NUTRITION MEDICAL INC, 424B1, 1996-09-27

NUTRITION MEDICAL INC
424B1, 1996-09-27
DRUGS, PROPRIETARIES & DRUGGISTS' SUNDRIES

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PURSUANT FILE TO 424(b)(1)
REGISTRATION NUMBER 333-09999

1,250,000 SHARES

[LOGO]

NUTRITION MEDICAL, INC.

COMMON STOCK

All of the shares of Common Stock offered hereby (the "Shares") are being
sold by Nutrition Medical, Inc. (the "Company"). Prior to this offering there
has been no public market for the Common Stock of the Company (the "Common
Stock"). See "Underwriting" for information relating to the factors considered
in determining the initial public offering price. Application has been made to
have the Common Stock approved for trading on the Nasdaq SmallCap Market under
the symbol "NMED."

THE COMMON STOCK OFFERED BY THIS PROSPECTUS IS SPECULATIVE AND INVOLVES A
HIGH DEGREE OF RISK AND IMMEDIATE SUBSTANTIAL DILUTION. SEE "RISK FACTORS"
BEGINNING ON PAGE 5 AND "DILUTION" ON PAGE 12.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.

<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT (1) COMPANY (2)
<S> <C> <C> <C>
Per Share.............................. $3.50 $.35 $3.15
Total (1,250,000 shares)(3)............ $4,375,000 $437,500 $3,937,500
</TABLE>

(1) The Company has agreed to pay to Miller, Johnson & Kuehn, Incorporated (the
"Underwriter") a nonaccountable expense allowance of 1% of the gross
proceeds of this offering. The Company has also agreed to sell to the
Underwriter, for a nominal purchase price, a five-year warrant to purchase
up to 125,000 shares of Company Common Stock exercisable at $4.20 per share.
In addition, the Company has agreed to indemnify the Underwriter against
certain liabilities, including liabilities under the Securities Act of 1933,
as amended. See "Underwriting."
(2) Before deducting expenses payable by the Company estimated at $275,000
(including the Underwriter's nonaccountable expense allowance of 1% of the
gross proceeds referenced in Note 1 above).
(3) The Company has granted the Underwriter a 30-day option to purchase up to
187,500 additional shares of Common Stock solely to cover over-allotments.
If such option is exercised in full, the total Price to Public, Underwriting
Discount and Proceeds to Company will be $5,031,250, $503,125 and
$4,528,125, respectively. See "Underwriting."

The Shares are being offered by the Underwriter subject to prior sale, to
withdrawal, cancellation or modification of the offer without notice, to
delivery to and acceptance by the Underwriter and to certain other conditions.
It is expected that delivery of the certificates for the Shares will be made on
or about October 1, 1996.

MILLER, JOHNSON & KUEHN, INCORPORATED

The date of this Prospectus is September 26, 1996.
<PAGE>

<TABLE>
<S> <C>
THE COMPANY MARKETS ITS
CRITICAL CARE NUTRITION
PRODUCTS, INCLUDING THESE
L-EMENTAL AND PRO-PEPTIDE
FORMULAS, TO HOSPITALS AND
[PHOTO] OTHER HEALTH CARE PROVIDERS.
</TABLE>

<TABLE>
<S> <C>
THE COMPANY'S PRIVATE LABEL
NUTRITION PRODUCTS ARE
MARKETED TO RETAIL CHAINS AND
GENERALLY ARE PACKAGED USING
THE RETAILER'S PROPRIETARY
STORE BRAND LABEL. [PHOTO]
</TABLE>

IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL ON THE NASDAQ
SMALLCAP MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY
TIME.
------------------------

Instant Nutrition-TM-, L-Emental-TM-, Nutrition Advanced Formula-TM-,
Nutrition PLUS-TM- and Pro-Peptide-TM- are trademarks of the Company.

The Company intends to furnish to its shareholders annual reports containing
financial statements audited by independent auditors.

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PROSPECTUS SUMMARY

THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE IN
THIS PROSPECTUS. UNLESS OTHERWISE INDICATED, ALL INFORMATION HEREIN ASSUMES (I)
THAT THE UNDERWRITER'S OVER-ALLOTMENT OPTION IS NOT EXERCISED AND (II) THE GRANT
OF AN OPTION TO PURCHASE 100,000 SHARES OF COMMON STOCK TO MR. WILLIAM L. RUSH,
PRESIDENT OF THE COMPANY, WITH AN EXERCISE PRICE EQUAL TO $3.50 PER SHARE, WHICH
GRANT IS CONTINGENT UPON THE COMPLETION OF THIS OFFERING.

THE COMPANY

Nutrition Medical, Inc. (the "Company") develops and sells generic critical
care nutrition products for the hospital/nursing home market, as well as private
label nutrition products for sale through regional and national retail chains.
The Company's products are manufactured using ingredients, formulas and
processes comparable to those of national brand products. The Company currently
has six critical care nutrition products and three private label nutrition
products. The Company intends to expand its existing product lines and is also
currently in the early stages of developing an infant formula, which is not
expected to be available for sale for at least one year.

CRITICAL CARE NUTRITION PRODUCTS. Critical care nutrition products are used
by hospitals and other health care providers to feed critically ill patients who
cannot consume adequate nutrients orally and consequently require specialized
feeding via tubes into the intestinal tract. The use of critical care nutrition
products often continues at home or in a nursing home after a patient is
discharged from the hospital.

The Company's strategy has been to focus on the development and sale of a
line of generic critical care nutrition products for patients who are being
treated in intensive care units. Certain of these products contain unique
ingredients or proportions of ingredients to meet the metabolic requirements of
specific patient populations. The Company markets its critical care nutrition
products to hospitals and other health care providers as a less expensive,
generic alternative to the established products offered by major manufacturers.
The Company intends to develop an expanded line of critical care nutrition
products and to establish itself as a major supplier of such products in generic
form. During the past twelve months, the Company has made sales to more than 350
hospitals and other health care providers.

PRIVATE LABEL NUTRITION PRODUCTS. Private label, or "store brand,"
nutrition products are marketed to retailers, which sell the products under
their own private labels. The Company's private label product line currently
consists of three adult nutrition supplements, each of which has three flavors.
Adult nutrition supplements are designed to provide balanced nutrition in
beverage form as a supplement or substitute for solid food for healthy
individuals as well as those recovering from or affected by illness. The Company
intends to expand its private label product line to include additional adult
nutrition supplements, some of which are currently under development.

The Company's private label marketing strategy has been to offer lower
priced products that are equivalent in quality and efficacy to leading national
brands, such as the Ensure-Registered Trademark- family of products. The
Company's customers currently include nine retail chains that offer the
Company's adult nutrition supplements in approximately 5,000 stores nationwide.

Nutrition Medical, Inc. was incorporated in Minnesota in July 1993. The
Company's principal executive offices are located at 308 12th Avenue South,
Buffalo, Minnesota 55313, and its telephone number is (612) 682-9288.

3
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THE OFFERING

<TABLE>
<S> <C>
Common Stock offered......................... 1,250,000 shares

Common Stock outstanding (1):
Before the offering........................ 3,155,524 shares
After the offering......................... 4,405,524 shares

Use of proceeds.............................. Development of additional products, marketing
and working capital. See "Use of Proceeds."

Proposed Nasdaq SmallCap Market-SM- symbol... NMED
</TABLE>

- ------------------------
(1) Does not include (a) 900,000 shares reserved for issuance pursuant to the
Company's stock option plans, of which options for 610,250 shares are
outstanding, (b) 202,107 shares issuable upon exercise of other outstanding
options or warrants or (c) 125,000 shares issuable upon exercise of the
Underwriter's warrant. See "Description of Capital Stock" and
"Underwriting."

SUMMARY FINANCIAL DATA

<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS
DECEMBER 31, ENDED JUNE 30,
---------------------------- ----------------------------
1994 1995 1995 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>

STATEMENT OF OPERATIONS DATA:
Net sales.......................................... $ 81,961 $ 841,241 $ 284,106 $ 1,086,049
Gross profit....................................... 57,348 434,850 144,180 403,855
Selling, general and administrative expenses....... 733,413 1,242,863 523,485 577,679
Research and development expenses.................. 17,557 170,963 28,287 96,155
Operating loss..................................... (693,622) (978,976) (407,592) (269,979)
Net loss........................................... $ (694,689) $ (959,623) $ (409,267) $ (253,415)
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Net loss per share(1).............................. $ (0.29) $ (0.30) $ (0.16) $ (0.06)
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Weighted average number of shares outstanding(1)... 2,415,348 3,174,827 2,639,411 4,220,816
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>

<TABLE>
<CAPTION>
JUNE 30, 1996
------------------------------
AS ADJUSTED
ACTUAL (2)
-------------- --------------

<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents....................................................... $ 890,032 $ 4,552,532
Working capital................................................................. 888,399 4,550,899
Total assets.................................................................... 1,482,780 5,145,280
Accumulated deficit............................................................. (1,784,384) (1,784,384)
Total shareholders' equity...................................................... 967,783 4,630,283
</TABLE>

- ------------------------
(1) Computed on the basis described in Note 2 of the Notes to Financial
Statements.
(2) Adjusted to give effect to the sale of the 1,250,000 shares of Common Stock
offered hereby and the application of the estimated net proceeds therefrom.
Does not include 812,357 shares of Common Stock issuable upon exercise of
stock options and warrants outstanding at the date of this Prospectus. See
"Use of Proceeds," "Capitalization," and "Management -- Stock Option Plans."

4
<PAGE>
RISK FACTORS

IN ADDITION TO THE OTHER INFORMATION IN THIS PROSPECTUS, THE FOLLOWING
FACTORS SHOULD BE CONSIDERED CAREFULLY BY POTENTIAL INVESTORS IN EVALUATING AN
INVESTMENT IN THE COMMON STOCK OFFERED HEREBY.

LACK OF OPERATING PROFITS; LIMITED OPERATING HISTORY

The Company, which was incorporated in July 1993, is subject to all of the
risks inherent in the establishment of a new business. The likelihood of the
success of the Company must be considered in light of the difficulties, expenses
and delays frequently encountered in connection with the development and
marketing of new products and the competitive environment in which the Company
is operating.

Although the Company began generating revenues from product sales in May
1994, the Company has not yet been profitable. Through June 30, 1996, the
Company has accumulated losses of $1,784,384. No assurance can be given that the
Company will ever be able to achieve profitability. Further, there can be no
assurance that the Company will be able to successfully develop or market
additional products or that the Company will have sufficient funds available to
successfully market its current products or any new products that it may develop
in the future.

PRODUCT ACCEPTANCE AND PRICING

The Company's products are designed to be substantially equivalent to
existing branded competitive products. Although the Company believes that the
efficacy of its products is comparable to branded competitive products, no
independent comparison between the Company's products and competitive products
has been completed and there can be no assurance that the efficacy of the
Company's products is or will be comparable to branded competitive products.

Furthermore, the Company's name and its products are relatively unknown to
large segments of the Company's target markets. Although the Company intends to
use a significant portion of the proceeds of this offering for marketing, there
can be no assurance that the Company's marketing efforts will achieve sufficient
name recognition of the Company and its products to significantly enhance
revenues.

The principal advantage of the Company's products is, and is expected to be,
lower price. In the past several months the Company has become aware of one
competitor in the critical care nutrition products market that has lowered
prices to various customers of its branded products to levels that offset all or
part of the price advantage of the Company's three competitive products
(L-Emental, L-Emental Plus and L-Emental Pediatric). The Company believes that
these selective price reductions by this competitor resulted in indeterminable
lost sales of the Company's three competing products, and that this competitor
has begun to use this form of price competition more frequently. See "Business
- -- Competition -- Critical Care Nutrition Products." This competitor may decide
to consistently lower its prices to the Company's level, and other competitors
may adopt the same strategy. Because the Company's marketing strategy is focused
on the price advantage of its products, if a competitor selling branded products
reduces or eliminates the price advantage of the Company's products, there can
be no assurance that the Company can compete successfully with such a competitor
or operate profitably under such conditions. See "Business -- Competition."

DEVELOPMENT OF NEW PRODUCTS

The Company intends to continue to develop new products, which will require
both the timely identification of market opportunities and the identification
of, and the negotiation of contracts with, suitable technical consultants. There
can be no assurance that an adequate market opportunity will exist for the
potential products the Company selects for development or that such products
will be successfully developed or marketed.

DEPENDENCE ON CONTRACT MANUFACTURERS

The Company engages contract manufacturers to produce its products according
to the Company's specifications. The Company relies on these manufacturers to
comply with all applicable

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government regulations and manufacturing guidelines. There can be no assurance
that contract manufacturers will consistently supply adequate quantities of the
Company's products on a timely basis, that such manufacturers will consistently
comply with government regulations or that the quality of such products will be
consistently maintained. In the event of a sale of a defective product, the
Company would be exposed to product liability claims and could lose customer
confidence. In addition, minimum quantity order requirements imposed by
manufacturers may result in excess inventory levels, requiring additional
working capital and increasing exposure to losses from inventory obsolescence.
Although the Company believes it could find alternative manufacturers for its
products, any interruption in supply of any of the Company's products could
adversely affect the Company's ability to market its products and, therefore,
the Company's business, financial condition and results of operations. See
"Business -- Manufacturing and Distribution."

DEPENDENCE ON RETAIL DISTRIBUTION OF PRODUCTS

The Company's private label nutrition products are sold only through retail
chains. The Company's strategy includes the development of additional products,
including an infant formula that is currently under development by the Company.
There can be no assurance that the Company will be able to enter into
arrangements with retailers to market its infant formula or any other private
label products or that any such arrangements will result in successful product
commercialization. The Company's future profitability will depend in large part
upon the Company's ability to develop products that meet the needs of these
potential retail customers and upon the marketing efforts of such retailers.
Although the Company believes that its current and prospective retail customers
have an economic motivation to market vigorously the Company's products, the
amount and timing of resources to be devoted to marketing by such retailers is
not within the control of the Company. In addition, successful commercialization
might result in a substantial portion of the Company's revenues being generated
by one or a few retailers. Such retailers could make material marketing and
other commercialization decisions that would adversely affect the Company's
future revenues, financial condition and results of operations. See "Business --
Marketing."

POSSIBLE FLUCTUATIONS IN OPERATING RESULTS

The Company believes that its future operating results may be subject to
substantial quarterly fluctuations because its retail customers may order large
quantities at irregular intervals. In addition, the gross profit as a percentage
of sales on the Company's private label nutrition products is substantially less
than the gross profit percentage on the Company's critical care nutrition
products, and therefore the Company's overall gross profit percentage could vary
widely based on the product mix in a given period. To the extent that quarterly
revenues and operating results fluctuate substantially, the market price of the
Company's Common Stock may be affected. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."

CUSTOMER CONCENTRATION

Although the Company's experience with its customer base is limited, retail
customers often place a large initial stocking order that can increase the
relative importance of a particular customer in a particular period. In the six
months ended June 30, 1996, an initial stocking order to a large retail chain
constituted approximately 31% of the Company's total sales. There can be no
assurance that this large retail chain will continue to be a customer or that
its future orders will not significantly decline.

