deemed to be given five (5) days after being sent, and if sent by personal delivery, telecopier or prepaid courier, notice shall be deemed to be given when delivered. SECTION 9.5. SEVERABILITY. If any term, covenant or condition of this Agreement, or the application of such term, covenant or condition to any party or circumstance shall be found by a court of competent jurisdiction to be, to any extent, invalid or unenforceable, the remainder of this Agreement and the application of such term, covenant, or condition to parties or circumstances other than those as to which it is held invalid or unenforceable, shall not be affected thereby, and each term, covenant or condition shall be valid and enforced to the fullest extent permitted by law. Upon determination that any such term is invalid, illegal or unenforceable, Lender may, but is not obligated to, advance funds to Borrower under this Agreement until the parties to this Agreement amend this Agreement so as to effect the original intent of the parties as closely as possible in a valid and enforceable manner. SECTION 9.6. SUCCESSORS AND ASSIGNS. This Agreement, the Note, and the other Loan Documents shall be binding upon and inure to the benefit of Borrower and Lender and their respective successors and assigns. Notwithstanding the foregoing, Borrower may not assign any of its rights or delegate any of its obligations under this Agreement without the prior written consent of Lender, which may be withheld in its sole discretion. Lender may sell, assign, transfer, or participate any or all of its rights or obligations under this Agreement without notice to or consent of Borrower. SECTION 9.7. COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original, but all of which together shall constitute but one instrument. 39 41 SECTION 9.8. INTERPRETATION. No provision of this Agreement or any other Loan Document shall be interpreted or construed against any party because that party or its legal representative drafted that provision. The titles of the paragraphs of this Agreement are for convenience of reference only and are not to be considered in construing this Agreement. Any pronoun used in this Agreement shall be deemed to include singular and plural and masculine, feminine and neuter gender as the case may be. The words "herein," "hereof," and "hereunder" shall be deemed to refer to this entire Agreement, except as the context otherwise requires. SECTION 9.9. SURVIVAL OF TERMS. All covenants, agreements, representations and warranties made in this Agreement, any other Loan Document, and in any certificates and other instruments delivered in connection with this Agreement shall be considered to have been relied upon by Lender and shall survive the making by Lender of the Loans contemplated by this Agreement and the execution and delivery to Lender of the Note, and shall continue in full force and effect until all liabilities and obligations of Borrower to Lender are satisfied in full. SECTION 9.10. RELEASE OF LENDER. For and in consideration of the Loan, Borrower, voluntarily, knowingly, unconditionally, and irrevocably, with specific and express intent, for and on behalf of itself and its agents, attorneys, heirs, successors, and assigns (collectively the "Releasing Parties") does hereby fully and completely release, acquit and forever discharge Lender, and its successors, assigns, heirs, affiliates, subsidiaries, parent companies, principals, directors, officers, employees, shareholders and agents (hereinafter called the "Lender Parties"); and any other person, firm, business, corporation, insurer, or association which may be responsible or liable for the acts or omissions of the Lender Parties, or who may be liable for the injury or damage resulting therefrom (collectively the "Released Parties"), of and from any and all actions, causes of