<PAGE>
================================================================================
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1996
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to _________
COMMISSION FILE NUMBER 333-9999
NUTRITION MEDICAL, INC.
(Exact name of Small Business Issuer as specified in its charter)
MINNESOTA 41-1756256
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
9850 51ST AVENUE NORTH, SUITE 110, MINNEAPOLIS, MN 55442
(Address of principal executive offices)
(612) 551-9595
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes No X
------- -------
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the last practicable date:
Class Outstanding as of November 8, 1996
----- ----------------------------------
Common Stock, $.01 par value 4,593,024 shares
Transitional Small Business Disclosure Format (Check one): Yes No X
------ ------
================================================================================
<PAGE>
NUTRITION MEDICAL, INC.
INDEX
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements Page No.
--------
Condensed Statements of Operations (Unaudited) For the
Three Months and Nine Months Ended September 30,
1996 and 1995 2
Condensed Balance Sheets (Unaudited) As of
September 30, 1996 and December 31, 1995 3
Condensed Statements of Cash Flows (Unaudited)
For the Nine Months Ended September 30, 1996 and 1995 4
Notes to Condensed Financial Statements (Unaudited) 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 6
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 11
Item 6. Exhibits and Reports on Form 8-K 11
1
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NUTRITION MEDICAL, INC.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------- -------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $ 645,208 $ 205,791 $ 1,731,257 $ 489,897
Cost of goods sold 400,293 88,706 1,082,487 228,632
---------- ---------- ----------- ----------
Gross profit 244,915 117,085 648,770 261,265
Operating expenses:
Selling, general and administrative 375,936 328,760 953,615 852,245
Research and development 51,823 43,818 147,978 72,105
---------- ---------- ----------- ----------
427,759 372,578 1,101,593 924,350
---------- ---------- ----------- ----------
Operating loss (182,844) (255,493) (452,823) (663,085)
Other income (expense):
Interest income 7,619 820 27,087 1,494
Interest expense (554) (1,450) (3,458) (3,799)
---------- ---------- ----------- ----------
7,065 (630) 23,629 (2,305)
---------- ---------- ----------- ----------
Net loss $ (175,779) $ (256,123) $ (429,194) $ (665,390)
---------- ---------- ----------- ----------
---------- ---------- ----------- ----------
Net loss per share $ (.04) $ (.08) $ (.10) $ (.24)
---------- ---------- ----------- ----------
---------- ---------- ----------- ----------
Weighted average number of shares
outstanding 4,270,543 3,182,488 4,245,680 2,822,424
---------- ---------- ----------- ----------
---------- ---------- ----------- ----------
</TABLE>
See accompanying notes to condensed financial statements
2
<PAGE>
NUTRITION MEDICAL, INC.
CONDENSED BALANCE SHEETS
September 30, December 31,
1996 1995
---- ----
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 512,473 $ 1,127,247
Accounts receivable 317,069 121,345
Inventories 325,773 358,104
Prepaid expenses 295,237 5,729
----------- ------------
Total current assets 1,450,552 1,612,425
Equipment and office furniture (net) 78,756 81,595
----------- ------------
Total assets $ 1,529,308 $ 1,694,020
----------- ------------
----------- ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 366,854 $ 313,810
Accrued expenses 370,450 198,512
Current portion of long-term debt --- 100,000
----------- ------------
Total current liabilities 737,304 612,322
Shareholders' equity:
Common stock, $.01 par value, 20,000,000 shares
authorized, 3,155,524 and 3,105,524 issued and
outstanding in 1996 and 1995 31,555 31,055
Additional paid-in capital 2,720,612 2,581,612
Accumulated deficit (1,960,163) (1,530,969)
----------- ------------
Total shareholders' equity 792,004 1,081,698
----------- ------------
Total liabilities and shareholders' equity $ 1,529,308 $ 1,694,020
----------- ------------
----------- ------------
See accompanying notes to condensed financial statements
3
<PAGE>
NUTRITION MEDICAL, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine months ended
September 30,
-------------
1996 1995
---- ----
OPERATING ACTIVITIES
Net loss $ (429,194) $ (665,390)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 17,259 16,899
Value of warrants granted for services performed 14,500 5,000
Changes in operating assets and liabilities:
Accounts receivable (195,724) (66,771)
Inventories 32,331 (91,614)
Prepaid expenses (289,508) (4,689)
Accounts payable 53,044 162,524
Accrued expenses 171,938 45,503
---------- -----------
Net cash used in operating activities (625,354) (598,538)
INVESTING ACTIVITIES
Purchase of equipment and office furniture (14,420) (31,174)
---------- -----------
Net cash used in investing activities (14,420) (31,174)
FINANCING ACTIVITIES
Proceeds from issuance of common stock 125,000 1,974,167
Payments on notes payable (100,000) ----
---------- -----------
Net cash provided by financing activities 25,000 1,974,167
---------- -----------
Increase (decrease) in cash (614,774) 1,344,455
Cash and cash equivalents at beginning of period 1,127,247 111,080
---------- -----------
Cash and cash equivalents at end of period $ 512,473 $ 1,455,535
---------- -----------
---------- -----------
See accompanying notes to condensed financial statements
4
<PAGE>
NUTRITION MEDICAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The condensed consolidated financial statements as of September 30, 1996
and for the three and nine months ended September 30, 1996 and 1995 included in
this Form 10-QSB have been prepared by the Company pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
footnote disclosures, normally included in financial statements prepared in
accordance with generally accepted accounting principles, have been condensed or
omitted pursuant to such rules and regulations. These financial statements
should be read in conjunction with the financial statements and related notes
thereto included in the Company's Registration Statement on Form SB-2 and
Prospectus dated September 26, 1996, for the year ended December 31, 1995.