FUTURE CAPITAL REQUIREMENTS; NO ASSURANCE FUTURE CAPITAL WILL BE AVAILABLE

Although the proceeds of this offering, together with the Company's existing
cash balances, are expected to be sufficient to fund the Company's operations
through 1997, under certain circumstances the Company may require substantial
additional funds before the end of 1997 to meet its working capital requirements
in connection with the introduction of new products, including its proposed
infant formula. In order to meet this possible need, and to meet possible needs
after 1997, the Company may be required to raise additional funds through public
or private financings, including equity financings. Any additional equity
financings may be dilutive to purchasers in this offering, and

6
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debt financing, if available, may involve restrictive covenants. Adequate funds
for the Company's operations, regardless of the source, may not be available
when needed or on terms attractive to the Company. Insufficient funds may
require the Company to delay, scale back or eliminate the introduction of new
products, including its proposed infant formula, and the failure to obtain
funding when needed could have a material adverse effect on the Company's
business, financial condition and results of operations. See "Use of Proceeds"
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."

KEY PERSONNEL

The Company is particularly dependent on the services of its President, Mr.
William Rush. If the services of Mr. Rush were to become unavailable to the
Company for any reason, there can be no assurance that the Company could
adequately replace him. The loss of Mr. Rush's services could have a material
adverse effect on the Company. The Company has an employment agreement with Mr.
Rush that expires three years from the completion of this offering. The Company
currently maintains a life insurance policy with a face value of $1 million on
Mr. Rush.

ADDITION OF MANAGEMENT PERSONNEL AND STAFF

In order to pursue its growth objectives, the Company intends to increase
the number of its employees, including management personnel and sales and
marketing staff. There can be no assurance that the Company will be able to
hire, train and retain sufficient personnel with the necessary experience and
abilities to achieve the Company's growth objectives, or that they will perform
at a level commensurate with the Company's expectations.

LITIGATION INVOLVING COMPETITORS

It is not uncommon for companies in the generic and private label industry
to be the subject of claims and lawsuits brought by brand name competitors
alleging that the generic or private label products have formulas, labelings or
packagings similar to competing brand name products. The Company recently
resolved two lawsuits in which competitors alleged patent infringement and false
advertising by the Company, and the Company is currently subject to another suit
alleging patent infringement. Since the Company's business strategy is to
develop and market products that are equivalent to competitors' branded
products, similar claims may be made by competitors in the future. Competitors
may also respond to the Company's strategy by more aggressively seeking patents
on their products to limit the Company's future product development efforts.

If similar allegations are made against the Company in the future, some of
the Company's current and future products may need to be reformulated or
repackaged in order for the Company to continue to market products that are
comparable to competitors' patented products. While the Company believes that
reformulation of its products is generally possible, the Company may be unable
to effectively reformulate certain of its products, and there can be no
assurance that a reformulated product would be deemed by customers to be
essentially equivalent to the patented product. Moreover, there can be no
assurance that any future lawsuits could be satisfactorily settled by
reformulating, relabeling or repackaging a product, that such litigation will
not require the commitment of substantial management time and legal fees, or
that such litigation would not have a material adverse effect on the Company's
future revenues, financial condition and results of operations. See "Business --
Litigation."

COMPETITION

Competition in the critical care nutrition products market consists of
established companies that sell branded products which have achieved a high
level of customer awareness. Although the Company believes it is the only
company currently offering low cost, generic alternatives to the established
brands, other companies may enter this market.

Competition in the private label nutrition market consists of companies that
sell established national brands and companies that sell private label products.
Competitors that sell private label products include established companies that
produce private label products for a wide range of

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markets and a number of small producers of private label products. Nearly all of
the Company's competitors and potential competitors have substantially greater
financial resources, more extensive business experience and more personnel than
the Company. The Company's ability to compete will depend on the timeliness of
the development of its products and its ability to market its products
effectively.

If a larger company with significant financial resources were to compete
directly with the Company in particular market segments, there can be no
assurance that the Company will be able to compete successfully with such a
competitor or operate profitably. See "Business -- Products" and "Business --
Competition."

PRODUCT LIABILITY AND INSURANCE RISKS

The Company's business involves exposure to potential product liability
risks that are inherent in the production, manufacture and distribution of food
products. The Company maintains a general insurance policy that includes
coverage for product liability claims up to an aggregate amount of $5 million.
There can be no assurance, however, that the Company will be able to maintain
such insurance on acceptable terms, that the Company will be able to secure
increased coverage as the commercialization of its products increases or that
any insurance will provide adequate protection against potential liabilities.

GOVERNMENT REGULATION

The Company's products and potential products are or will be subject to
government regulation. The Company's current products are regulated as food and
medical food by the Food and Drug Administration (the "FDA") and are subject to
labelling requirements, current good manufacturing practice ("CGMP") regulations
and certain other regulations designed to ensure the safety of the products. The
Company's proposed infant formula may be required to undergo an adequate and
well controlled clinical study, in accordance with good clinical practice, to
determine whether the formula supports normal physical growth in infants when
fed as the sole source of nutrition. There can be no assurance that the
Company's proposed infant formula, if developed, would successfully complete
this trial.

Additionally, the FDA has recently proposed significant revisions to its
infant formula regulations to establish requirements for quality factors and
CGMP, and to amend its quality control procedure, notification, and records and
report requirements for infant formulas. These regulations, if adopted, may
delay, and increase the cost of, the Company's introduction of an infant formula
product.

Claims made by the Company in labeling and advertising its products are
subject to regulation by the FDA, the Federal Trade Commission and various state
agencies under their general authority to prevent false, misleading and
deceptive trade practrices. Failure to comply with such requirements can result
in adverse regulatory action, including injunctions, civil or criminal
penalties, product recalls or the relabelling, reformulation or possible
termination of certain products.

The Company's current and potential products may become subject to further
regulation in the future. The burden of such regulation could add materially to
the costs and risks of the Company's development and marketing efforts. There
can be no assurance that the Company could obtain the required approvals or
comply with new regulations if the Company's products are subject to additional
governmental regulation in the future. Failure to obtain necessary approvals or
otherwise comply with government regulations could have a material adverse
effect on the Company's future revenues, financial condition and results of
operations.

CONTROL BY PRINCIPAL SHAREHOLDERS

Following the completion of this offering, the directors, officers and
principal shareholders of the Company will own beneficially approximately 30.8%
of the outstanding Common Stock. As a result, such shareholders may have the
ability to effectively control the election of the Company's entire

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Board of Directors and the affairs of the Company, including all fundamental
corporate transactions such as mergers, consolidations and the sale of
substantially all of the Company's assets. See "Principal Shareholders."

LACK OF PUBLIC MARKET; POSSIBLE STOCK PRICE VOLATILITY

Prior to this offering, there has been no public market for the Common
Stock. Although the Company has applied for listing of the Common Stock on the
Nasdaq SmallCap Market, there can be no assurance that an active trading market
will develop, or if developed will be maintained or that the market price of the
Common Stock will not decline below the initial public offering price. The price
has been determined by negotiation between the Company and the Underwriter with
reference to the general status of the securities market and other relevant
factors. Such offering price may not be indicative of the market price for the
Common Stock after this offering, which may be highly volatile depending upon
various factors, including the general economy, stock market conditions,
announcements by the Company or competitors and fluctuations in the Company's
operating results. See "Underwriting."

If the Company fails to maintain its qualification for its Common Stock to
trade on the Nasdaq SmallCap Market, the Common Stock will be subject to the
rules of the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
relating to penny stocks (the "Penny Stock Rules"). Under the Penny Stock Rules,
unless a transaction in a "designated security" is exempt (e.g., a transaction
in which the purchase price of the security is $5.00 or more, a transaction in
which the purchaser is an institutional accredited investor or "established
customer," a transaction not recommended by the broker or a transaction by a
broker which is not a market maker in the stock and which derives 5% or less of
its income from transactions in designated securities), a broker must provide
certain mandated disclosure, approve the customer's account for the transaction
in "designated securities" in accordance with mandated procedures and obtain
from the customer a written agreement particular to the transaction setting
forth the identity and quantity of the securities. These procedures make it more
difficult for brokers to sell "designated securities" to certain people and many
brokers have decided not to trade securities subject to the Penny Stock Rules
because of such procedures. Accordingly, purchasers of the Common Stock may have
difficulty in selling such Common Stock if it became subject to the Penny Stock
Rules.

SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS

Sales of significant amounts of Common Stock in the public market or the
perception that such sales will occur could adversely affect the market price of
the Common Stock or the future ability of the Company to raise capital through
an offering of its equity securities. Of the 4,405,524 shares of Common Stock to
be outstanding upon completion of this offering, the 1,250,000 shares offered
hereby will be eligible for immediate sale in the public market without
restriction, with the exception of shares held by "affiliates" of the Company
within the meaning of Rule 144 under the Securities Act of 1933, as amended (the
"Securities Act"). The remaining 3,155,524 shares of Common Stock held by
existing shareholders upon completion of this offering will continue to be
"restricted securities" as that term is defined in Rule 144 under the Securities
Act. Of these shares, 1,380,000 shares will be eligible for resale in the open
market pursuant to Rule 144 beginning 90 days after the date of this Prospectus
(the "Rule 144 Shares"). The Company's officers, directors and certain of its
shareholders (all of such persons representing in the aggregate 940,000 of the
Rule 144 Shares) have agreed that they will not sell, directly or indirectly,
any Common Stock without the prior written consent of the Underwriter for a
period of one year from the date of this Prospectus. In addition, certain
warrant holders have the right, subject to certain conditions, to participate in
future Company registrations and to cause the Company to register certain shares
of Common Stock owned by them. See "Shares Eligible for Future Sale."

TRADEMARKS

The Company has not registered its existing trademarks, but instead relies
on its common law trademark rights. The lack of such registration may impair the
ability of the Company to prosecute

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successfully an infringement action against other users of these trademarks.
There can be no assurance that the Company's marks do not or will not violate
the proprietary rights of others, that the Company's proprietary rights in the
marks would be upheld if challenged, or that the Company would not be prevented
from using its marks, any of which could have an adverse effect on the Company.
In addition, there can be no assurance that the Company will have the financial
resources necessary to enforce or defend its trademarks.

DILUTION

There will be an immediate and substantial dilution to the public investors
who purchase shares in this offering in that the net tangible book value per
share of the Common Stock after the offering will be substantially less than the
public offering price of the shares offered hereby. The sale of 1,250,000 shares
at an initial public offering price of $3.50 per share will result in an
immediate dilution to investors of 70% or $2.45 per share. In addition, dilution
will occur upon the exercise of outstanding stock options and warrants of the
Company and may occur upon future equity financings of the Company. See
"Dilution."

UNDESIGNATED STOCK

The Company's authorized capital consists of 25,000,000 shares of capital
stock, of which 20,000,000 shares are designated as Common Stock and 5,000,000
are preferred shares undesignated as to series. Upon completion of this
offering, the Company will have no outstanding shares of preferred stock, and
there is no current plan to designate or issue any shares of preferred stock.
Nevertheless, the Company's Board of Directors has the power to issue any or all
of these shares of unissued stock, including the authority to establish the
rights and preferences of the unissued shares, without shareholder approval.
Furthermore, as a Minnesota corporation, the Company is subject to certain
"anti-takeover" provisions of the Minnesota Business Corporation Act. These
provisions and the power to issue additional shares and to establish separate
classes or series of common or preferred stock may, in certain circumstances,
deter or discourage take-over attempts and other changes in control of the
Company not approved by the Board. See "Description of Capital Stock."

10
<PAGE>
USE OF PROCEEDS

The net proceeds to the Company from the sale of the 1,250,000 shares of
Common Stock offered hereby, after deducting underwriting discounts and
commissions and estimated offering expenses, are estimated to be approximately
$3,662,500 ($4,253,125 if the Underwriter's over-allotment option is exercised
in full). The Company currently intends to apply these proceeds approximately as
follows:

<TABLE>
<S> <C>
Research and development....................................... $1,100,000
Sales and marketing............................................ 1,100,000
Working capital................................................ 1,462,500
----------
Total.......................................................... $3,662,500
----------
----------
</TABLE>

RESEARCH AND DEVELOPMENT. The Company intends to use approximately
$1,100,000 of the net proceeds for research and development expenditures,
including the expansion of existing product lines and the development of an
infant formula.

SALES AND MARKETING. The Company intends to use approximately $1,100,000 of
the net proceeds for sales and marketing, including salaries for additional
personnel and increased marketing activities relating to the Company's existing
products and to the introduction of new products.

WORKING CAPITAL. The Company intends to use approximately $1,462,500 of the
net proceeds to increase working capital and for general corporate purposes,
including the financing of possible increases in accounts receivable and
inventory relating to the introduction of new products.

Pending the use of the net proceeds, the Company intends to invest such
funds in interest bearing money market funds, short term certificates of deposit
and United States governmental obligations. The described use of proceeds is
based upon the Company's assumptions concerning certain marketing, selling,
development, financial and other matters which may affect the Company. If the
development of the Company's business varies materially from these assumptions,
the Company may reallocate the use of proceeds in such a manner as it deems
appropriate under the circumstances.

11
<PAGE>
DILUTION

The Company's net tangible book value at June 30, 1996 was approximately
$967,783 or $0.31 per share. "Net tangible book value per share" represents the
Company's total tangible assets less its total liabilities, divided by the
number of shares of Common Stock outstanding. Without giving effect to changes
in net tangible book value after June 30, 1996 except for the sale of the shares
offered hereby (after deducting the underwriting discount and estimated offering
expenses payable by the Company), the Company's pro forma net tangible book
value at June 30, 1996 would have been approximately $4,630,283 or $1.05 per
share. This amount represents an immediate increase in net tangible book value
per share of $.74 to existing shareholders and an immediate dilution of $2.45
per share to the investors purchasing the shares offered hereby. The following
table illustrates this per share dilution in net tangible book value to new
investors:

<TABLE>
<S> <C> <C>
Initial public offering price per share........................ $ 3.50
Net tangible book value per share at June 30, 1996............. .31
Increase per share attributable to new investors............... .74
--
Pro forma net tangible book value per share after this
offering...................................................... 1.05
---------
Dilution per share to new investors............................ $ 2.45
---------
---------
</TABLE>

The following summarizes the differences between (i) existing shareholders
and (ii) purchasers of the Common Stock offered hereby, with respect to their
ownership of Common Stock upon the closing of this offering, the total
consideration paid and the average consideration paid per share:

<TABLE>
<CAPTION>
SHARES OWNED TOTAL CONSIDERATION AVERAGE
------------------------ -------------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
----------- ----------- ------------- ----------- -----------

<S> <C> <C> <C> <C> <C>
Existing shareholders.................................. 3,155,524 71.6% $ 3,077,951 41.3% $ 0.98
New investors.......................................... 1,250,000 28.4 4,375,000 58.7 $ 3.50
----------- ----- ------------- -----
Total.................................................. 4,405,524 100.0% $ 7,452,951 100.0%
----------- ----- ------------- -----
----------- ----- ------------- -----
</TABLE>

The Company has granted warrants to purchase 202,107 shares of Common Stock,
has agreed to sell to the Underwriter a warrant to purchase 125,000 shares of
Common Stock and has adopted stock option plans under which a total of 900,000
shares of Common Stock have been reserved for future issuance, of which 610,250
shares are subject to outstanding options. Although no options or warrants have
been exercised as of the date of this Prospectus, any shares issued upon
exercise of these options or warrants could have a dilutive effect to new
investors. See "Management -- Stock Option Plans."