action, suits, debts, disputes, damages, claims, obligations, liabilities, costs, expenses and demands of any kind whatsoever, at law or in equity, whether matured or unmatured, liquidated or unliquidated, vested or contingent, choate or inchoate, known or unknown that the Releasing Parties (or any of them) have, whether now or in the future, (whether directly or indirectly) against the Released Parties or any of them except those arising out of gross negligence or willful misconduct. The Borrower acknowledges that the foregoing release is a material inducement ot Lender's decision to extend to Borrower the financial accommodations hereunder and has been relied upon by Lender in agreeing to make the Loan. SECTION 9.11. TIME. Whenever Borrower is required to make any payment or perform any act on a Saturday, Sunday, or a legal holiday under the laws of the State of Maryland (or other jurisdiction where Borrower is required to make the payment or perform the act), the payment may be made or the act performed on the next Business Day. Time is of the essence in Borrower's performance under this Agreement and all other Loan Documents. SECTION 9.12. COMMISSIONS. The transaction contemplated by this Agreement was brought about by Lender and Borrower acting as principals and without any brokers, agents, or finders being the effective procuring cause. Borrower represents that it has not committed Lender to the payment of any brokerage fee, commission, or charge in connection with this 40 42 transaction. If any such claim is made on Lender by any broker, finder, or agent or other person, Borrower will indemnify, defend, and hold Lender harmless from and against the claim and will defend any action to recover on that claim, at Borrower's cost and expense, including Lender's counsel fees. Borrower further agrees that until any such claim or demand is adjudicated in Lender's favor, the amount demanded will be deemed a liability of Borrower under this Agreement, secured by the Collateral. SECTION 9.13. THIRD PARTIES. No rights are intended to be created under this Agreement or under any other Loan Document for the benefit of any third party donee, creditor, or incidental beneficiary of Borrower. Nothing contained in this Agreement shall be construed as a delegation to Lender of Borrower's duty of performance, including without limitation Borrower's duties under any account or contract in which Lender has a security interest. SECTION 9.14. DISCHARGE OF BORROWER'S OBLIGATIONS. Lender, in its sole discretion, shall have the right at any time, and from time to time, without prior notice to Borrower if Borrower fails to do so, to: (i) obtain insurance covering any of the Collateral as required under this Agreement; (ii) pay for the performance of any of Borrower's obligations under this Agreement; (iii) discharge taxes, liens, security interests, or other encumbrances at any time levied or placed on any of the Collateral in violation of this Agreement unless Borrower is in good faith with due diligence by appropriate proceedings contesting those items; and (iv) pay for the maintenance and preservation of any of the Collateral, provided Lender provides Borrower with written notice promptly after doing so. Expenses and advances shall be added to the Loan, until reimbursed to Lender and shall be secured by the Collateral. Any such payments and advances by Lender shall not be construed as a waiver by Lender of an Event of Default. SECTION 9.15. INFORMATION TO PARTICIPANTS. Lender may divulge to any participant it may obtain in the Loan, or any portion of the Loan, all information, and furnish to such participant copies of reports, financial statements, certificates, and documents obtained under any provision of this Agreement or any other Loan Document, provided such participant enters into an agreement reasonably satisfactory