The condensed consolidated financial statements presented herein as of
September 30, 1996 and for the three and nine months ended September 30, 1996
and 1995 are unaudited, but in the opinion of management, reflect all
adjustments, consisting of normal recurring adjustments, necessary for a fair
presentation of financial position, results of operations and cash flows for the
periods presented. The results of operations for any interim period are not
necessarily indicative of results for the full year.
2. SHAREHOLDER ACTIONS
On August 19, 1996, the shareholders of the Company approved an amendment
to the Company's Articles of Incorporation increasing the number of shares of
authorized capital stock from 10,000,000 to 25,000,000 shares, 5,000,000 of
which were undesignated preferred stock. In addition, the shareholders approved
a proposal increasing the number of shares available for issuance under the
Company's 1995 Long-Term Incentive and Stock Option Plan from 500,000 to 800,000
and adopted the Nutrition Medical, Inc. 1996 Non-Employee Director Stock Option
Plan, reserving under this plan 100,000 shares of the Company's common stock for
issuance to directors of the Company who are not also employees.
3. INITIAL PUBLIC OFFERING
On September 26, 1996, the Company's registration statement for its initial
public offering was declared effective by the Securities and Exchange
Commission. The Company sold pursuant to this registration statement, in a
transaction that closed on October 1, 1996, 1,437,500 shares of the Company's
Common Stock at $3.50 per share, including an overallotment of 187,500 shares.
Net proceeds to the Company, after deducting all offering costs, totaled $4.24
million.
5
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
CAUTIONARY STATEMENT
This Quarterly Report on form 10-QSB contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. When used in
this Form 10-QSB and in future filings by the Company with the Securities and
Exchange Commission, in the Company's press releases and in oral statements
made with the approval of an authorized executive officer, the words or phrases
"believes", "anticipates", "intends", "will likely result", "estimates",
"projects" or similar expressions are intended to identify such forward-looking
statements, but are not the exclusive means of identifying such statements.
These forward-looking statements involve risks and uncertainties that may cause
the Company's actual results to differ materially from the results discussed in
the forward-looking statements. The Company wishes to caution readers not to
place undue reliance on any such forward-looking statements, which speak only as
of the date made. The Company undertakes no obligation to revise any
forward-looking statements in order to reflect events or circumstances after the
date of such statements. Readers are urged to carefully review and consider the
various disclosures made by the Company in this report and in the Company's
other reports filed with the Securities and Exchange Commission that attempt to
advise interested parties of the risks and factors that may affect the Company's
business. Such forward-looking statements are qualified in their entirety by
the cautions and risk factors set forth under the "Cautionary Statement" filed
as exhibit 99.1 to this Form 10-QSB.
GENERAL
The Company develops and sells nutrition products offered as lower cost,
generic alternatives to equivalent national branded products. Initial product
development focused on branded generic products for the critical care nutrition
market. These products are sold to 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.
As of September 30, 1996, the Company had developed six such products. Critical
care nutrition products are generally purchased by a relatively large customer
base which typically places orders in relatively small order quantities. Until
the fourth quarter of 1995, all sales were solely attributable to this product
line.
In October 1995, the Company introduced an adult nutrition supplement
product line. 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.
These products are marketed to retail chains and are generally packaged using
the retailer's proprietary store brand label. Such private label products allow
the retailer to offer quality, low cost alternatives to national branded adult
nutrition products. The Company's private label nutrition product line
currently consists of three adult nutrition supplements, each of
6
<PAGE>
which is available in three flavors. Adult nutrition supplements are generally
purchased by a relatively small customer base which typically places relatively
large orders.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
NET SALES. The Company's net sales for the three months ended September
30, 1996 totaled $645,208, representing an increase of $439,417, or 214%, over
net sales of $205,791 in the corresponding 1995 period. Sales of the Company's
critical care nutrition products, which accounted for 100% of the 1995 period
sales of $205,791, increased $97,124 or 47% to $302,915 in the three months
ended September 30, 1996. Of this increase, $41,122 is attributable to new
products introduced in the 1996 period and $56,002 is the result of increased
unit sales of products offered in both periods. The balance of the 1996
revenues, $342,293, was derived from sales of the Company's adult nutrition
supplement products, introduced in October of 1995.