DIVIDEND POLICY

The Company has never paid or declared any cash dividends on its Common
Stock and does not intend to pay dividends on its Common Stock in the
foreseeable future. The Company currently intends to retain any earnings for use
in the operation and expansion of its business.

12
<PAGE>
CAPITALIZATION

The following table sets forth the capitalization of the Company as of June
30, 1996, and as adjusted to give effect to the sale by the Company of the
1,250,000 shares offered hereby (after deduction of the underwriting discount
and estimated offering expenses) and the application of the estimated net
proceeds therefrom. See "Use of Proceeds." The information set forth below
should be read in conjunction with the financial statements and notes thereto
included elsewhere in this Prospectus.

<TABLE>
<CAPTION>
JUNE 30, 1996
------------------------------
ACTUAL AS ADJUSTED
-------------- --------------

<S> <C> <C>
Long-term debt................................................ $ -- $ --
Shareholders' equity:
Preferred Stock, no par value; 5,000,000 shares authorized;
none issued and outstanding, actual and as adjusted........ -- --
Common Stock, $.01 par value; 20,000,000 shares authorized;
3,155,524 shares issued and outstanding, 4,405,524 shares
as adjusted (1)............................................ 31,555 44,055
Additional paid-in capital.................................. 2,720,612 6,370,612
Accumulated deficit......................................... (1,784,384) (1,784,384)
-------------- --------------
Total shareholders' equity................................ 967,783 4,630,283
-------------- --------------
Total capitalization...................................... $ 967,783 $ 4,630,283
-------------- --------------
-------------- --------------
</TABLE>

- ------------------------
(1) Does not include 812,357 shares of Common Stock issuable upon the exercise
of stock options and warrants outstanding at the date of this Prospectus.
See "Management -- Stock Option Plans."

13
<PAGE>
SELECTED FINANCIAL DATA

SELECTED HISTORICAL FINANCIAL DATA

The selected statement of operations data for the year ended December 31,
1994, the six months ended June 30, 1995 and the year ended December 31, 1995
and the balance sheet data as of December 31, 1994, June 30, 1995 and December
31, 1995 are derived from, and are qualified by reference to, the audited
financial statements included elsewhere in the Prospectus, and should be read in
conjunction with those financial statements and notes thereto, which have been
audited by Ernst & Young LLP, independent auditors, whose report is located
elsewhere in this Prospectus. The financial statements for the six months ended
June 30, 1996 have not been audited but, in the opinion of management, reflect
all adjustments, consisting only of normal recurring adjustments, necessary to
present fairly the financial data for and at the end of such period. Results for
interim periods are not necessarily indicative of the results that may be
expected for the entire year or other interim periods. The selected financial
data should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the financial statements and
notes thereto included elsewhere in this Prospectus.

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
--------------------------- ---------------------------
1994 1995 1995 1996
------------ ------------- ------------ -------------

<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales............................................... $ 81,961 $ 841,241 $ 284,106 $ 1,086,049
Cost of goods sold...................................... 24,613 406,391 139,926 682,194
------------ ------------- ------------ -------------
Gross profit............................................ 57,348 434,850 144,180 403,855

Operating expenses
Selling, general and administrative................... 733,413 1,242,863 523,485 577,679
Research and development.............................. 17,557 170,963 28,287 96,155
------------ ------------- ------------ -------------
Total operating expenses............................ 750,970 1,413,826 551,772 673,834
------------ ------------- ------------ -------------
Operating loss.......................................... (693,622) (978,976) (407,592) (269,979)

Interest income (expense), net.......................... (1,067) 19,353 (1,675) 16,564
------------ ------------- ------------ -------------
Net loss................................................ $ (694,689) $ (959,623) $ (409,267) $ (253,415)
------------ ------------- ------------ -------------
------------ ------------- ------------ -------------
Net loss per share (1).................................. $ (0.29) $ (0.30) $ (0.16) $ (0.06)
------------ ------------- ------------ -------------
------------ ------------- ------------ -------------
Weighted average number of shares outstanding (1)....... 2,415,348 3,174,827 2,639,411 4,220,816
------------ ------------- ------------ -------------
------------ ------------- ------------ -------------
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
---------------------------- ----------------------------
1994 1995 1995 1996
------------ -------------- ------------ --------------

<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............................. $ 111,080 $ 1,127,247 $ 40,787 $ 890,032
Working capital (deficit)............................. 102,942 1,000,103 (113,956) 888,399
Total assets.......................................... 245,985 1,694,020 324,077 1,482,780
Accumulated deficit................................... (571,346) (1,530,969) (980,613) (1,784,384)
Total shareholders' equity (deficit).................. 62,154 1,081,698 (147,113) 967,783
</TABLE>

- ------------------------
(1) Computed on the basis described in Note 2 of the Notes to Financial
Statements.

14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

GENERAL

Nutrition Medical, Inc. was founded in July 1993. Prior to the Company's
first sale in May 1994, activities were directed toward development of its first
nutrition products and marketing programs. The Company has focused on the
development and marketing of nutrition products offered as low cost, generic
alternatives to equivalent national branded products. Initial product
development involved branded generic products for the critical care nutrition
market, sold primarily to hospitals and nursing homes. As of August 1996, the
Company had developed six such products. See "Business -- Products -- Critical
Care Nutrition Products." Critical care nutrition products are generally
purchased by a relatively large customer base, currently consisting of more than
350 hospitals and other health care providers, which typically places relatively
small orders. Until late 1995, sales were solely attributable to this product
line.

In October 1995, the Company introduced an adult nutrition supplement
product line. See "Business -- Products -- Private Label Nutrition Products."
These products were developed for and are marketed to retail chains and
generally are packaged using the retailer's proprietary store brand label. These
private label products allow the retailer to offer quality, low cost
alternatives to national branded nutrition products. Adult nutrition supplements
are generally purchased by a relatively small customer base, currently
consisting of nine retail chains, which typically places relatively large
orders.

RESULTS OF OPERATIONS

SIX MONTHS ENDED JUNE 30, 1996 AND 1995

NET SALES. The Company's net sales increased by $801,943 to $1,086,049 for
the six months ended June 30, 1996, from $284,106 for the same period in 1995.
Net sales of critical care nutrition products were $545,521 for the six months
ended June 30, 1996, an increase of $261,415 over net sales of $284,106 for the
same period in 1995, and net sales of adult nutrition supplements, which the
Company introduced after June 30, 1995, totalled $540,528. The $261,415 increase
in net sales of critical care nutrition products is attributable to an increase
of $212,472 in net sales of the three critical care nutrition products
(L-Emental, L-Emental Plus and Pro-Peptide) that the Company sold in both
periods, which increase was derived from higher unit sales of these products,
and $48,943 in net sales of the three critical care nutrition products
(L-Emental Hepatic, L-Emental Pediatric and Pro-Peptide VHN) that the Company
introduced after June 30, 1995. The net sales of adult nutrition supplements
included sales to a single customer that accounted for 61% of net sales of adult
nutrition supplements and 31% of net sales of all products for the six months
ended June 30, 1996. This sale was an initial stocking order, and the Company
cannot predict whether this customer will continue to be a customer or that its
future orders will not significantly decline.

The prices of the Company's products remained relatively stable within and
between the two periods, and the Company believes that the growth in unit sales
was the result of the Company's marketing effort to acquire new customers.

The Company competes in the critical care nutrition products market by
positioning its products as less expensive, generic alternatives to established
products. In the past several months the Company has become aware of one
competitor in the critical care nutrition products market that has lowered
prices to various customers of its branded products to levels that offset all or
part of the price advantage of the Company's three competitive products. The
Company believes that these selective price reductions resulted in lost sales of
the Company's three competing products and that this competitor has begun to use
this form of price competition more frequently. The Company has not been able to
determine the frequency or extent of this practice or its effects on overall net
sales of these three critical care nutrition products, sales of which have
remained stable. See "Business -- Competition -- Critical Care Nutrition
Products."

15
<PAGE>
GROSS PROFIT. As a result of the growth in net sales, the Company's gross
profit increased $259,675 to $403,855 for the six months ended June 30, 1996,
from $144,180 for the same period in 1995. The gross profit on the Company's
critical care nutrition products and adult nutrition supplements for the six
months ended June 30, 1996 was $306,896 and $96,959, respectively. Due to
changes in product mix, gross profit as a percentage of net sales decreased to
37% for the six months ended June 30, 1996, from 51% for the same period in
1995. The gross profit for the 1995 period was derived solely from sales of the
Company's critical care nutrition products. The gross profit percentage for this
group of products increased to 56% for the six months ended June 30, 1996, from
51% for the same period in 1995. This increase has been offset by sales of adult
nutrition supplements, introduced in October 1995, which had an 18% gross profit
percentage in the six months ended June 30, 1996. If sales of adult nutrition
supplements increase as a proportion of total sales, management expects the
overall gross profit percentage to decline.

SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses increased by $54,194 to $577,679 in the six months ended June 30, 1996,
from $523,485 in the same period in 1995. The increase is attributable to the
addition of personnel in sales and administrative positions as the Company
developed its marketing programs. The increase in these expenses was partially
offset by a decrease in the 1996 period of approximately $81,000 in legal
expenses. See "Business -- Litigation." The Company believes that its selling,
general and administrative expenses will continue to increase in future periods;
however, because of the fixed nature of some of these costs, such costs are
expected to decrease as a percentage of net sales if sales increase. The Company
expects that the selling, general and administrative costs associated with adult
nutrition supplements and future private label nutrition products will be less
than those required to support critical care nutrition products, since the
Company markets its private label nutrition products through independent
brokers, while it maintains more costly inside marketing personnel for its
critical care nutrition products.

RESEARCH AND DEVELOPMENT. Research and development costs increased by
$67,868 to $96,155 in the six months ending June 30, 1996, from $28,287 in the
same period in 1995. The increase is attributable to a greater number of
products under development.

YEARS ENDED DECEMBER 31, 1995 AND 1994

NET SALES. Net sales increased by $759,280 to $841,241 in 1995 from $81,961
in 1994. Net sales in 1994 consisted entirely of critical care nutrition
products. Net sales of critical care nutrition products in 1995 increased by
$663,284 due to increased unit sales resulting from the introduction of new
critical care nutrition products and expansion of the Company's customer base.
The remaining $95,996 of the increase in 1995 net sales is attributable to adult
nutrition supplements, which were introduced in October 1995.

GROSS PROFIT. Gross profit increased by $377,502 to $434,850 in 1995 from
$57,348 in 1994. Gross profit as a percentage of net sales decreased to 52% in
1995 from 70% in 1994. The gross profit percentage in 1994 was based on a
limited sales volume, and was significantly above the level the Company expects
to have on a continuing basis. The decrease in the 1995 gross profit percentage
is also attributable to the introduction of adult nutrition supplements, which
have substantially lower gross profit percentages.

SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses increased by $509,450 to $1,242,863 in 1995 from $733,413 in 1994. The
increase is principally due to the addition of sales and administrative
personnel. Total personnel costs in 1995 increased by approximately $400,000. In
addition, the Company incurred a $75,000 relocation charge in connection with
the Company's planned move of its operations to Minneapolis, Minnesota. The
charge relates to the writeoff of the remaining costs associated with the
Company's lease of its Buffalo, Minnesota facility. The Company also incurred
approximately $144,000 more in legal expenses in 1995 than in 1994 due to the
costs associated with two lawsuits against the Company. See "Business --
Litigation."

16
<PAGE>
RESEARCH AND DEVELOPMENT. Research and development costs increased by
$153,406 to $170,963 in 1995 from $17,557 in 1994. The increase was the result
of increased product development expenditures.

LIQUIDITY AND CAPITAL RESOURCES

Since its inception, the Company has incurred net losses and negative cash
flows from operations. The Company's principal source of cash and working
capital has been from the private placement of Common Stock, pursuant to which
the Company has received approximately $2,800,000 in net proceeds. The Company
also obtained loans from the City of Buffalo, Minnesota totalling $100,000.
These loans were repaid on July 22, 1996 in connection with the Company's
planned relocation. The Company's cash and cash equivalent balance decreased
$237,215 to $890,032 as of June 30, 1996, from $1,127,247 as of December 31,
1995. Total cash used in operations during the six-month period ended June 30,
1996 was $353,067, which was partially offset by proceeds from the sale of
Common Stock of $125,000. Capital expenditures of the Company from its inception
have totalled approximately $116,000. Currently, the Company has no significant
capital expenditure commitments.

The Company expects that its existing cash balances, along with the
anticipated net proceeds of this offering, will be sufficient to fund the
operations of the Company through 1997. The Company's future liquidity and
capital requirements will depend on numerous factors, including competition, the
extent to which the Company's products gain market acceptance, and the costs and
timing of expansion of sales, marketing and product development activities.
There can be no assurance that the Company will not be required to raise
additional capital before the end of 1997 or thereafter, or that such capital
will be available on acceptable terms, or at all. See "Risk Factors -- Future
Capital Requirements; No Assurance Future Capital Will Be Available."

Prior to March 14, 1994, the Company operated as an S corporation whereby
taxable income or loss is passed through to the shareholders. The Subchapter S
election was terminated on March 14, 1994 and, as a result, the Company became
subject to federal and state income taxes. The Company has not generated taxable
income through June 1996. At June 30, 1996, the operating losses available to
offset future taxable income were approximately $1,721,000. The net operating
loss carryforwards expire beginning in 2009 and are subject to limitations under
Section 382 of the Internal Revenue Code due to potential changes in equity
ownership of the Company. The Company expects that the utilization of net
operating loss carryforwards will be impacted as a result of this offering by
limiting the amount which may be used on an annual basis.

17
<PAGE>
BUSINESS

BACKGROUND

CRITICAL CARE NUTRITION PRODUCTS.

Critically ill or severely injured patients are often unlikely to consume
adequate nutrients, which can exacerbate a patient's condition, cause
complications and prolong hospital stays. In the 1960's, pioneering work
demonstrated that patients could be fed intravenously with specialized proteins
and carbohydrates. This procedure, called total parenteral nutrition (TPN),
became a life saving modality, particularly for individuals with sections of
their intestinal tract damaged or removed due to injury or disease. An
alternative to TPN is total enteral nutrition (TEN). Instead of feeding sterile
solutions directly into the patient's vein, TEN delivers formulations of
protein, carbohydrates, fat and vitamins via feeding tubes directly into the
patient's intestinal tract. Unless nearly all of the intestinal tract is missing
or nonfunctional, most patients can be fed via this enteral route. The total
cost of the TEN procedure is substantially less than the cost of TPN, and may
result in fewer complications and shorter hospital stays.