to Borrower to keep such information confidential. SECTION 9.16. INDEMNITY. Borrower hereby agrees to indemnify and hold harmless Lender, its partners, officers, agents and employees (collectively, "Indemnitee") from and against any liability, loss, cost, expense, claim, damage, suit, action or proceeding ever suffered or incurred by Lender (including reasonable attorneys' fees and expenses) arising from Borrower's failure to observe, perform or discharge any of its covenants, obligations, agreements or duties under this Agreement, or from the breach of any of the representations or warranties contained in Article IV of this Agreement. In addition, Borrower shall defend Indemnitee against and save it harmless from all claims of any Person with respect to the Collateral. Notwithstanding any contrary provision in this Agreement, the obligation of Borrower under this Section 9.16 shall survive the payment in full of the Obligations and the termination of this Agreement. 41 43 SECTION 9.17. APPOINTMENT OF AGENT UNDER THIS AGREEMENT. (a) Each of the entities comprising Borrower hereby irrevocably appoints and constitutes Thomas Klema as its agent to request and receive Revolving Credit Loans (and to otherwise act on behalf of each such entity pursuant to this Agreement and the other Loan Documents) from Lender in the name or on behalf of each such entity. Lender may disburse the Revolving Credit Loans to the bank account of any one or more of such entities without notice to any of the other entities comprising Borrower or any other Person at any time obligated on or in respect of the Obligations. (b) Each of the entities comprising Borrower hereby irrevocably appoints and constitutes Thomas Klema as its agent to receive statements of account and all other notices from Lender with respect to the Obligations or otherwise under or in connection with this Agreement and the other Loan Documents. (c) No purported termination of the appointment of Thomas Klema as agent shall be effective without the prior written consent of Lender. SECTION 9.18. LENDER APPROVALS. Unless expressly provided herein to the contrary, any approval, consent, waiver or satisfaction of Lender with respect to any matter that is the subject of this Agreement, the other Loan Documents may be granted or withheld by Lender in its sole and absolute discretion. SECTION 9.19. CHOICE OF LAW; CONSENT TO JURISDICTION. THIS AGREEMENT AND THE NOTE SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF MARYLAND, WITHOUT REGARD TO ANY OTHERWISE APPLICABLE PRINCIPLES OF CONFLICTS OF LAWS. IF ANY ACTION ARISING OUT OF THIS AGREEMENT OR THE NOTE IS COMMENCED BY LENDER IN THE STATE COURTS OF THE STATE OF MARYLAND OR IN THE U.S. DISTRICT COURT FOR THE DISTRICT OF MARYLAND, BORROWER HEREBY CONSENTS TO THE JURISDICTION OF ANY SUCH COURT IN ANY SUCH ACTION AND TO THE LAYING OF VENUE IN THE STATE OF MARYLAND. ANY PROCESS IN ANY SUCH ACTION SHALL BE DULY SERVED IF MAILED BY REGISTERED MAIL, POSTAGE PREPAID, TO BORROWER AT ITS ADDRESS DESCRIBED IN SECTION 9.4. OR IF SERVED BY ANY OTHER MEANS PERMITTED BY APPLICABLE LAW. SECTION 9.20. INTENTIONALLY DELETED SECTION 9.21. WAIVER OF TRIAL BY JURY. BORROWER HEREBY (A) COVENANTS AND AGREES NOT TO ELECT A TRIAL BY JURY OF ANY ISSUE TRIABLE OF RIGHT BY A JURY, AND (B) WAIVES ANY RIGHT TO TRIAL BY JURY FULLY TO THE EXTENT THAT ANY SUCH RIGHT SHALL NOW OR HEREAFTER EXIST. THIS WAIVER OF RIGHT TO TRIAL BY JURY IS SEPARATELY GIVEN, 42 44 KNOWINGLY AND VOLUNTARILY, BY BORROWER, AND THIS WAIVER IS INTENDED TO ENCOMPASS INDIVIDUALLY EACH INSTANCE AND EACH ISSUE AS TO WHICH THE RIGHT TO A JURY TRIAL WOULD OTHERWISE ACCRUE. LENDER IS HEREBY AUTHORIZED AND REQUESTED TO SUBMIT THIS AGREEMENT TO ANY COURT HAVING JURISDICTION OVER THE SUBJECT MATTER AND THE PARTIES TO THIS AGREEMENT, SO AS TO SERVE AS CONCLUSIVE EVIDENCE OF BORROWER'S