The prices of the Company's products remained relatively stable within and
between the two reporting periods. Management believes that the growth in unit
sales is the result of increased marketing efforts of the Company as well as
wider acceptance and use of the Company's products by existing customers. The
critical care nutrition products offered by the Company are marketed as less
expensive alternatives to established products. In response, a competitor of
the Company has lowered its prices to select customers of its branded products,
offsetting part or all of the price advantage of the Company's three competing
products. Although the Company continues to experience overall sales growth of
these products, management believes that these selective price reductions
resulted in lost sales and slowed the rate of sales growth of the Company's
three competing products, and that this competitor has begun to use this form of
selective price competition more frequently.
GROSS PROFIT. The Company's gross profit increased by $127,830 or 109% to
$244,915 for the three months ended September 30, 1996 compared to $117,085 in
the same period in 1995. The following table sets forth the gross profit and
gross profit percentage, by product line, for the three months ended September
30, 1996 and 1995:
Three months ended September 30,
--------------------------------
1996 1995
------------------------- -------------------------
Product Line Gross profit % of Sales Gross Profit % of Sales
------------ ------------------------- -------------------------
Critical Care Nutrition $ 175,429 57.9% $117,085 56.9%
Adult Nutrition
Supplements 69,486 20.3 --product not available--
------------------------- -------------------------
Total $ 244,915 38.0% $117,085 56.9%
The introduction in the 1996 period of the lower gross profit adult nutrition
supplement products resulted in a decrease in overall gross profit, as a
percentage of sales, from 56.9% in 1995 to 38% in 1996. The gross profit related
to sales of the critical care nutrition products increased slightly over the
periods presented, largely the result of product mix within the category. The
gross profit
7
<PAGE>
percentage of the adult nutrition products were within management's expectations
and represent a slight increase from prior periods. If sales of adult nutrition
supplements increase as a proportion of total sales, management expects the
overall gross profit to decline.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses increased by $47,176 or 14.3% in the three months ended September 30
1996 compared with the same period in 1995. The increase is related to overall
higher costs resulting from the continued development of the Company's sales and
administration infrastructure and a $15,000 reserve for bad debt established in
the 1996 period relating to a single customer in chapter 11 bankruptcy. The
Company also incurred approximately $68,000 more in legal costs in the 1995
period as a result of two lawsuits against the Company.
RESEARCH AND DEVELOPMENT. Research and development costs increased 18.3%
to $51,823 for the three months ended September 30, 1996 compared with the
$43,818 expensed in the corresponding period in 1995. The increase is
attributable to higher costs associated with the Company's development of an
infant formula product.
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
NET SALES. Net sales for the nine months ended September 30, 1996 totaled
$1,731,257 compared to $489,897 for the same period in 1995, an increase of
253%. The growth in sales is attributable to increases in sales of products
offered in both periods, as well as new products introduced since the September
30, 1995 reporting period. Sales of the Company's critical care nutrition
products increased $358,540, or 73%, from $489,897 in the nine months ended
September 30, 1995 to $848,436 in the corresponding 1996 period. New clinical
products introduced in the 1996 period accounted for $60,153 of the increase,
with the balance from new customers and growth in orders from existing
customers. The remaining sales increase between periods, $882,821, was derived
from sales of adult nutrition supplements, introduced in October 1995. Included
in these sales is a single customer whose product purchase in the first quarter
of 1996 accounts for approximately 38% of adult nutrition supplement sales
year-to-date (approximately 19% of total sales in the nine-month period). This
customer placed no orders in the second and third quarters and had recently
informed the Company of its intent to discontinue purchasing adult nutrition
supplements from the Company and source the product from a competitor of the
Company. The customer subsequently agreed to consider a revised proposal from
the Company. Final resolution of the status of this customer is expected in
the fourth quarter. Third quarter sales of adult nutrition supplements
(without this customer) exceeded the average level of sales for the first two
quarters (which included sales to this customer). Management believes that
while the loss of this customer will have a negative impact on the sales
growth rate, part or all of the loss will be offset by the addition of new
customers.
8
<PAGE>
GROSS PROFIT. The overall increase in sales in the nine months ended
September 30, 1996, resulted in an increase in gross profit of $387,505, or
148%, to $648,770 compared with $261,265 in the same period in 1995. The
following table sets forth the gross profit and gross profit percentage, by
product line, for the nine months ended September 30, 1996 and 1995:
Nine months ended September 30,
--------------------------------
1996 1995
------------------------- -------------------------
Product Line Gross profit % of Sales Gross Profit % of Sales
------------ ------------------------- -------------------------
Critical Care Nutrition $ 482,325 56.8 % $261,265 53.3%
Adult Nutrition
Supplements 166,445 18.8 --product not available--
------------------------- -------------------------
Total $ 648,770 37.5% $261,265 53.3%
The improvement in the gross profit as a percentage of sales in 1996 within
the critical care nutrition product line is the result of product mix changes
between the periods and has remained relatively consistent throughout 1996. The
gross profit percentage of sales generated by the adult nutrition supplements
has been consistent throughout 1996.