One application of TEN is in the treatment of critical care patients. The
largest single category of TEN nutrition products used in critical care are
products that contain unique protein sources referred to as "elemental." Unlike
formulas that contain "whole protein," which must be digested before it

18
<PAGE>
can be absorbed and utilized by the patient, elemental formulas contain
predigested protein that offers immediately available nutrition because little
or no digestion is required. All of the Company's critical care nutrition
products are elemental formulas.

In 1993, sales in the United States adult TEN market were estimated to be
over $550 million. The market for United States adult TEN products generally is
forecasted to grow by at least 9% per year into the next century, primarily due
to the expected increase in the elderly population. The Company is focusing its
initial efforts on critical care nutrition products, which the Company believes
currently constitute a $200 million segment of the United States TEN market.

The critical care nutrition formula market is currently dominated by a small
number of established manufacturers of national brands, each of which focuses on
particular segments of the market. These manufacturers include Ross
Laboratories, a division of Abbott Laboratories ("Ross Laboratories"), Sandoz
Nutrition Corporation, a subsidiary of Sandoz Corp. ("Sandoz"), Clintec
Nutrition Co. ("Clintec") and McGaw, Inc. ("McGaw"). The Company believes these
manufacturers sell their products at substantial profit margins. Meanwhile, the
United States health care system has been under pressure to control costs. As a
result, consumers and the medical community have come to accept lower priced
generic drugs and private label over-the-counter products and the market for
these products has grown rapidly. The Company believes it is the only company
that has addressed the critical care medical nutrition market with low cost,
generic alternatives to established brands. The Company generally sells its
generic critical care nutrition products under its own label.

PRIVATE LABEL NUTRITION PRODUCTS

Adult nutrition supplements are products designed to provide balanced
nutrition in beverage form as a supplement or substitute for solid food for
healthy individuals as well as those recovering from or affected by illness.
Adult nutrition supplements contain vitamins, minerals, protein, fat,
carbohydrates and flavoring. The retail market for adult nutrition beverage
supplements is estimated to be $375 million in 1996, and to grow to $1 billion
by the year 2000. Market growth is expected to occur due in part to an
increasing number of elderly, who are the primary consumers of nutrition
supplements. The market for adult nutrition supplements is currently dominated
by the Ensure-Registered Trademark- family of products produced by Ross
Laboratories.

In recent years, the retail food and drug industry has experienced a growing
demand for private label products from both consumers and retailers. Today's
private label products generally are equivalent to national brands in
formulation and packaging and appeal to value conscious consumers in all income
brackets. Private label products also appeal to retailers. The cost to the
retailer of a private label product is typically lower than that of a nationally
advertised brand name product. The retailer, therefore, can generally price a
private label product below the competing national brand product.

INFANT FORMULA

Infant formulas are products designed to provide balanced nutrition as a
supplement to or substitute for breast milk, or as a supplement to other foods
in the diet of children, generally under the age of one. The infant formula
market was estimated to be $2.5 billion in 1995, and to grow to $4 billion by
the year 2000. Three manufacturers currently control the infant formula market:
Ross Laboratories (maker of Similac-Registered Trademark-); Mead Johnson
Nutritionals ("Mead Johnson"), a division of Bristol-Myers Squibb Co. (maker of
Enfamil-Registered Trademark-); and Nestle S.A. (maker of Good
Start-Registered Trademark-).

19
<PAGE>
PRODUCTS

CRITICAL CARE NUTRITION PRODUCTS

The Company currently has six critical care nutrition products. Each
contains elemental protein sources, which contain predigested protein that
offers immediately available nutrition. Three of these products are for general
use in intensive care unit ("ICU") environments, and three are designed to meet
the needs of specific patient populations. The following chart provides
information regarding each of the Company's critical care nutrition products.

<TABLE>
<CAPTION>
COMPETING BRANDED PRODUCT
------------------------------------------------------
PRODUCT NAME DATE INTRODUCED TREATMENT CATEGORY NAME MANUFACTURER
------------------- --------------- ------------------ ---------------------------------------- ------------

<S> <C> <C> <C> <C>
L-Emental May 1994 ICU nutrition Vivonex-Registered Trademark- Sandoz
L-Emental Plus January 1995 ICU nutrition Vivonex Plus-Registered Trademark- Sandoz
L-Emental Hepatic June 1996 Liver Failure Hepatic Aid II-Registered Trademark- McGaw
L-Emental Pediatric June 1996 Children Vivonex Pediatric-Registered Trademark- Sandoz
Pro-Peptide November 1994 ICU nutrition Peptamen-Registered Trademark- Clintec
Pro-Peptide VHN November 1995 Trauma Peptamen VHP-Registered Trademark- Clintec
</TABLE>

The Company generally prices its critical care nutrition products
approximately 20% to 30% less than the selling prices of competing established
brand name products. At least one competitor in the critical care nutrition
products market has lowered prices to various customers of its branded products
to levels that offset all or part of the price advantage of the Company's three
competitive products. See "Business -- Competition -- Critical Care Nutrition
Products."

PRIVATE LABEL NUTRITION PRODUCTS

The Company produces three private label nutrition supplements that the
Company has designed to be equivalent to the family of
Ensure-Registered Trademark- products. The following chart provides information
regarding each of the Company's adult nutrition supplements.

<TABLE>
<CAPTION>
COMPETING BRANDED PRODUCT
----------------------------------------------------------------
PRODUCT NAME* DATE INTRODUCED NAME MANUFACTURER
------------------------------ --------------- --------------------------------------------- -----------------

<S> <C> <C> <C>
Nutrition PLUS October 1995 Ensure Plus-Registered Trademark- Ross Laboratories
Instant Nutrition February 1996 Ensure Powder-Registered Trademark- Ross Laboratories
Nutrition Advanced Formula June 1996 Ensure Advanced Formula-Registered Trademark- Ross Laboratories
</TABLE>

- ------------------------
* Each product is available in vanilla, strawberry and chocolate flavors.

The Company's nutrition supplements are generally priced by the retailer
approximately 20% to 30% less than the list prices of branded competitors.

INFANT FORMULA

The Company is currently developing an infant formula to be marketed through
one or more retail chains. The Company believes that its infant formula, if
successfully developed, would not be available for sale for at least one year.

RESEARCH AND DEVELOPMENT

The product development process begins with a determination by the Company's
management that a market opportunity exists with respect to a particular
product. The Company then contracts with an outside laboratory to analyze the
ingredients of the competitor's product and to formulate the Company's version
of the product. Certain members of the Company's scientific advisory board
consult with the contractors during the development process.

The Company has to date only developed products with respect to which the
Company believed that no patent had been issued, and expects to continue this
development strategy. The Company has

20
<PAGE>
not engaged legal counsel to conduct formal searches for intellectual property
rights with respect to its products in development, instead relying on the
industry knowledge of its employees and consultants. In the future, the Company
may engage legal counsel if warranted under the circumstances.

The Company's critical care nutrition products and adult nutrition
supplements are not required to undergo clinical testing or obtain FDA approval.
The Company's proposed infant formula may be required to undergo a clinical
study and would be subject to the infant formula regulations of the FDA,
including any additional requirements that the FDA may impose under recently
proposed revisions to these regulations. See "Risk Factors -- Government
Regulation" and "Business -- Government Regulation."

MANUFACTURING AND DISTRIBUTION

All of the Company's products are manufactured on a contract basis by third
parties. The Company's contract manufacturers are subject to FDA regulatory
requirements for food and medical food production, and the Company's products
undergo quality control testing during and after the production process. By
using third party manufacturers, the Company is better able to introduce new
products that require differing manufacturing processes. Nevertheless, reliance
on contract manufacturers involves various risks. See "Risk Factors --
Dependence on Contract Manufacturers."

Critical care nutrition products are shipped from the manufacturer to the
Company's distribution warehouse in Buffalo, Minnesota. Home consumers of
critical care and nutrition products typically receive the Company's products
through health care providers.

Private label nutrition products generally are shipped directly from the
contract manufacturers to the Company's retail customers. Any excess product is
stored and subsequently distributed from locations in New York and California by
a private warehouser that the Company has engaged for this purpose.

MARKETING

CRITICAL CARE NUTRITION PRODUCTS

The Company employs its own inside sales personnel to market its critical
care nutrition products. These sales personnel target, via telephone, the
dietary and pharmaceutical departments of hospitals and nursing homes. This
approach reduces the Company's selling costs by eliminating travel expenses and
allowing its sales personnel to contact and service a larger number of potential
and actual customers. The Company also uses direct mail and trade shows to
further promote its products. In addition, the Veteran's Administration and
state and county hospitals have annual bids for clinical nutrition products and
the Company actively participates in these bids. The Company believes its sales
personnel are effective without in-person sales calls since the Company is not
creating primary demand for new products, but is instead offering lower cost
substitutes for existing products.

In January 1996, the Company began sales of its critical care nutrition
products under a licensing arrangement with Voluntary Hospitals of America
("VHA"), a hospital purchasing group with more than 1,200 member hospitals. VHA
markets the Company's products to its members as part of its "VHA Plus" line of
products, which carry distinctive VHA labeling. The licensing arrangement has a
term of five years, is cancelable by either party upon 60 days written notice,
and provides for the payment by the Company to VHA of a licensing fee calculated
as a percentage of product sales to VHA members.

PRIVATE LABEL NUTRITION PRODUCTS

The Company markets its private label nutrition products nationwide to
retail chains through independent brokers working on a commission basis. The
Company makes promotional announcements regarding adult nutrition supplements
through the Company's hospital customers. Customers also have access to a
toll-free phone number that the Company staffs with dietitians. The Company
works directly with retailers to develop product labeling and conducts joint
advertising campaigns with retailers.

21
<PAGE>
COMPETITION

CRITICAL CARE NUTRITION PRODUCTS

Competition in the critical care nutrition products market primarily
consists of three companies that have established brands in the specialty
markets in which the Company has chosen to compete. These companies are Sandoz,
Clintec and McGaw, each of which markets their specialty products through sales
personnel who use traditional in-person sales calls rather than the
telemarketing approach employed by the Company. Although Ross Laboratories is
the dominant manufacturer in the United States adult TEN market (which includes
the critical care nutrition market), Ross Laboratories has focused on whole
protein products and the Company has avoided direct competition with Ross
Laboratories by choosing to develop elemental protein products. Although the
Company believes it is the only company currently offering low cost, generic
alternatives to the established brands, other companies may enter this market.

The Company competes in the critical care nutrition products market by
positioning its products as less expensive, generic alternatives to established
products. The Company's sales personnel in the past several months have become
aware of an increasing number of instances in which one of its competitors in
this market, Sandoz, has lowered its prices to various customers of its branded
products to levels that offset all or part of the price advantage of the
Company's three competitive products (L-Emental, L-Emental Plus and L-Emental
Pediatric), with the result that potential customers have purchased Sandoz'
products rather than the Company's products. The Company has not been able to
determine the frequency or extent of this practice or its effects on overall net
sales of these three critical care nutrition products, which have remained
stable. The Company currently has no plans to alter its product pricing in
response to the aforementioned pricing practices of Sandoz. Sandoz may decide to
consistently lower its prices to the Company's level, and other competitors may
adopt the same strategy. Because the Company's marketing strategy is focused on
the price advantage of its products, if a competitor selling branded products
reduces or eliminates the price advantage of the Company's products, there can
be no assurance that the Company can compete successfully with such a competitor
or operate profitably under such conditions.

PRIVATE LABEL NUTRITION PRODUCTS

Competition in the private label nutrition supplement market consists of
companies that sell established national brands and companies that sell private
label products. In the adult nutrition supplement market, Ross Laboratories
sells Ensure-Registered Trademark-, which has an approximately 80% share of this
market. The other established national brands are Sustacal-Registered Trademark-
and Boost-Registered Trademark-, both of which are Mead Johnson products. The
Company believes that retail customers in the adult nutrition supplement market
make purchase decisions based on the price, taste and quality of the product.
Competitors in the private label segment of this market include established
companies that produce private label products for a wide range of markets,
including Perrigo Company, NutraMax Products, Inc. and American White Cross,
Inc., and a number of small private label product producers.

INFANT FORMULA

Infant formulas are products designed to provide balanced nutrition as a
supplement to or substitute for breast milk, or as a supplement to other foods
in the diet of children, generally under the age of one. The infant formula
market was estimated to be $2.5 billion in 1995, and to grow to $4 billion by
the year 2000. Three manufacturers currently control the infant formula market:
Ross Laboratories (maker of Similac-Registered Trademark-); Mead Johnson (maker
of Enfamil-Registered Trademark-); and Nestle USA Inc. (maker of Good
Start-Registered Trademark-).

GOVERNMENT REGULATION

22
<PAGE>
good clinical practice, to determine whether the formula supports normal
physical growth in infants when fed as the sole source of nutrition.
Additionally, the FDA has recently proposed significant revisions to its infant
formula regulations to establish requirements for quality factors and CGMP, and
to amend its quality control procedure, notification, and records and report
requirements for infant formulas. These regulations, if adopted, may delay, and
increase the cost of, the Company's introduction of an infant formula product.
Claims made by the Company in labeling and advertising its products are subject
to regulation by the FDA, the Federal Trade Commission and various state
agencies under their general authority to prevent false, misleading and
deceptive trade practices. Failure to comply with such requirements can result
in adverse regulatory action, including injunctions, civil or criminal
penalties, product recalls or the relabelling, reformulation or possible
termination of certain products. The Company's current and potential products
may become subject to further regulation in the future. See "Risk Factors --
Government Regulation."

EMPLOYEES

The Company currently has 14 full-time employees and one part-time employee.
The Company does not have an agreement with any labor union and the Company
believes its relations with its employees are good.

FACILITIES

The Company's corporate headquarters is currently located in Buffalo,
Minnesota, in an office/ warehouse complex consisting of 5,300 square feet. The
Company's current lease expires on December 31, 1998. The Company has leased an
9,500 square foot facility in Minneapolis, Minnesota, and will move its
operations to this new location in October 1996. The Company accrued a $75,000
charge to earnings in 1995 relating to the termination of its lease of the
Buffalo, Minnesota facility.

LITIGATION

In August 1995, the Company was named as a defendant in a patent
infringement lawsuit brought by Sandoz. The complaint asserts that one of the
Company's products, L-Emental Plus, infringes on two patents held by Sandoz and
asks for relief in the form of an injunction that would prevent the Company from
selling the product as well as damages of an unspecified amount. Both patents
were issued subsequent to the Company's introduction of L-Emental Plus. The
Company has responded with a counterclaim seeking a declaration of invalidity,
unenforceability, non-infringement and inventorship of the subject patents. A
court order has stayed the litigation pending a reexamination by the United
States Patent and Trademark Office of both patents. The Company intends to
continue to defend vigorously against the claim. Sales of L-Emental Plus
constituted $298,000, or 35%, and $210,000, or 19%, of the Company's net sales
in 1995 and the first six months of 1996, respectively. It is not possible at
this time to predict the outcome of the lawsuit, including whether the Company
will have to cease selling L-Emental Plus, or to estimate the amount or range of
potential loss, if any. To date, no injunction has been issued.