WAIVER OF THE RIGHT TO JURY TRIAL. FURTHER, BORROWER HEREBY CERTIFIES THAT NO REPRESENTATIVE OR AGENT OF LENDER (INCLUDING LENDER'S COUNSEL) HAS REPRESENTED, EXPRESSLY OR OTHERWISE, TO BORROWER THAT LENDER WILL NOT SEEK TO ENFORCE THIS WAIVER OF RIGHT TO JURY TRIAL PROVISION. SECTION 9.22. CONFESSION OF JUDGMENT. UPON THE OCCURRENCE AND DURING THE CONTINUANCE OF AN EVENT OF DEFAULT, BORROWER AUTHORIZES ANY ATTORNEY ADMITTED TO PRACTICE BEFORE ANY COURT OF RECORD IN THE UNITED STATES OR THE CLERK OF SUCH COURT TO APPEAR ON BEHALF OF BORROWER IN ANY COURT IN ONE OR MORE PROCEEDINGS, OR BEFORE ANY CLERK THEREOF OF PROTHONOTARY OR OTHER COURT OFFICIAL, AND TO CONFESS JUDGMENT AGAINST BORROWER IN FAVOR OF LENDER IN THE FULL AMOUNT DUE ON THIS AGREEMENT (INCLUDING PRINCIPAL, ACCRUED INTEREST AND ANY AND ALL CHARGES, FEES AND COSTS) PLUS REASONABLE ATTORNEYS' FEES NOT TO EXCEED FIFTEEN PERCENT (15%) OF THE AMOUNT DUE, PLUS COURT COSTS, ALL WITHOUT PRIOR NOTICE OR OPPORTUNITY OF BORROWER FOR PRIOR HEARING. BORROWER AGREES AND CONSENTS THAT VENUE AND JURISDICTION SHALL BE PROPER IN THE CIRCUIT COURT OF ANY COUNTY OF THE STATE OF MARYLAND OR OF BALTIMORE CITY, MARYLAND, OR IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF MARYLAND. BORROWER WAIVES THE BENEFIT OF ANY AND EVERY STATUTE, ORDINANCE, OR RULE OF COURT WHICH MAY BE LAWFULLY WAIVED CONFERRING UPON BORROWER ANY RIGHT OR PRIVILEGE OF EXEMPTION, HOMESTEAD RIGHTS, STAY OF EXECUTION, OR SUPPLEMENTARY PROCEEDINGS, OR OTHER RELIEF FROM THE ENFORCEMENT OR IMMEDIATE ENFORCEMENT OF A JUDGMENT OR RELATED PROCEEDINGS ON A JUDGMENT. THE AUTHORITY AND POWER TO APPEAR FOR AND ENTER JUDGMENT AGAINST BORROWER SHALL NOT BE EXHAUSTED BY ONE OR MORE EXERCISES THEREOF, OR BY ANY IMPERFECT EXERCISE THEREOF, AND SHALL NOT BE EXTINGUISHED BY ANY JUDGMENT ENTERED PURSUANT THERETO; SUCH AUTHORITY AND POWER MAY BE EXERCISED ON ONE OR MORE OCCASIONS FROM TIME TO TIME, IN THE SAME OR DIFFERENT JURISDICTIONS, AS OFTEN AS LENDER SHALL DEEM NECESSARY, CONVENIENT, OR PROPER. 43 45 SECTION 9.23. CONFIDENTIALITY. Lender agrees to keep all information provided to it by Borrower strictly confidential and not to disclose any of such information to any third party, except as provided by Section 9.15. SECTION 9.24. TERMINATION. Promptly following the Termination of the Loan and the payment by Borrower of all Obligations, Lender will terminate all Liens and take such other actions as reasonably requested by Borrower to reflect the termination of this Agreement and the Loans. [SIGNATURES FOLLOW] 44 46 IN WITNESS WHEREOF, intending to be legally bound, and intending that this Agreement constitutes an instrument executed under seal, the parties have caused this Agreement to be executed under seal as of the date first written above. LENDER: HELLER HEALTHCARE FINANCE, INC. a Delaware corporation By: /s/ Joseph Prandoni Name: Joseph Prandoni Title: Vice President BORROWER: ROCKWELL MEDICAL TECHNOLOGIES, INC. , A Michigan corporation By: /s/ Thomas E. Klema Name: Thomas E. Klema Title: Vice President, Secretary and CFO ROCKWELL TRANSPORTATION, INC. A Michigan corporation By: /s/ Thomas E. Klema Name: Thomas E. Klema Title: Vice President, Secretary & CFO 45 47 LIST OF EXHIBITS Exhibit A - Form of Revolving Credit Note Exhibit B - Form of Lockbox Agreement Exhibit C - Form of Legal Opinion 46 48 LIST OF SCHEDULES Schedule 1.36 - Permitted Liens Schedule 4.1 - Subsidiaries Schedule 4.5 - Litigation Schedule 4.7 - Tax Identification Numbers Schedule 4.13 - Non-Compliance with Law Schedule 4.14 - Environmental Matters Schedule 4.15 - Places of Business Schedule 4.16 - Licenses Schedule 4.17 - Stock Ownership Schedule 4.19 - Borrowings and Guarantees Schedule 4.21 - Trade Names Schedule 4.22 - Joint Ventures Schedule 7.12 - Transactions with Affiliates 47 -----END PRIVACY-ENHANCED MESSAGE-----