SELLING GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses increased by $101,370 or 11.9% to $953,615 for the nine months ended
September 30, 1996 from $852,245 in the same period of 1995. The expense
increase relates to the overall staffing and related expenditures required to
support the growth in sales. The total 1996 period expenditure increase has
been offset by a decrease in legal costs of $149,208 compared to the same period
in 1995, when the Company was involved in two lawsuits.
RESEARCH AND DEVELOPMENT. Research and development costs increased 105% to
$147,978 for the nine months ended September 30, 1996 when compared to the
$72,105 incurred in the nine months ended September 30, 1995. The increase is
attributable to higher costs associated with new products under development,
particularly costs related to development of an infant formula product.
LIQUIDITY AND CAPITAL RESOURCES
Since 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 totaling $100,000. These
loans were repaid on July 22, 1996 in connection with the Company's relocation
to Minneapolis, Minnesota. As a result of the above described results of
operations and activities of the Company, the Company incurred a net decrease in
cash of $614,774 in the nine months ended September 30, 1996. Cash balances as
of September 30, 1996 totaled $512,473.
On September 26, 1996, the Company's registration statement for its initial
public offering was declared effective by the Securities and Exchange
Commission. The Company sold
9
<PAGE>
pursuant to this registration statement, in a transaction that closed on October
1, 1996, 1,437,500 shares of the Company's Common Stock at $3.50 per share,
including an overallotment of 187,500 shares. Net proceeds to the Company,
after deducting all offering costs, totaled $4.24 million.
The Company expects that the existing cash balances, along with the
proceeds from the initial public offering will be sufficient to fund operations
of the Company through 1997. However, 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.
Inflation has not been a significant factor in the Company's operations.
10
<PAGE>
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At a special meeting held on August 19, 1996, the shareholders of the
Company approved (a) an amendment to the Company's Articles of Incorporation
increasing the number of shares of authorized capital stock from 10,000,000 to
25,000,000 shares, 5,000,000 of which were undesignated preferred stock (shares
voted: For - 2,404,118; Against - 7,500; Abstain - 18,704); (b) an increase in
the number of shares available for issuance under the Company's 1995 Long-Term
Incentive and Stock Option Plan from 500,000 to 800,000 (shares voted: For -
2,351,118; Against - 60,500; Abstain - 18,704) and (c) the adoption of the
Nutrition Medical, Inc. 1996 Non-Employee Director Stock Option Plan, reserving
under this plan 100,000 shares of the Company's common stock for issuance to
directors of the Company who are not also employees (shares voted: For -
2,293,218; Against - 118,400; Abstain - 18,704).
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) The following exhibits are included with this quarterly report on Form
10-QSB as required by Item 601 of Regulation S-B.
Exhibit
Number Description
------- -----------
3.1 Second Restated Articles of Incorporation of Nutrition
Medical, Inc.
3.2 Second Restated Bylaws of Nutrition Medical, Inc.
11 Calculation of loss per share
27 Financial data schedule
99.1 Cautionary Statement
b) Reports on Form 8-K - There were no reports on Form 8-K filed during
the quarter ended September 30, 1996.
11
<PAGE>
SIGNATURE
In accordance with the requirements of the Securities Exchange Act of 1934,
the registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
NUTRITION MEDICAL, INC.
Dated: November 11, 1996 By:/s/ Richard J. Hegstrand
-------------------------
for the Registrant, and as
Chief Financial Officer
12
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
------- -----------
3.1 Second Restated Articles of Incorporation of Nutrition
Medical, Inc.
3.2 Second Restated Bylaws of Nutrition Medical, Inc.
11 Calculation of loss per share
27 Financial data schedule
99.1 Cautionary Statement
13
<PAGE>
EXHIBIT 3.1
SECOND RESTATED
ARTICLES OF INCORPORATION
OF
NUTRITION MEDICAL, INC.
Under and pursuant to the Minnesota Business Corporation Act, the
board of directors and shareholders of Nutrition Medical, Inc., have resolved to
amend the retated articles of incorporation of the corporation, which are
restated as follows:
ARTICLE 1. NAME
The name of the corporation is Nutrition Medical, Inc.
ARTICLE 2. REGISTERED OFFICE AND REGISTERED AGENT
The address of the registered office of the corporation is 308 12th
Street South, Buffalo, MN 55313.
ARTICLE 3. AUTHORIZED SHARES
The aggregate number of authorized shares of the corporation is
25,000,000, par value of $.01 per share, of which 5,000,000 are undesignated
preferred stock. The remaining shares shall be divisible into classes and
series, have the designations, voting rights, and other rights and preferences,
and be subject to the restrictions, that the board of directors may from time to
time establish, fix, and determine, consistent with these articles of
incorporation. Unless otherwise designated by the board of directors, all
issued shares shall be deemed common stock with equal rights and preferences.
ARTICLE 4. NO CUMULATIVE VOTING
There shall be no cumulative voting by the shareholders of the
corporation.