The Company has resolved two previous lawsuits. In one suit, Sandoz claimed
that Mr. William L. Rush, President of the Company, had violated a
confidentiality agreement relating to his prior employment by Sandoz and that
the Company's marketing of L-Emental employed deceptive and defamatory
statements. The Company and Sandoz resolved the litigation in June 1995. In a
second suit, Clintec claimed that the protein source in Pro-Peptide infringed a
patent held by Clintec and that the Company's marketing of Pro-Peptide employed
false and misleading statements. The Company and Clintec resolved the litigation
in November 1995. The Company did not pay any amounts in settlement of either
the Sandoz or Clintec litigation and continues to market the products that were
the subject of these two lawsuits.

23
<PAGE>
MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS

The Company's executive officers and directors are:

<TABLE>
<CAPTION>
NAME AGE POSITION
- ---------------------------- ---- -------------------------------------------------
<S> <C> <C>

William L. Rush 45 Chairman, President and Chief Executive Officer
Joseph F. Coffey 60 Vice President of Corporate Sales
Marlin G. Rudebusch 50 Vice President of Marketing
Richard J. Hegstrand 43 Chief Financial Officer
Kenneth L. Evenstad 53 Director
George E. Kline 60 Director
Lawrence A. Lehmkuhl 59 Director
</TABLE>

WILLIAM L. RUSH has been Chairman of the Board of Directors, President and
Chief Executive Officer of the Company since its inception in July 1993. From
1984 to March 1993, Mr. Rush was employed by Sandoz, most recently as Senior
Vice President of its clinical products division. As Senior Vice President, his
duties included supervision of a national sales force, product management group,
outpatient clinic services group, related support functions and research and
development. From 1978 to 1984, Mr. Rush was employed by Baxter Healthcare Corp.
in its medical nutrition division.

JOSEPH F. COFFEY has been Vice President of Corporate Sales of the Company
since September 1994. From 1965 to June 1994, Mr. Coffey was employed by Sandoz
in a variety of positions, including 14 years, as National Sales Manager of the
clinical nutrition division. As National Sales Manager, Mr. Coffey had
managerial responsibility for regional and district sales managers, the national
account group, the telemarketing group, and the direct sales force.

MARLIN G. RUDEBUSCH has been Vice President of Marketing of the Company
since December 1994. From December 1993 to May 1994, Mr. Rudebusch was employed
by AudioScience, Inc., a hearing aid manufacturer, as Director of Sales and
Marketing. From 1981 to August 1993, Mr. Rudebusch was employed by Medtronic,
Inc., a medical device manufacturer, most recently as Director of Sales and
Marketing of its neurological division. From 1977 to 1981, Mr. Rudebusch was
employed by Cardiac Pacemakers, Inc. in various sales and marketing positions.

RICHARD J. HEGSTRAND has been Chief Financial Officer of the Company since
November 1995. From December 1992 until September 1995, Mr. Hegstrand was
employed by PDS Financial Corporation, an equipment finance company, most
recently as its Vice President and Chief Financial Officer. From January 1987 to
December 1992, Mr. Hegstrand served in various management capacities with
Magnetic Data, Inc., a computer disk-drive refurbisher, most recently as Chief
Financial Officer. He served in several management positions from 1984 to 1986
with Zycad Corporation, most recently as Assistant Controller. Mr. Hegstrand
previously practiced public accounting for two years with Coopers & Lybrand
L.L.P.

KENNETH L. EVENSTAD has been a director of the Company since May 1995. Since
1969, Mr. Evenstad has been Chairman and Chief Executive Officer of Upsher-Smith
Laboratories, Inc., a pharmaceutical company that specializes in cardiovascular
drugs. From 1967 to 1969, Mr. Evenstad practiced as a pharmacist in Alaska and
Minnesota. Mr. Evenstad is also a director of Medi-Ject Corporation.

GEORGE E. KLINE has been a director of the Company since May 1995. Since
1966, Mr. Kline has been President of Venture Management, a financial consulting
services firm. Since 1985, Mr. Kline has also served as the General Partner of
Brightstone Capital, Ltd. LLC ("Brightstone Capital"), a venture partnership.
Mr. Kline is also a director of Applied Biometrics, Inc., Cyberoptics
Corporation, Pet Food Warehouse, Inc., Health Fitness Physical Therapy, Inc. and
Rimage Corporation.

24
<PAGE>
LAWRENCE A. LEHMKUHL has been a director of the Company since January 1995.
From 1985 to March 1993, Mr. Lehmkuhl was President and Chief Executive Officer
of St. Jude Medical, Inc., a medical device manufacturer, and from April 1993 to
February 1995, Mr. Lehmkuhl was Chairman of its Board of Directors. From 1966 to
1985, Mr. Lehmkuhl was employed by American Hospital Supply Corporation in
various management capacities. Mr. Lehmkuhl is also a director of Aequitron
Medical, Inc., Kera Vision, Inc. and Fisher Imaging Corporation.

The executive officers are elected by, and serve at the discretion of, the
Board of Directors. The directors of the Company are elected at the annual
meeting of shareholders and serve until the next annual meeting or until their
successors are duly elected and qualified.

SCIENTIFIC ADVISORY BOARD

The Company has established a scientific advisory board composed of
individuals who consult with the Company in their areas of expertise. The
advisory board provides advice to the Company and contacts for the Company in
the members' areas of expertise. The Company reimburses advisors for accountable
expenses, but they do not receive any cash compensation for their services.
During the period from January 1994 through March 1995, each advisor was granted
an option to purchase 5,000 shares of Common Stock at an exercise price of $1.00
per share, vesting at the rate of 1,250 shares per year. The Company may grant
additional options for projects that require the advisor to devote significant
time to the Company. The Board of Directors will approve any such projects and
related compensation. The scientific advisory board members include:

RONALD S. AMEN, PH.D., is Vice President of ABIC International Consultants,
Inc. in Orange, California, a provider of technical services, product and
process development, clinical studies, consumer evaluation, and technical
marketing research to the health care, food, and personal care products
industries. Dr. Amen has edited two books on fiber and nutrition and has
authored or co-authored dozens of publications, presentations, monographs,
patents, and teaching modules. Dr. Amen earned his Ph.D. in nutritional
physiology from Rutgers University.

ALBERT BARROCAS, M.D., F.A.C.S., is Vice President of Medical Affairs and
Medical Director of Nutrition Support and Home Health Services at Pendleton
Memorial Methodist Hospital; Clinical Professor of Surgery and Nutrition at
Tulane University School of Medicine; Clinical Professor of Medicine (Nutrition)
at Louisiana State University School of Medicine, New Orleans; and Adjunct
Professor of Nutrition at Tulane School of Public Health and Tropical Medicine.
Dr. Barrocas serves as Chairman of the Medical Advisory Council of the Nutrition
Institute of Louisiana-TM-; is a member of the Professional Development and
Education Committee and the Technical Review Committee for the Nutrition
Screening Initiative; and is Public Director-at-Large on the American Dietetic
Association Board of Directors.

STACEY J. BELL, D.SC., R.D., is a research dietitian at Deaconess Hospital
in Boston, Massachusetts, and is a member of the surgical metabolism laboratory
and an Instructor in Surgery at Harvard Medical School, also in Boston. Dr. Bell
has over 20 years of clinical and research experience involving
nutrition-related issues of burned, critically ill and, most recently, AIDS
patients. Dr. Bell has published dozens of scientifically reviewed articles and
seven book chapters, and has co-edited three books. Dr. Bell earned her Doctor
of Science degree from Boston University.

STANLEY J. DUDRICK, M.D., is Associate Chairman and Program Director,
Department of Surgery, St. Mary's Hospital and Clinical Professor of Surgery at
Yale University, Waterbury, Connecticut. Prior to joining St. Mary's Hospital,
Dr. Dudrick was Clinical Professor of Surgery, The University of Texas Health
Science Center at Houston; Surgeon in Chief, Hermann Hospital, Texas Medical
Center; and Director of the Nutritional Science Center at Hermann Hospital. Dr.
Dudrick has authored or co-authored hundreds of journal articles, chapters, and
books. Dr. Dudrick earned his M.D. from the University of Pennsylvania School of
Medicine.

DIANE D. HESTER, M.S., R.D., C.N.S.D., is the Director of Clinical Nutrition
at Stanford University Hospital and Lucille S. Packard Children's Hospital,
Stanford, California. Ms. Hester has worked with

25
<PAGE>
nutrition support in critical care for the past nine years, and has extensive
experience with trauma, burn and head-injury patients. In 1989 she received the
"Recognized Young Dietitian of the Year" award. Ms. Hester has published many
articles on nutrition support in critical care and has most recently authored a
chapter in the 1993 Nutrition Support Dietetics Core Curriculum titled
"Neurological Impairment." Ms. Hester earned her B.S. in Dietetic and Food
Administration from California Polytechnic State University and her M.S. in
Nutrition from the Houston Veterans Administration Medical Center/Texas Woman's
University.

DAVID P. KATZ, PH.D., is the Associate Director, Nutrition Support Service,
Department of Anesthesiology, Division of Critical Care Medicine at Montefiore
Medical Center and at the Albert Einstein College of Medicine. Dr. Katz has
co-authored several chapters in various textbooks, ranging from pediatric
nutrition to artificial nutrition support in clinical practice, and has authored
or co-authored several reviews and peer-reviewed reports on various aspects of
nutrition and metabolism. Dr. Katz earned his Ph.D. in Nutritional Biochemistry
and Metabolism at the Massachusetts Institute of Technology.

WOODROW C. MONTE, PH.D., R.D., is an Associate Professor of Foods and
Nutrition at Arizona State University in Tempe, Arizona. Dr. Monte has been
interviewed on national television on the topics of sulfiting agents and
Aspartame. Dr. Monte has authored or co-authored over 30 papers on food
additives and food chemistry. Dr. Monte earned his Ph.D. in Food Science and
Nutrition from Colorado State University.

CHARLES T. VAN BUREN, M.D., is Professor of Surgery, Division of Immunology
and Organ Transplantation at the University of Texas Medical School in Houston,
and is Director of the Renal Transplant Program at St. Luke's Episcopal Hospital
in Houston. Dr. Van Buren is the recipient of several awards and honors,
including the John Freeman Award for Outstanding Teacher in Medical School. Dr.
Van Buren earned his M.D. from the University of Pennsylvania in Philadelphia.

ARTHUR WEISBERG, L.L.B., J.D., is a retired partner of Dorsey & Whitney LLP,
a law firm based in Minneapolis, Minnesota. Mr. Weisberg has counseled numerous
publicly and privately held companies and for 20 years was a member of the board
of directors of National Computer Systems, Inc. Mr. Weisberg earned his J.D.
from the William Mitchell College of Law in St. Paul, Minnesota.

The Company may develop additional advisory boards composed of individuals
with expertise in the areas of clinical nutrition, health care business and
medical devices. The Company expects to provide compensation to the members of
any additional advisory boards that is comparable to that received by members of
the scientific advisory board.

COMMITTEES

In July 1996, the Board of Directors established a Compensation Committee
and an Audit Committee. The Compensation Committee of the Board of Directors
consists of Messrs. Evenstad, Kline and Lehmkuhl. The Compensation Committee
determines the compensation for the President and reviews recommendations of the
President concerning compensation for the other executives and incentive
compensation for employees of the Company, subject to ratification by the full
Board of Directors. The Compensation Committee also administers the Company's
1995 Long-Term Incentive and Stock Option Plan (the "1995 Stock Option Plan")
and the 1996 Non-Employee Director Stock Option Plan (the "1996 Director Plan").

The Audit Committee of the Board of Directors consists of Messrs. Evenstad,
Kline and Lehmkuhl. The Audit Committee reviews the results and scope of the
audit and other services provided by the Company's independent auditors, as well
as the Company's accounting principles and its system of internal controls, and
reports the results of these reviews to management and to the full Board of
Directors.

26
<PAGE>
EXECUTIVE COMPENSATION

SUMMARY OF CASH AND OTHER COMPENSATION.

The following table sets forth the total cash and non-cash remuneration paid
to the Company's Chief Executive Officer for services rendered during 1995. No
other executive officer of the Company received aggregate annual salary and
bonus compensation of more than $100,000 during 1995.

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
ANNUAL COMPENSATION
NAME AND -------------------- ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION
- ------------------------------------------------------------------- --------- --------- --------- -----------------
<S> <C> <C> <C> <C>

William L. Rush 1995 $ 89,000 $ 20,000 --
President and Chief Executive Officer
</TABLE>

EMPLOYMENT CONTRACT

In September 1996, the Company entered into an employment agreement with
William L. Rush, the Company's Chairman of the Board, President and Chief
Executive Officer. The agreement will be effective upon the successful
completion of this offering. The agreement provides for an initial annual salary
of $95,000, which salary is subject to annual review and adjustment by the
Company's Board of Directors. Mr. Rush also will receive an option to purchase
100,000 shares of Common Stock, with an exercise price of $3.50 per share, and
may receive incentive compensation to be established by the Board of Directors.
The agreement has a three-year term, but is terminable by the Company or Mr.
Rush with cause, or without cause by either party upon ninety days' written
notice. Under the agreement, Mr. Rush has granted the Company rights to all
inventions conceived or produced by Mr. Rush during the period of his
employment. Mr. Rush also is subject to a confidentiality provision and a
twelve-month noncompetition provision. If the contract is terminated by the
Company without cause, or by Mr. Rush with cause, the Company is obligated to
pay Mr. Rush's annual salary for a period of twelve months and the maximum
amount of incentive compensation that could have been due in such period.

COMPENSATION OF DIRECTORS

Directors do not receive any compensation from the Company for attending
meetings of the Board of Directors, other than options granted under the 1996
Director Plan. See "Management -- Stock Option Plans." The Company reimburses
directors for expenses incurred in connection with attendance at meetings of the
Board of Directors.

STOCK OPTION PLANS

1995 STOCK OPTION PLAN. The Company adopted the 1995 Stock Option Plan in
March 1995. Pursuant to the 1995 Stock Option Plan, executive officers, other
employees, directors and consultants may receive awards. The 1995 Stock Option
Plan provides for the grant of both incentive stock options intended to qualify
for preferential tax treatment under Section 422 of the Internal Revenue Code of
1986, as amended (the "Code"), and for nonqualified stock options that do not
qualify for such treatment. The exercise price of incentive stock options (which
only employees are eligible to receive) must equal or exceed the fair market
value of the Common Stock on the date of grant; the exercise price of
nonqualified stock options must equal or exceed 85% of the fair market value of
the Common Stock on the date of grant. The 1995 Stock Option Plan also provides
for restricted stock awards and grants of stock appreciation rights (SARs), but
no restricted stock awards or SARs have been granted to date.