ARTICLE 5. NO PREEMPTIVE RIGHTS
The shareholders of the corporation shall not have any preemptive
rights to subscribe for or acquire securities or rights to purchase securities
of any class, kind, or series of the corporation.
<PAGE>
ARTICLE 6. ISSUANCE OF SHARES TO
HOLDERS OF ANOTHER CLASS OR SERIES
Shares of any class or series of the corporation, including shares of
any class or series which are then outstanding, may be issued to the holders of
shares of another class or series of the corporation, whether to effect a share
dividend or split, including a reserve share split, or otherwise, without
authorization, approval or vote of the holders of shares of any class or series
of the corporation.
ARTICLE 7. WRITTEN ACTION BY DIRECTORS
An action required or permitted to be taken at a meeting of the board
of directors of the corporation may be taken by a written action signed, or
counterparts of a written action signed in the aggregate, by all of the
directors unless the action need not be approved by the shareholders of the
corporation, in which case the action may be taken by a written action signed,
or counterparts of a written action signed in the aggregate, by the number of
directors that would be required to take the same action at a meeting of the
board of directors of the corporation at which all of the directors were
present.
ARTICLE 8. DIRECTOR LIABILITY
A director of this corporation shall not be personally liable to the
corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except for liability (i) for any breach of the director's
duty of loyalty to the corporation or its stockholders; (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law; (iii) under sections 302A.559 or 80A.23 of the Minnesota
Statutes; (iv) for any transaction from which the director derived an improper
personal benefit; or (v) for any act or omission occurring prior to the date
when this article 8 became effective.
If the Minnesota Business Corporation Act is hereafter amended to
authorized any further limitation of the liability of a director, then the
liability of a director of the corporation shall be eliminated or limited to the
fullest extent permitted by the Minnesota Business Corporation Act, as amended.
Any repeal or modification of the foregoing provisions of this
article 8 by the stockholders of the corporation shall not adversely affect any
right or protection of a director of the corporation existing at the time of
such repeal or modification.
-2-
<PAGE>
SECOND
RESTATED
BYLAWS
OF
NUTRITION MEDICAL, INC.
Effective October 1, 1996
<PAGE>
TABLE OF CONTENTS
ARTICLE 1.
OFFICES, CORPORATE SEAL . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Section 1.01. Registered Office . . . . . . . . . . . . . . . . . . . 1
Section 1.02. Other Offices . . . . . . . . . . . . . . . . . . . . . 1
Section 1.03. Corporate Seal . . . . . . . . . . . . . . . . . . . . 1
ARTICLE 2.
MEETINGS OF SHAREHOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Section 2.01. Place and Time of Meetings . . . . . . . . . . . . . . 1
Section 2.02. Regular Meetings. . . . . . . . . . . . . . . . . . . . 1
Section 2.03. Special Meetings . . . . . . . . . . . . . . . . . . . 2
Section 2.04. Quorum, Adjourned Meetings . . . . . . . . . . . . . . 2
Section 2.05. Voting . . . . . . . . . . . . . . . . . . . . . . . . 3
Section 2.06. Record Date . . . . . . . . . . . . . . . . . . . . . . 3
Section 2.07. Notice of Meetings . . . . . . . . . . . . . . . . . . 3
Section 2.08. Waiver of Notice . . . . . . . . . . . . . . . . . . . 4
Section 2.09. Written Action . . . . . . . . . . . . . . . . . . . . 4
ARTICLE 3.
DIRECTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Section 3.01. General Powers . . . . . . . . . . . . . . . . . . . . 4
Section 3.02. Number, Qualification and Term of Office . . . . . . . 4
Section 3.03. Board Meetings . . . . . . . . . . . . . . . . . . . . 4
Section 3.04. Calling Meetings; Notice . . . . . . . . . . . . . . . 4
Section 3.05. Waiver of Notice . . . . . . . . . . . . . . . . . . . 4
Section 3.06. Quorum . . . . . . . . . . . . . . . . . . . . . . . . 5
Section 3.07. Absent Directors . . . . . . . . . . . . . . . . . . . 5
Section 3.08. Conference Communications . . . . . . . . . . . . . . . 5
Section 3.09. Vacancies; Newly Created Directorships . . . . . . . . 5
Section 3.10. Removal . . . . . . . . . . . . . . . . . . . . . . . . 5
Section 3.11. Committees . . . . . . . . . . . . . . . . . . . . . . 6
Section 3.12. Written Action . . . . . . . . . . . . . . . . . . . . 6
Section 3.13. Compensation . . . . . . . . . . . . . . . . . . . . . 6
ARTICLE 4.
OFFICERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Section 4.01. Number . . . . . . . . . . . . . . . . . . . . . . . . 6
Section 4.02. Election, Term of Office and Qualifications . . . . . . 7
Section 4.03. Removal and Vacancies . . . . . . . . . . . . . . . . . 7
Section 4.04. Chairman of the Board . . . . . . . . . . . . . . . . . 7
Section 4.05. President . . . . . . . . . . . . . . . . . . . . . . . 7
Section 4.06. Vice President . . . . . . . . . . . . . . . . . . . . 7
-i-
<PAGE>
Section 4.07. Secretary . . . . . . . . . . . . . . . . . . . . . . . 8
Section 4.08. Treasurer . . . . . . . . . . . . . . . . . . . . . . . 8
Section 4.09. Compensation . . . . . . . . . . . . . . . . . . . . . 8
ARTICLE 5.
SHARES AND THEIR TRANSFER . . . . . . . . . . . . . . . . . . . . . . . . . 8
Section 5.01. Certificates for Shares . . . . . . . . . . . . . . . . 8
Section 5.02. Issuance of Shares . . . . . . . . . . . . . . . . . . 8
Section 5.03. Transfer of Shares . . . . . . . . . . . . . . . . . . 9
Section 5.04. Loss of Certificates . . . . . . . . . . . . . . . . . 9
ARTICLE 6.
DISTRIBUTIONS, RECORD DATE . . . . . . . . . . . . . . . . . . . . . . . . . 9
Section 6.01. Distributions . . . . . . . . . . . . . . . . . . . . . 9
Section 6.02. Record Date . . . . . . . . . . . . . . . . . . . . . . 9
ARTICLE 7.
BOOKS AND RECORDS, FISCAL YEAR . . . . . . . . . . . . . . . . . . . . . . . 10
Section 7.01. Share Register . . . . . . . . . . . . . . . . . . . . 10
Section 7.02. Other Books and Records . . . . . . . . . . . . . . . . 10
Section 7.03. Fiscal Year . . . . . . . . . . . . . . . . . . . . . . 11
ARTICLE 8.
LOANS, GUARANTEES, SURETYSHIP . . . . . . . . . . . . . . . . . . . . . . . 11
Section 8.01 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
ARTICLE 9.
INDEMNIFICATION OF CERTAIN PERSONS . . . . . . . . . . . . . . . . . . . . . 12
Section 9.01 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
ARTICLE 10.
AMENDMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Section 10.01 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
ARTICLE 11.
SECURITIES OF OTHER CORPORATIONS . . . . . . . . . . . . . . . . . . . . . . 12
Section 11.01. Voting Securities Held by the Corporation . . . . . . 12
Section 11.02. Purchase and Sale of Securities . . . . . . . . . . . 13
-ii-
<PAGE>
ARTICLE 1.
OFFICES, CORPORATE SEAL
Section 1.01. REGISTERED OFFICE. The registered office of the
corporation in Minnesota shall be that set forth in the articles of
incorporation or in the most recent amendment of the articles of incorporation
or resolution of the directors filed with the secretary of state of Minnesota
changing the registered office.
Section 1.02. OTHER OFFICES. The corporation may have such other
offices, within or without the state of Minnesota, as the directors shall, from
time to time, determine.
Section 1.03. CORPORATE SEAL. The corporation shall have no seal.
ARTICLE 2.
MEETINGS OF SHAREHOLDERS
Section 2.01. PLACE AND TIME OF MEETINGS. Except as provided
otherwise by the Minnesota Business Corporation Act, meetings of the
shareholders may be held at any place, within or without the state of Minnesota,
as may from time to time be designated by the directors and, in the absence of
such designation, shall be held at the registered office of the corporation in
the state of Minnesota. The directors shall designate the time of day for each
meeting and, in the absence of such designation, every meeting of shareholders
shall be held at ten o'clock a.m.
Section 2.02. REGULAR MEETINGS.
(a) A regular meeting of the shareholders shall be held on such date
as the board of directors shall by resolution establish.
(b) At a regular meeting the shareholders, voting as provided in the
articles of incorporation and these bylaws, shall designate the number of
directors to constitute the board of directors (subject to the authority of the
board of directors thereafter to increase or decrease the number of directors as
permitted by law), shall elect qualified successors for directors who serve for
an indefinite term or whose terms have expired or are due to expire within six
months after the date of the meeting and shall transact such other business as
may properly come before them.
(c) To be properly brought before a regular meeting of shareholders,
business must be (1) specified in the notice of the meeting, (2) directed to be
brought before the meeting by the board of directors or (3) proposed at the
meeting by a shareholder who (i) was a shareholder of record at the time of
giving of notice provided for in these bylaws, (ii) is entitled to vote at the
meeting and (iii) gives
-1-
<PAGE>
prior notice of the matter, which must otherwise be a proper matter for
shareholder action, in the manner herein provided. For business to be properly
brought before a regular meeting by a shareholder, the shareholder must give
written notice to the Secretary and Chief Executive Officer of the corporation
so as to be received at the principal executive offices of the corporation at
least 60 days before the date that is one year after the prior year's regular
meeting. Such notice shall set forth (1) the name and record address of the
shareholder and of the beneficial owner, if any, on whose behalf the proposal
will be made, (2) the class and number of shares of the corporation owned by the
shareholder and beneficially owned by the beneficial owner, if any, on whose
behalf the proposal will be made, (3) a brief description of the business
desired to be brought before the regular meeting and the reasons for conducting
such business, and (4) any material interest in such business of the shareholder
and the beneficial owner, if any, on whose behalf the proposal is made. The
chairman of the meeting may refuse to acknowledge any proposed business not made
in compliance with the foregoing procedure.