The shareholders of the Company recently approved an increase from 500,000
to 800,000 in the number of shares of Common Stock authorized for issuance under
the 1995 Stock Option Plan. As of July 31, 1996, options covering 610,250 shares
had been granted under the 1995 Stock Option Plan, at a weighted average
exercise price of $1.86.

27
<PAGE>
1996 DIRECTOR PLAN. The shareholders of the Company adopted the 1996
Director Plan in August 1996. The 1996 Director Plan provides for an automatic
grant of unqualified stock options to purchase 15,000 shares of Common Stock to
non-employee directors on the date such individuals are first appointed
directors of the Company, and an automatic grant of an option to purchase an
additional 7,500 shares of Common Stock on the day after each subsequent annual
meeting of the Company's shareholders. The option price is equal to the fair
market value of the Common Stock on the date of grant. The options granted upon
appointment to the Board of Directors vest and become exercisable as to 50% of
the shares on the date of grant, and an additional 25% on each of the first and
second anniversaries of such grant, if the holder remains a director on such
date. The options granted in connection with subsequent annual meetings vest and
become exercisable as to 100% of the shares six months after the date of such
grant if the holder remains a director on such date. The Company has reserved
100,000 shares of Common Stock for issuance under the 1996 Director Plan.

LIMITED LIABILITY AND INDEMNIFICATION OF DIRECTORS

The Company's Articles of Incorporation limit the liability of directors in
their capacity as directors to the Company or its shareholders to the full
extent permitted by Minnesota law. Minnesota law provides that, if so provided
in a company's articles of incorporation, a director shall not be liable to the
company or its shareholders for monetary damage for breach of fiduciary duty as
a director, except (a) for any breach of the director's duty of loyalty to the
company or its shareholders, (b) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (c) for
dividends, stock repurchases and other distributions made in violation of
Minnesota law or for violations of Minnesota securities laws, (d) for any
transactions from which the director derived an improper personal benefit or (d)
for any act or omission occurring prior to the effective date of the provision
in the company's articles of incorporation limiting such liability. These
provisions do not affect the availability of equitable remedies, such as an
action to enjoin or rescind a transaction involving a breach of fiduciary duty,
although, as a practical matter, equitable relief may not be available. The
above provisions also do not limit liability of the directors for violations of,
or relieve them from the necessity of complying with, the federal securities
laws.

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<PAGE>
PRINCIPAL SHAREHOLDERS

The following table sets forth certain information with respect to
beneficial ownership of the Company's Common Stock as of July 31, 1996 and as
adjusted to reflect the sale of shares offered hereby (assuming no exercise of
the Underwriter's over-allotment option) by: (a) each director of the Company,
(b) the Chief Executive Officer of the Company, (c) each person or entity known
by the Company to own beneficially more than five percent of the Company's
Common Stock, and (d) all directors and executive officers of the Company as a
group.

<TABLE>
<CAPTION>
PERCENT OF OUTSTANDING
SHARES SHARES (1)
BENEFICIALLY ----------------------------------
NAME AND ADDRESS OWNED BEFORE OFFERING AFTER OFFERING
- --------------------------------------------------------------------- ----------- ----------------- ---------------
<S> <C> <C> <C>

William L. Rush 740,000 23.5% 16.8%
308 12th Avenue South
Buffalo, MN 55313

Lawrence A. Lehmkuhl (2) 67,038 2.1% 1.5%
134 Dellwood Avenue
Dellwood, MN 55110

George E. Kline (2)(3) 540,000 16.7% 12.0%
Venture Management
4750 IDS Center
Minneapolis, MN 55402

Kenneth L. Evenstad (2) 30,000 0.9% 0.7%
Upsher-Smith Laboratories
14905 23rd Avenue North
Minneapolis, MN 55447

Brightstone Funds (4) 510,000 15.9% 11.4%
Venture Management
4750 IDS Center
Minneapolis, MN 55402

John N. Kapoor Trust (5) 187,038 5.9% 4.2%
E.J. Financial
225 East Deer Path
Suite 250
Lake Forest, IL 60045

All directors and officers as a
group (7 persons) (6) 1,408,788 42.5% 30.8%
</TABLE>

- ------------------------
(1) As of July 31, 1996, the Company had 3,155,524 outstanding shares of Common
Stock. In addition, shares of Common Stock subject to options or warrants
currently exercisable or exercisable within 60 days from the date hereof
("Currently Exercisable Options") are deemed outstanding for computing the
percentage of the person holding such options but are not deemed outstanding
for computing the percentage of any other person. Except as indicated by
footnote, the persons named in the table above have sole voting and
investment power with respect to all shares of Common Stock shown as
beneficially owned by them. The number of shares of Common Stock deemed
outstanding after this offering includes an additional 1,250,000 shares of
Common Stock that are being offered for sale by the Company in this
offering, but assumes no exercise of the Underwriter's over-allotment
option.

(2) Includes 30,000 shares issuable pursuant to Currently Exercisable Options.

29
<PAGE>
(3) Includes 200,000 shares owned by Brightstone Fund IV, 150,000 shares owned
by Brightstone Fund VI, 110,000 shares owned and 30,000 shares issuable
pursuant to warrants held by Brightstone Fund VII and 20,000 shares issuable
pursuant to a warrant held by Brightstone Capital. George E. Kline, a
director of the Company, and James A. Bernards serve as general partners of
all of the Brightstone entities referenced above. By virtue of this
position, Mr. Kline and Mr. Bernards may be deemed to have voting and
investment control over the shares owned by such Brightstone entities, and
thus beneficial owners of those shares. Mr. Kline and Mr. Bernards disclaim
any beneficial ownership of such shares.

(4) These securities are also included in beneficial ownership of Mr. Kline. See
footnote (3) above.

(5) These securities are beneficially owned by John N. Kapoor, M.D.

(6) Includes 161,750 shares issuable pursuant to Currently Exercisable Options.

CERTAIN TRANSACTIONS

On June 6, 1995, the Company entered into a 90-day, non-interest bearing
loan arrangement with Brightstone Capital, whose general partner is George E.
Kline, pursuant to which the Company borrowed a total of $200,000. Mr. Kline is
a member of the Company's Board of Directors. As consideration for the loan and
related consulting services, the Company issued a warrant to purchase 20,000
shares of the Company's Common Stock at an exercise price of $1.35 per share. On
September 6, 1995, the Company repaid the loan.

On June 30, 1996, the Company sold 50,000 shares of Common Stock for
$125,000, or $2.50 per share, to Brightstone Fund VII, whose general partner
also is Mr. Kline.

Management of the Company believes that the terms of the transactions
described above were no less favorable to the Company than would have been
obtained from an unaffiliated third party. Any future material transactions and
loans with officers, directors or 5% beneficial shareholders of the Company's
Common Stock, or affiliates of such persons, will be on terms no less favorable
to the Company than could be obtained from unaffiliated third parties and will
be approved by a majority of the outside members of the Company's Board of
Directors who do not have an interest in the transactions.

DESCRIPTION OF CAPITAL STOCK

GENERAL

Upon the closing of this offering, the Company's authorized capital stock
will consist of 20,000,000 shares, $.01 par value. All shares of capital stock
the Company issues are Common Stock unless the Board of Directors designates
otherwise. As of July 31, 1996, there were outstanding 3,155,524 shares of
Common Stock, which were held by 98 shareholders of record, and 812,357 shares
of Common Stock reserved for issuance upon exercise of outstanding options and
warrants. No shares of preferred stock are outstanding. See "Management -- Stock
Option Plans."

COMMON STOCK

The holders of Common Stock are entitled to one vote for each share held of
record on all matters submitted to a vote of shareholders. There is no
cumulative voting for the election of directors, which means that the holders of
more than 50% of the outstanding Common Stock voting for the election of
directors can elect all of the directors of the Company to be elected, if they
so choose. Subject to preferences that may be applicable to any outstanding
preferred stock, holders of Common Stock are entitled to receive ratably such
dividends as may be declared by the Board of Directors out of funds legally
available therefor and are entitled to share ratably in all assets of the
Company available for distribution to holders of the Common Stock upon
liquidation, dissolution or winding up of the affairs of the Company. Holders of
Common Stock have no preemptive, subscription or conversion rights and

30
<PAGE>
there are no redemption or sinking fund provisions applicable thereto. The
outstanding shares of Common Stock are, and the shares of Common Stock offered
hereby will be, fully paid and nonassessable.

PREFERRED STOCK

The Company's Articles of Incorporation authorize the Company's Board of
Directors, without further shareholder action, to issue shares of preferred
stock in one or more series and to fix the voting rights, liquidation
preferences, dividend rights, repurchase rights, conversion rights, redemption
rights and terms, including sinking fund provisions, and certain other rights
and preferences, of the preferred stock.

Although there is no current intention to do so, the Board of Directors of
the Company may, without shareholder approval, issue shares of a class or series
of preferred stock with voting and conversion rights which could adversely
affect the voting power or dividend rights of the holders of Common Stock and
may have the effect of delaying, deferring or preventing a change in control of
the Company.

PROVISIONS OF THE COMPANY'S ARTICLES OF INCORPORATION AND BYLAWS
AND MINNESOTA BUSINESS CORPORATION ACT

The existence of authorized but unissued preferred stock, described above,
and certain provisions of the Company's Articles of Incorporation and Bylaws and
Minnesota law, described below, could have an anti-takeover effect. These
provisions are intended to provide management flexibility, to enhance the
likelihood of continuity and stability in the composition of the Company's Board
of Directors and in the policies formulated by the Board and to discourage an
unsolicited takeover of the Company if the Board determines that such a takeover
is not in the best interests of the Company and its shareholders. However, these
provisions could have the effect of discouraging some attempts to acquire the
Company, which would deprive the Company's shareholders of opportunities to sell
their shares of Common Stock at prices higher than prevailing market prices.

Section 302A.671 of the Minnesota Statutes applies, with certain exceptions,
to any acquisition of voting stock of the Company (from a person other than the
Company, and other than in connection with certain mergers and exchanges to
which the Company is a party) resulting in the beneficial ownership of 20
percent or more of the voting stock then outstanding. Section 302A.671 requires
approval of any such acquisition by a majority vote of the shareholders of the
Company prior to its consummation. In general, shares acquired in the absence of
such approval are denied voting rights and are redeemable at their then fair
market value by the Company within 30 days after the acquiring person has failed
to give a timely information statement to the Company or the date the
shareholders voted not to grant voting rights to the acquiring person's shares.

Section 302A.673 of the Minnesota Statutes generally prohibits any business
combination by the Company, or any subsidiary of the Company, with any
shareholder which purchases 10% or more of the Company's voting shares (an
"interested shareholder") within four years following such interested
shareholder's share acquisition date, unless the business combination is
approved by a committee of all of the disinterested members of the Board of
Directors of the Company before the interested shareholder's share acquisition
date.

TRANSFER AGENT AND REGISTRAR

Norwest Bank, Minnesota, N.A., has been appointed as the transfer agent and
registrar for the Common Stock.

SHARES ELIGIBLE FOR FUTURE SALE

Prior to this offering, there has been no public market for the Common
Stock. Upon closing of this offering, the Company will have outstanding an
aggregate of 4,405,524 shares of Common Stock. Of these shares, the 1,250,000
shares of Common Stock sold in this offering will be freely tradeable

31
<PAGE>
without restriction or further registration under the Securities Act of 1933, as
amended (the "Securities Act"), unless held by "affiliates" of the Company, as
that term is defined in Rule 144 under the Securities Act (whose sales would be
subject to certain volume limitations and other restrictions described below).
The remaining 3,155,524 shares (the "Restricted Shares") were issued and sold by
the Company in private transactions in reliance upon exemptions from
registration under the Securities Act.

Approximately 1,380,000 of the Restricted Shares will be eligible for sale
90 days after the date of this Prospectus, subject to compliance with the volume
limitations and other restrictions of Rule 144. The Company's officers,
directors and certain of its shareholders (all of such persons representing in
the aggregate 940,000 of such Restricted Shares) have agreed that they will not
sell, directly or indirectly, any Common Stock without the prior written consent
of the Underwriter for a period of one year from the date of this Prospectus.
See "-- Lock-Up Agreements."

In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who beneficially owns shares last acquired
privately from the Company or from an affiliate of the Company at least two
years previously, would be entitled to sell within any three-month period a
number of shares that does not exceed the greater of (a) 1% of the then
outstanding shares of Common Stock (approximately 44,055 shares immediately
after this offering) or (b) the average weekly trading volume in the Common
Stock during the four calendar weeks preceding such sale. Sales under Rule 144
are also subject to certain manner-of-sale provisions, notice requirements and
the availability of current public information about the Company. A person who
has not been an affiliate of the Company at any time during the three months
preceding a sale, and who beneficially owns shares last acquired from the
Company or from an affiliate of the Company at least three years previously, is
entitled to sell all such shares under Rule 144 without regard to any of the
limitations of the rule.

Rule 701 under the Securities Act provides an exemption from the
registration requirements of the Securities Act for offers and sales of
securities issued pursuant to certain compensatory benefit plans, such as the
1995 Stock Option Plan, or written contracts of a company not subject to the
reporting requirements of Section 13 or Section 15(d) of the Securities Exchange
Act of 1934 (the "Exchange Act"). Securities issued pursuant to Rule 701 are
restricted securities for purposes of Rule 144. However, 90 days after the
issuer becomes subject to the reporting provisions of the Exchange Act, the Rule
144 resale restrictions, except for the manner of sale and brokers' transaction
requirements, are inapplicable for non-affiliates. Affiliates are not subject to
the Rule 144 holding period requirement, but are subject to the volume
limitations and other restrictions of Rule 144. A total of 302,450 additional
shares issuable upon the exercise of vested options (the "Rule 701 Shares") will
be eligible for sale in the public market in accordance with Rule 701 beginning
90 days after the date of this Prospectus. The Company's officers, directors and
certain of its shareholders (all of such persons representing in the aggregate
121,950 of the Rule 701 Shares) have agreed that they will not sell, directly or
indirectly, any Common Stock without the prior written consent of the
Underwriter for a period of one year from the date of this Prospectus. See "--
Lock-Up Agreements."

The Company intends to file a Form S-8 registration statement under the
Securities Act to register all shares of Common Stock issuable under the 1995
Stock Option Plan and the 1996 Director Plan. That registration statement is
expected to become effective immediately upon filing. Shares covered by that
registration statement will be eligible for sale in the public market after the
effective date of that registration statement, subject to Rule 144 limitations
applicable to affiliates and to the lock-up agreements described below.

The Company can make no prediction as to the effect, if any, that sales of
shares of Common Stock or the availability of Common Stock for sale will have on
the market price prevailing from time to time. Nevertheless, sales of
substantial amounts of the Common Stock in the public markets or the perception
that such sales could occur could adversely affect the market price or the
future ability of the Company to raise capital through an offering of its equity
securities.