Section 2.03. SPECIAL MEETINGS. Special meetings of the shareholders
may be held at any time and for any purpose and may be called by the chief
executive officer, the chief financial officer, two or more directors or by a
shareholder or shareholders holding 10% or more of the voting power of all
shares entitled to vote, except that a special meeting for the purpose of
considering any action to directly or indirectly facilitate or affect a business
combination, including any action to change or otherwise affect the composition
of the board of directors for that purpose, must be called by 25% or more of the
voting power of all shares entitled to vote. A shareholder or shareholders
holding the requisite percentage of the voting power of all shares entitled to
vote may demand a special meeting of the shareholders by written notice of
demand given to the chief executive officer or chief financial officer of the
corporation and containing the purposes of the meeting. Within 30 days after
receipt of demand by one of those officers, the board of directors shall cause a
special meeting of shareholders to be called and held on notice no later than 90
days after receipt of the demand, at the expense of the corporation. Special
meetings shall be held on the date and at the time and place fixed by the chief
executive officer or the board of directors, except that a special meeting
called by or at demand of a shareholder or shareholders shall be held in the
county where the principal executive office is located. The business transacted
at a special meeting shall be limited to the purposes as stated in the notice of
the meeting.
Section 2.04. QUORUM, ADJOURNED MEETINGS. The holders of a majority
of the shares entitled to vote shall constitute a quorum for the transaction of
business at any regular or special meeting. Whether or not a quorum is present
at a meeting, the meeting may be adjourned from time to time without notice
other than announcement at the time of adjournment of the date, time and place
of the adjourned meeting. At adjourned meetings at which a quorum is present,
any business may be transacted which might have been transacted at the meeting
as
-2-
<PAGE>
originally noticed. If a quorum is present when a meeting is convened, the
shareholders present may continue to transact business until adjournment
notwithstanding the withdrawal of enough shareholders originally present to
leave less than a quorum.
Section 2.05. VOTING. At each meeting of the shareholders every
shareholder having the right to vote shall be entitled to vote either in person
or by proxy. Each shareholder, unless Minnesota statutes or the articles of
incorporation provide otherwise, shall have one vote for each share having
voting power registered in such shareholder's name on the books of the
corporation. Jointly owned shares may be voted by any joint owner unless the
corporation receives written notice from any one of them denying the authority
of that person to vote those shares. Upon the demand of any shareholder, the
vote upon any question before the meeting shall be by ballot. All questions
shall be decided by a majority vote of the number of shares entitled to vote and
represented at the meeting at the time of the vote except if otherwise required
by statute, the articles of incorporation, or these bylaws.
Section 2.06. RECORD DATE. The board of directors may fix a date,
not exceeding 60 days preceding the date of any meeting of shareholders, as a
record date for the determination of the shareholders entitled to notice of, and
to vote at, such meeting, notwithstanding any transfer of shares on the books of
the corporation after any record date so fixed. If the board of directors fails
to fix a record date for determination of the shareholders entitled to notice
of, and to vote at, any meeting of shareholders, the record date shall be the
20th day preceding the date of such meeting.
Section 2.07. NOTICE OF MEETINGS. There shall be mailed to each
shareholder, shown by the books of the corporation to be a holder of record of
voting shares pursuant to section 2.06, at his address as shown by the books of
the corporation, a notice setting out the date, time and place of each regular
meeting and each special meeting at least 10 days before the date of the
meeting, except (unless otherwise provided in section 2.04 hereof) where the
meeting is an adjourned meeting and the date, time and place of the meeting were
announced at the time of adjournment, which notice shall be mailed at least five
days prior thereto (unless otherwise provided in section 2.04 hereof); except
that notice of a meeting at which a plan of merger or exchange is to be
considered shall be mailed to all shareholders of record, whether entitled to
vote or not, at least 14 days prior thereto. Every notice of any special
meeting called pursuant to section 2.03 hereof shall state the purpose or
purposes for which the meeting has been called, and the business transacted at
all special meetings shall be confined to the purposes stated in the notice.
The written notice of any meeting at which a plan of merger or exchange is to be
considered shall so state such as a purpose of the meeting. A copy or short
description of the plan of merger or exchange shall be included in or enclosed
with such notice.
-3-
<PAGE>
Section 2.08. WAIVER OF NOTICE. Notice of any regular or special
meeting may be waived by any shareholder either before, at or after such meeting
orally or in writing signed by such shareholder or a representative entitled to
vote the shares of such shareholder. A shareholder, by his attendance at any
meeting of shareholders, shall be deemed to have waived notice of such meeting,
except where the shareholder objects at the beginning of the meeting to the
transaction of business because the meeting is not lawfully called or convened,
or objects before a vote on an item of business because the item may not
lawfully be considered at that meeting and does not participate in the
consideration of the item at that meeting.