32
<PAGE>
LOCK-UP AGREEMENTS

The Company's officers, directors and certain of its shareholders, who in
the aggregate hold 1,247,038 shares of Common Stock, have agreed that they will
not to sell, transfer or otherwise dispose of, or agree to sell, transfer or
otherwise dispose of any shares of Common Stock or any rights to purchase shares
of Common Stock, without the written consent of the Underwriter, for a period of
one year after the date of this Prospectus, other than by gift to donees who
agree to be bound by the same restriction or by will or the laws of descent. The
Company will use its best efforts to obtain similar lock-up agreements from its
remaining shareholders. These agreements take precedence over the limitations on
sale under the Securities Act described in the foregoing paragraphs.

REGISTRATION RIGHTS

Holders of warrants to purchase 152,107 shares of Common Stock (the
"Registerable Shares") that represent 50% or more of the Registerable Shares
have the right, at any time after this offering but only on one occasion, to
require the Company to file a registration statement registering the
Registerable Shares under the Securities Act. Holders of the Registerable
Shares, and the holder of a warrant to purchase 20,000 shares of Common Stock,
are also entitled to "piggy-back" registration rights on registrations of the
Company, subject to the right of the managing underwriter of a particular
offering to reduce, in view of market conditions, the number of shares the
holders propose to have the Company register. The Company will bear all of the
expenses of the registration of the Registrable Shares, except for underwriting
commissions and the fees of the legal counsel to the holders of the Registrable
Shares participating in any such offering.

UNDERWRITING

Miller, Johnson & Kuehn, Incorporated (the "Underwriter") has agreed,
subject to the terms and conditions of the Underwriting Agreement, with the
Company to purchase from the Company the 1,250,000 shares of Common Stock
offered hereby. The Underwriting Agreement provides that the Underwriter will be
obligated to purchase all of the Shares offered hereby if any are purchased.

The Underwriter proposes to offer the Shares to the public at the Price to
Public set forth on the cover page of this Prospectus and to dealers at such
price less a concession not in excess of $.175 per share. After the initial
public offering, the Price to Public and concession may be changed by the
Underwriter. The Underwriter does not intend to confirm sales to any account
over which it has discretionary authority.

The Company has granted the Underwriter an option exercisable within 30 days
after the date of this Prospectus to purchase up to an additional 187,500 shares
of Common Stock at the Price to Public, less the Underwriting Discount shown on
the cover page of this Prospectus. The Underwriter may exercise such option only
for the purpose of covering any over-allotments in the sale of the Shares
offered hereby.

The Company has agreed to pay the Underwriter a nonaccountable expense
allowance equal to 1% of the gross proceeds from the sale of the Shares and to
pay the fees and expenses of the Underwriter's counsel in an amount not to
exceed $45,000. The Company has also agreed to give the Underwriter a right of
first refusal to act as co-managing underwriter for any offering of the
Company's capital stock for three years following this offering, unless a
regional or national investment banking firm has agreed to act as managing
underwriter for such offering.

The Company has agreed to sell to the Underwriter, for nominal
consideration, a warrant to purchase 125,000 shares of Common Stock (the
"Underwriter's Warrant"). The Underwriter's Warrant may be exercised in whole or
in part commencing twelve months after the date of this Prospectus and for a
period of four years thereafter at a per share exercise price of $4.20, equal to
120% of the Price to Public. Until exercisable, the Underwriter's Warrant may
not be transferred, sold, assigned or hypothecated except to persons who are
both officers and shareholders of the Underwriter or who are both officers and
employees of the Underwriter. The Underwriter's Warrant contains anti-dilution
provisions providing for appropriate adjustments upon the occurrence of certain
events, and contains

33
<PAGE>
customary participatory and demand registration rights. The holders of the
Underwriter's Warrant also have the right to exchange the Underwriter's Warrant
without any cash payment for a number of shares of Common Stock having a value,
at the time of such exchange, equal to the appreciated value of the
Underwriter's Warrant. Any profits realized by the Underwriter upon the sale of
such warrant, or the securities issuable upon exercise thereof, may be deemed to
constitute additional underwriting compensation.

The Underwriting Agreement provides for reciprocal indemnification between
the Company, the Underwriter and their controlling persons against civil
liabilities in connection with the offering, including liabilities under the
Securities Act of 1933, as amended. Insofar as indemnification for liabilities
arising under the Securities Act of 1933 may be permitted pursuant to the
foregoing provisions, the Company has been informed that, in the opinion of the
Securities and Exchange Commission, such indemnification is against public
policy as expressed in such Act and is therefore unenforceable.

The foregoing is a summary of the provisions of the Underwriting Agreement
and the Underwriter's Warrant and does not purport to be a complete statement of
their terms and conditions. The Underwriting Agreement and the Underwriter's
Warrant have been filed as an exhibit to the Registration Statement of which
this Prospectus is a part.

LEGAL MATTERS

The validity of the issuance of the Common Stock offered hereby will be
passed upon for the Company by Dorsey & Whitney LLP, Minneapolis, Minnesota. A
partner and an employee of Dorsey & Whitney LLP own a total of 47,037 shares of
Common Stock. Certain legal matters will be passed upon for the Underwriter by
Leonard, Street and Deinard Professional Association, Minneapolis, Minnesota.

EXPERTS

The financial statements of the Company as of December 31, 1994, June 30,
1995 and December 31, 1995, and for the year ended December 31, 1994, the six
months ended June 30, 1995 and the year ended December 31, 1995, included in
this Prospectus and Registration Statement have been audited by Ernst & Young
LLP, independent auditors, as set forth in their report thereon appearing
elsewhere herein and in the Registration Statement, and such financial
statements are included herein in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing.

ADDITIONAL INFORMATION

The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form SB-2 under the Securities Act
with respect to the Common Stock offered hereby. For further information with
respect to the Company and the Common Stock, reference is made to such
Registration Statement and exhibits filed as a part thereof. Statements
contained in this Prospectus as to the contents of any contract, agreement or
other documents referred to are not necessarily complete. With respect to each
such contract, agreement or document filed as an exhibit to the Registration
Statement, reference is made to the exhibit for a more complete description of
the matter involved. The Registration Statement and exhibits may be inspected
without charge and copied at the public reference facilities maintained by the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
Commission's regional offices at Northwestern Atrium Center, 500 West Madison,
Suite 1400, Chicago, Illinois 60661 and 75 Park Place, 14th Floor, New York, New
York 10048. Copies of such material may be obtained at prescribed rates from the
Commission's Public Reference Section at 450 Fifth Street, N.W., Washington,
D.C. 20549. In addition, the Commission maintains a Web site that contains
reports, proxy and information statements and other information regarding
issuers that file electronically with the Commission. The address of the Web
site is http://www.sec.gov.

34
<PAGE>
NUTRITION MEDICAL, INC.

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<S> <C>
Report of Independent Auditors........................................................ F-2

Balance Sheets........................................................................ F-3

Statements of Operations.............................................................. F-4

Statement of Shareholders' Equity..................................................... F-5

Statements of Cash Flows.............................................................. F-6

Notes to Financial Statements......................................................... F-7
</TABLE>

F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS

Board of Directors and Shareholders
Nutrition Medical, Inc.

We have audited the balance sheets of Nutrition Medical, Inc. as of December
31, 1994, June 30, 1995 and December 31, 1995 and the related statements of
operations, shareholders' equity and cash flows for the year ended December 31,
1994, the six months ended June 30, 1995 and the year ended December 31, 1995.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Nutrition Medical, Inc. at
December 31, 1994, June 30, 1995 and December 31, 1995 and the results of its
operations and its cash flows for the year ended December 31, 1994, the six
months ended June 30, 1995 and the year ended December 31, 1995, in conformity
with generally accepted accounting principles.

ERNST & YOUNG LLP

Minneapolis, Minnesota
March 22, 1996

F-2
<PAGE>
NUTRITION MEDICAL, INC.
BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------- JUNE 30,
1994 1995 1996
----------- ------------- -------------
<S> <C> <C> <C>
(UNAUDITED)

ASSETS
Current assets:
Cash and cash equivalents............................................ $ 111,080 $ 1,127,247 $ 890,032
Accounts receivable.................................................. 22,334 121,345 199,889
Inventories.......................................................... 50,409 358,104 275,625
Prepaid expenses..................................................... 2,950 5,729 37,850
----------- ------------- -------------
Total current assets............................................... 186,773 1,612,425 1,403,396

Equipment and office furniture:
Computer equipment................................................... 27,734 48,401 49,962
Office furniture..................................................... 34,728 54,221 61,808
Equipment............................................................ 3,885 3,885 3,885
----------- ------------- -------------
66,347 106,507 115,655
Less accumulated depreciation........................................ 7,135 24,912 36,271
----------- ------------- -------------
59,212 81,595 79,384
----------- ------------- -------------
Total assets..................................................... $ 245,985 $ 1,694,020 $ 1,482,780
----------- ------------- -------------
----------- ------------- -------------

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable..................................................... $ 63,276 $ 313,810 $ 231,778
Accrued lease costs.................................................. -- 75,000 75,000
Accrued expenses..................................................... 11,631 58,399 65,622
Accrued payroll...................................................... 8,924 65,113 42,597
Current portion of long-term debt.................................... -- 100,000 100,000
----------- ------------- -------------
Total current liabilities.......................................... 83,831 612,322 514,997

Long-term debt......................................................... 100,000 -- --

Shareholders' equity:
Common Stock, $.01 par value:
Authorized shares -- 10,000,000
Issued and outstanding shares --
December 31, 1994 -- 1,440,000;
December 31, 1995 -- 3,105,524;
June 30, 1996 -- 3,155,524......................................... 14,400 31,055 31,555
Additional paid-in capital........................................... 619,100 2,581,612 2,720,612
Accumulated deficit.................................................. (571,346) (1,530,969) (1,784,384)
----------- ------------- -------------
Total shareholders' equity......................................... 62,154 1,081,698 967,783
----------- ------------- -------------
Total liabilities and shareholders' equity....................... $ 245,985 $ 1,694,020 $ 1,482,780
----------- ------------- -------------
----------- ------------- -------------
</TABLE>

SEE ACCOMPANYING NOTES.

F-3
<PAGE>
NUTRITION MEDICAL, INC.
STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
--------------------------- ---------------------------
1994 1995 1995 1996
------------ ------------- ------------ -------------
<S> <C> <C> <C> <C>
(UNAUDITED)

Net sales............................................... $ 81,961 $ 841,241 $ 284,106 $ 1,086,049
Cost of goods sold...................................... 24,613 406,391 139,926 682,194
------------ ------------- ------------ -------------
Gross profit............................................ 57,348 434,850 144,180 403,855

Operating expenses:
Selling, general and administrative................... 733,413 1,242,863 523,485 577,679
Research and development.............................. 17,557 170,963 28,287 96,155
------------ ------------- ------------ -------------
750,970 1,413,826 551,772 673,834
------------ ------------- ------------ -------------
Operating loss.......................................... (693,622) (978,976) (407,592) (269,979)

Other income (expense):
Interest income....................................... 7,239 24,834 674 19,468
Interest expense...................................... (8,306) (5,481) (2,349) (2,904)
------------ ------------- ------------ -------------
(1,067) 19,353 (1,675) 16,564
------------ ------------- ------------ -------------
Net loss................................................ $ (694,689) $ (959,623) $ (409,267) $ (253,415)
------------ ------------- ------------ -------------
------------ ------------- ------------ -------------
Net loss per share...................................... $ (.29) $ (.30) $ (.16) $ (.06)
------------ ------------- ------------ -------------
------------ ------------- ------------ -------------
Weighted average number of shares outstanding........... 2,415,348 3,174,827 2,639,411 4,220,816
------------ ------------- ------------ -------------
------------ ------------- ------------ -------------
</TABLE>

SEE ACCOMPANYING NOTES.

F-4
<PAGE>
NUTRITION MEDICAL, INC.
STATEMENT OF SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
---------------------- PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
----------- --------- ------------- -------------- -----------
<S> <C> <C> <C> <C> <C>

Balance at December 31, 1993....................... 800,000 $ 8,000 $ 56,500 $ (35,657) $ 28,843
Recapitalization resulting from election of C
Corporation status.............................. -- -- (159,000) 159,000 --
Issuance of Common Stock at $1.00 per share from
March 1994 through April 1994................... 640,000 6,400 633,600 -- 640,000
Value of warrants granted for services
performed....................................... -- -- 63,000 -- 63,000
Value of options granted for services
performed....................................... -- -- 20,000 -- 20,000
Value of warrants granted in connection with
notes payable................................... -- -- 5,000 -- 5,000
Net loss......................................... -- -- -- (694,689) (694,689)
----------- --------- ------------- -------------- -----------
Balance at December 31, 1994....................... 1,440,000 14,400 619,100 (571,346) 62,154
Issuance of Common Stock at $1.35 per share from
February through September 1995, net offering
costs........................................... 1,665,524 16,655 1,957,512 -- 1,974,167
Value of warrants granted for services
performed....................................... -- -- 5,000 -- 5,000
Net loss......................................... -- -- -- (959,623) (959,623)
----------- --------- ------------- -------------- -----------
Balance at December 31, 1995....................... 3,105,524 31,055 2,581,612 (1,530,969) 1,081,698
Issuance of Common Stock at $2.50 per share in
June 1996 50,000 500 124,500 -- 125,000
Value of options granted for services
performed....................................... -- -- 14,500 -- 14,500
Net loss......................................... -- -- -- (253,415) (253,415)
----------- --------- ------------- -------------- -----------
Balance at June 30, 1996 (unaudited)............... 3,155,524 $ 31,555 $ 2,720,612 $ (1,784,384) $ 967,783
----------- --------- ------------- -------------- -----------
----------- --------- ------------- -------------- -----------
</TABLE>

SEE ACCOMPANYING NOTES.

F-5
<PAGE>
NUTRITION MEDICAL, INC.
STATEMENTS OF CASH FLOWS

OPERATING ACTIVITIES
Net loss................................................ $ (694,689) $ (959,623) $ (409,267) $ (253,415)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation.......................................... 6,538 17,777 13,050 11,359
Value of options and warrants granted for services
performed............................................ 88,000 5,000 5,000 14,500
Changes in operating assets and liabilities:
Accounts receivable................................. (22,334) (99,011) (62,238) (78,544)
Inventories......................................... (50,409) (307,695) (75,152) 82,479
Prepaid expenses.................................... (2,950) (2,779) (3,364) (32,121)
Accounts payable.................................... 65,921 250,534 176,267 (82,032)
Accrued expenses.................................... 20,555 177,957 61,092 (15,293)
------------ ------------- ------------ -------------
Net cash used in operating activities................... (589,368) (917,840) (294,612) (353,067)

INVESTING ACTIVITIES
Purchase of equipment and office furniture.............. (51,111) (40,160) (20,681) (9,148)
------------ ------------- ------------ -------------
Net cash used in investing activities................... (51,111) (40,160) (20,681) (9,148)

FINANCING ACTIVITIES
Proceeds from issuance of Common Stock.................. 640,000 1,974,167 195,000 125,000
Proceeds from issuance of notes payable................. 100,000 200,000 50,000 --
Payments on notes payable............................... -- (200,000) -- --
------------ ------------- ------------ -------------
Net cash provided by financing activities............... 740,000 1,974,167 245,000 125,000
------------ ------------- ------------ -------------
Increase (decrease) in cash............................. 99,521 1,016,167 (70,293) (237,215)
Cash and cash equivalents at beginning of period........ 11,559 111,080 111,080 1,127,247
------------ ------------- ------------ -------------
Cash and cash equivalents at end of period.............. $ 111,080 $ 1,127,247 $ 40,787 $ 890,032
------------ ------------- ------------ -------------
------------ ------------- ------------ -------------
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid........................................... $ -- $ -- $ -- $ 5,714
------------ ------------- ------------ -------------
------------ ------------- ------------ -------------
</TABLE>

SEE ACCOMPANYING NOTES.

F-6
<PAGE>
NUTRITION MEDICAL, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
(UNAUDITED WITH RESPECT TO JUNE 30, 1996 AND
THE SIX MONTH PERIOD ENDED JUNE 30, 1996)

1. NATURE OF OPERATIONS
Nutrition Medical, Inc. (the "Company") develops and sells generic critical
care nutrition products for the hospital/nursing home market, as well as private
label nutrition products for sale through regional and national retail chains
throughout the United States.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

CASH EQUIVALENTS

The Company considers all highly liquid investments with maturities of three
months or less at the time of purchase to be cash equivalents. Cash equivalents
are carried at cost which approximates market and consist of money market funds.

INVENTORIES

Inventories are valued at the lower of cost or market by the first-in,
first-out (FIFO) method.

EQUIPMENT AND OFFICE FURNITURE

Equipment and office furniture are stated at cost. Depreciation is provided
using the straight-line method over the estimated useful lives of the assets
over five years.

INCOME TAXES

Income taxes are accounted for under the liability method. Deferred income
taxes are provided for temporary differences between the financial reporting and
tax bases of assets and liabilities.

REVENUE RECOGNITION

The Company recognizes revenue at the time of shipment of the product.
Provisions for estimated returns and allowances are accrued for at the time of
sale.

RESEARCH AND DEVELOPMENT COSTS

All research and development costs are charged to operations as incurred.

USE OF ESTIMATES

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.

STOCK-BASED COMPENSATION

The Company follows Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" (APB 25), and related interpretations in
accounting for its stock options. Under APB 25, when the exercise price of stock
options equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized.

In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation." The Company has not determined the impact of the new statement on
its financial statements.

IMPAIRMENT OF LONG-LIVED ASSETS

The Company will record impairment losses on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount.

F-7
<PAGE>
NUTRITION MEDICAL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NET LOSS PER SHARE

Net loss per share is computed using the weighted average number of shares
of common stock outstanding during the periods presented. Pursuant to Securities
and Exchange Commission Staff Accounting Bulletin No. 83, shares of common stock
issued by the Company at prices less than the initial offering price during the
twelve months immediately preceding the initial public offering, plus stock
options and warrants granted at exercise prices less than the initial public
offering price during the same period, have been included in the determination
of shares used in calculating the net loss per share, using the treasury method,
as if they were outstanding for all periods presented.

Net loss per share computed in accordance with Accounting Principles Board
Opinion No. 15, "Earnings Per Share," would be $(.53), $(.47), $(.27) and $(.08)
for the years ended December 31, 1994 and 1995 and the six months ended June 30,
1995 and 1996 on 1,300,329, 2,059,808, 1,524,391 and 3,105,797 weighted average
number of shares outstanding, respectively.

INTERIM FINANCIAL INFORMATION

The financial statements for the six months ended June 30, 1996 have been
prepared by the Company pursuant to the rules and regulations of the Securities
and Exchange Commission. These statements are unaudited but, in the opinion of
management, include all adjustments (consisting of normal recurring adjustments
and accruals) necessary for a fair presentation of the financial information set
forth herein.

3. CAPITAL STOCK AUTHORIZATION
During July 1996, the Board of Directors approved, subject to shareholder
approval, an increase in the authorized shares of capital stock to 25,000,000,
including 20,000,000 shares of common stock and 5,000,000 shares of undesignated
preferred stock.

4. INVENTORIES
Inventories consist of the following:

<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
---------------------- ------------------------
1994 1995 1995 1996
--------- ----------- ----------- -----------

<S> <C> <C> <C> <C>
Raw materials........................................ $ 30,812 $ 95,078 $ 68,197 $ 108,899
Work in progress..................................... -- 89,848 -- 28,633
Finished goods....................................... 19,597 173,178 57,364 138,093
--------- ----------- ----------- -----------
$ 50,409 $ 358,104 $ 125,561 $ 275,625
--------- ----------- ----------- -----------
--------- ----------- ----------- -----------
</TABLE>

F-8
<PAGE>
NUTRITION MEDICAL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

5. DEBT
Long-term debt consists of the following:

<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
------------------------ ------------------------
1994 1995 1995 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>

Note payable -- Housing and Redevelopment Authority of Buffalo,
Minnesota; interest rate at 6.25%; interest paid quarterly; due
October 11, 1999.................................................... $ 50,000 $ 50,000 $ 50,000 $ 50,000
Note payable -- Housing and Redevelopment Authority of Buffalo,
Minnesota; interest rate at 5.05%; interest paid quarterly; due
December 1, 1998.................................................... 50,000 50,000 50,000 50,000
Note payable -- shareholder; non-interest bearing; unsecured; due
September 6, 1995................................................... -- -- 50,000 --
----------- ----------- ----------- -----------
100,000 100,000 150,000 100,000
Less current portion................................................. -- 100,000 50,000 100,000
----------- ----------- ----------- -----------
$ 100,000 $ -- $ 100,000 $ --
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>

In connection with the January 14, 1994 and October 11, 1994 issuance of the
Housing and Redevelopment Authority (HRA) notes payable, the Company granted
warrants to purchase 15,000 shares of Common Stock at $1.50 per share and $1.00
per share, respectively. The warrants expire five years from the grant date and
were deemed to have a value of $5,000, which was expensed in 1994.

The HRA notes payable require immediate repayment in the event the Company
relocates operations outside of the Buffalo area. Pursuant to the Company's
plans to relocate (Note 6), the notes payable have been classified as current as
of December 31, 1995. On July 22, 1996, the Company repaid the HRA notes
payable.

On June 6, 1995, the Company entered into a $200,000, 90-day non-interest
bearing loan arrangement with an entity that is a shareholder of the Company and
whose general partner is a member of the Board of Directors. As of June 30,
1995, the Company had received $50,000 under this arrangement. As consideration
for the loan and consulting services provided, the Company granted a warrant to
purchase 20,000 shares of Common Stock at $1.35 per share. The warrants were
assigned a value of $5,000 and were expensed in 1995. On September 6, 1995, the
Company repaid the loan in full.

6. LEASES
The Company leases an office facility in Buffalo, Minnesota under an
operating lease that expires December 31, 1998. Operating expenses including
maintenance, utilities, real estate taxes and insurance are paid by the Company.
In December 1995, the Company approved a plan to relocate its operations from
Buffalo to Minneapolis, Minnesota. As of December 31, 1995, the Company
established an accrual of approximately $75,000 for the remaining lease costs of
abandoning the facility.

Subsequent to year end, the Company entered into an agreement to lease an
office and warehouse facility in Minneapolis, Minnesota commencing September 1,
1996. The lease terminates on November 30, 2001, and requires the Company to pay
its proportionate share of real estate taxes and operating expenses. The
agreement allows for a five year renewal and a termination option after three
years in the event the landlord is unable to provide additional space for the
Company.

F-9
<PAGE>
NUTRITION MEDICAL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

6. LEASES (CONTINUED)
Future minimum lease rental payments required under leases in excess of one
year as of December 31, 1995 are as follows:

Total rent expense under operating leases for the years ended December 31,
1994 and 1995 and the six months ended June 30, 1995 and 1996 was $23,980,
$33,270, $12,236 and $14,933, respectively.

7. INCOME TAXES
Prior to March 14, 1994, the Company operated as an S Corporation, whereby
taxable income or loss is passed through to the shareholders. The Subchapter S
election was terminated on March 14, 1994 and, as a result, the Company became
subject to federal and state income taxes. Also, as of that date, the Company's
accumulated deficit of $159,000 was reclassified to additional paid-in capital.

At December 31, 1995 and June 30, 1996, the Company had net operating loss
carryforwards of approximately $1,468,000 and $1,721,000, respectively. The net
operating loss carryforwards are available to offset future taxable income
through 2011 and are subject to limitations under Section 382 of the Internal
Revenue Code due to changes in the equity ownership of the Company.

Components of deferred tax assets are as follows:

<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
-------------------------- --------------------------
1994 1995 1995 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>

Net operating loss carryforwards................ $ 278,000 $ 587,000 $ 360,000 $ 688,000
Less valuation allowance........................ (278,000) (587,000) (360,000) (688,000)
------------ ------------ ------------ ------------
Net deferred tax assets......................... $ -- $ -- $ -- $ --
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>

8. STOCK OPTIONS AND WARRANTS
On January 19, 1995, the Company adopted the 1995 Long-Term Incentive Stock
Option Plan (the "Plan") that includes both incentive stock options and
non-qualified stock options to be granted to directors, officers, employees and
consultants. As of December 31, 1995, the maximum number of shares reserved
under the Plan is 500,000 shares. The Board of Directors establishes the terms
and conditions of all stock option grants, subject to the Plan and applicable
provisions of the Internal Revenue Code. Options may not be granted under the
Plan after January 1, 2005.

During July 1996, the Board of Directors approved, subject to shareholder
approval, an increase in the number of shares authorized for issuance under the
Plan by 300,000 shares and adopted the 1996 Non-Employee Director Stock Option
Plan for which 100,000 shares are reserved.

F-10
<PAGE>
NUTRITION MEDICAL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

8. STOCK OPTIONS AND WARRANTS (CONTINUED)
Option and warrant activity is summarized as follows:

<TABLE>
<CAPTION>
SHARES OPTIONS OUTSTANDING
AVAILABLE ----------------------- SHARES PRICE
FOR GRANT INCENTIVE NON-QUALIFIED WARRANTS EXERCISABLE PER SHARE
---------- --------- ------------ --------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C>

Balance at December 31, 1993............. -- -- -- -- --
Establishment of stock option plan..... 500,000 -- -- -- --
Granted................................ (127,500) 65,000 62,500 30,000 30,000 $1.00 - $1.50
---------- --------- ------------ --------- -----------
Balance at December 31, 1994............. 372,500 65,000 62,500 30,000 30,000 1.00 - 1.50
Granted................................ (265,000) 44,000 221,000 172,107 -- 1.00 - 1.50
Canceled............................... 15,000 -- (15,000) -- -- 1.00
Becoming exercisable................... -- -- -- -- 329,107 1.00 - 1.50
---------- --------- ------------ --------- -----------
Balance at December 31, 1995............. 122,500 109,000 268,500 202,107 359,107 1.00 - 1.50
Additional shares reserved............. 300,000 -- -- -- -- --
Granted................................ (144,750) 120,000 24,750 -- -- 1.00 - 4.25
Canceled............................... 12,000 (12,000) -- -- (5,000) 1.00 - 1.35
Becoming exercisable................... -- -- -- -- 48,500 1.00 - 1.50
---------- --------- ------------ --------- -----------
Balance at June 30, 1996 (unaudited)..... 289,750 217,000 293,250 202,107 402,607 $1.00 - $4.25
---------- --------- ------------ --------- -----------
---------- --------- ------------ --------- -----------
</TABLE>

In connection with the issuance of Common Stock at $1.35 per share from
February through September 1995, the Company granted warrants to purchase a
total of 152,107 shares of Common Stock. The warrants are exercisable at $1.35
per share and expire at various dates through September 2000.

9. CONTINGENCY
In August 1995, the Company was named as a defendant in a patent
infringement lawsuit brought by Sandoz Nutrition Company, a subsidiary of Sandoz
Corp. ("Sandoz"). The complaint asserts that one of the Company's products,
L-Emental Plus, infringes on two patents held by Sandoz and asks for relief in
the form of an injunction that would prevent the Company from selling the
product as well as damages of an unspecified amount. Both patents were issued
subsequent to the Company's introduction of L-Emental Plus. The Company has
responded with a counterclaim seeking a declaration of invalidity,
unenforceability, non-infringement and inventorship of the subject patents. A
court order has stayed the litigation pending a request for reexamination of
both patents by the United States Patent and Trademark Office. The Company
intends to continue to defend vigorously against the claim. It is not possible
at this time to predict the outcome, including whether the Company will have to
cease selling L-Emental Plus, or to estimate the amount or range of potential
loss, if any. Accordingly, no loss provision has been made in the financial
statements for any liability that may result from the outcome of this
uncertainty.

10. MAJOR CUSTOMER
The Company's net sales to one customer constituted approximately 31% of the
total net sales for the six months ended June 30, 1996.

F-11
<PAGE>
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No dealer, salesperson or other person has been authorized to give any
information or to make any representations not contained in this Prospectus and,
if given or made, such information or representations must not be relied upon as
having been authorized by the Company, the Underwriter or any other person. This
Prospectus does not constitute an offer to sell, or a solicitation of an offer
to buy a security other than the shares of Common Stock offered hereby, nor does
it constitute an offer to sell or a solicitation of an offer to buy any of the
securities offered hereby to any person in any jurisdiction in which it is
unlawful to make such an offer or solicitation to such person. Neither the
delivery of this Prospectus nor any sale made hereunder shall under any
circumstance create any implication that the information contained herein is
correct as of any date subsequent to the date hereof.

------------------------

Prospectus Summary............................. 3
The Company.................................... 3
Risk Factors................................... 5
Use of Proceeds................................ 11
Dilution....................................... 12
Dividend Policy................................ 12
Capitalization................................. 13
Selected Financial Data........................ 14
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................... 15
Business....................................... 18
Management..................................... 24
Principal Shareholders......................... 29
Certain Transactions........................... 30
Description of Capital Stock................... 30
Shares Eligible for Future Sale................ 31
Underwriting................................... 33
Legal Matters.................................. 34
Experts........................................ 34
Additional Information......................... 34
Index to Financial Statements.................. F-1
</TABLE>

------------------------

Until October 21, 1996 (25 days after the date of this Prospectus), all
dealers effecting transactions in the Common Stock offered hereby, whether or
not participating in this distribution, may be required to deliver a Prospectus.
This is in addition to the obligation of dealers to deliver a Prospectus when
acting as an underwriter and with respect to their unsold allotments or
subscriptions.

1,250,000 SHARES

[LOGO]

COMMON STOCK

---------------------

PROSPECTUS

---------------------

MILLER, JOHNSON & KUEHN,
INCORPORATED

September 26, 1996

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