Section 2.09. WRITTEN ACTION. Any action which might be taken at a
meeting of the shareholders may be taken without a meeting if done in writing
and signed by all of the shareholders entitled to vote on that action.
ARTICLE 3.
DIRECTORS
Section 3.01. GENERAL POWERS. The business and affairs of the
corporation shall be managed by or under the authority of the board of
directors, except as otherwise permitted by statute.
Section 3.02. NUMBER, QUALIFICATION AND TERM OF OFFICE. The number
of directors of the Company shall be at least three (3) but no more than five
(5). Changes to the number of directors outside of this range shall be by
resolution of the shareholders (subject to the authority of the board of
directors to increase or decrease the number of directors as permitted by law).
Section 3.03. BOARD MEETINGS. Meetings of the board of directors may
be held from time to time at such time and place within or without the state of
Minnesota as may be designated in the notice of such meeting.
Section 3.04. CALLING MEETINGS; NOTICE. Meetings of the board of
directors may be called by the chairman of the board by giving at least 24
hours' notice, or by any other director by giving at least five days' notice, of
the date, time and place thereof to each director by mail, telephone, telegram
or in person. If the day or date, time and place of a meeting of the board of
directors has been announced at a previous meeting of the board, no notice is
required. Notice of an adjourned meeting of the board of directors need not be
given other than by announcement at the meeting at which adjournment is taken.
Section 3.05. WAIVER OF NOTICE. Notice of any meeting of the board
of directors may be waived by any director either before, at, or after such
meeting orally or in a writing signed by such director. A director, by his
attendance at any meeting
-4-
<PAGE>
of the board of directors, shall be deemed to have waived notice of such
meeting, except where the director objects at the beginning of the meeting to
the transaction of business because the meeting is not lawfully called or
convened and does not participate thereafter in the meeting.
Section 3.06. QUORUM. A majority of the directors holding office
immediately prior to a meeting of the board of directors shall constitute a
quorum for the transaction of business at such meeting.
Section 3.07. ABSENT DIRECTORS. A director may give advance written
consent or opposition to a proposal to be acted on at a meeting of the board of
directors. If such director is not present at the meeting, consent or
opposition to a proposal does not constitute presence for purposes of
determining the existence of a quorum, but consent or opposition shall be
counted as the vote of a director present at the meeting in favor of or against
the proposal and shall be entered in the minutes or other record of action at
the meeting, if the proposal acted on at the meeting is substantially the same
or has substantially the same effect as the proposal to which the director has
consented or objected.
Section 3.08. CONFERENCE COMMUNICATIONS. Any or all directors may
participate in any meeting of the board of directors, or of any duly constituted
committee thereof, by any means of communication through which the directors may
simultaneously hear each other during such meeting. For the purposes of
establishing a quorum and taking any action at the meeting, such directors
participating pursuant to this section 3.08 shall be deemed present in person at
the meeting; and the place of the meeting shall be the place of origination of
the conference telephone conversation or other comparable communication
technique.
Section 3.09. VACANCIES; NEWLY CREATED DIRECTORSHIPS. Vacancies on
the board of directors of this corporation occurring by reason of death,
resignation, removal or disqualification shall be filled for the unexpired term
by a majority of the remaining directors of the board although less than a
quorum; newly created directorships resulting from an increase in the authorized
number of directors by action of the board of directors as permitted by section
3.02 may be filled by a majority vote of the directors serving at the time of
such increase; and each director elected pursuant to this section 3.09 shall be
a director until such director's successor is elected by the shareholders at
their next regular or special meeting.
Section 3.10. REMOVAL. Any or all of the directors may be removed
from office at any time, with or without cause, by the affirmative vote of the
shareholders holding a majority of the shares entitled to vote at an election of
directors except, as otherwise provided by the Minnesota Business Corporation
Act, section 302A.223, as amended, when the shareholders have the right to
cumulate their votes. A director named by the board of directors to fill a
vacancy may be
-5-
<PAGE>
removed from office at any time, with or without cause, by the affirmative vote
of the remaining directors if the shareholders have not elected directors in the
interim between the time of the appointment to fill such vacancy and the time of
the removal. In the event that the entire board or any one or more directors be
so removed, new directors may be elected at the same meeting.
Section 3.11. COMMITTEES. A resolution approved by the affirmative
vote of a majority of the board of directors may establish committees having the
authority of the board in the management of the business of the corporation to
the extent provided in the resolution. A committee shall consist of one or more
persons, who need not be directors, appointed by affirmative vote of a majority
of the directors present. Committees are subject to the direction and control
of, and vacancies in the membership thereof shall be filled by, the board of
directors.
A majority of the members of the committee present at a meeting is a
quorum for the transaction of business, unless a larger or smaller proportion or
number is provided in a resolution approved by the affirmative vote of a
majority of the directors present.
Section 3.12. WRITTEN ACTION. Any action which might be taken at a
meeting of the board of directors, or any duly constituted committee thereof,
may be taken without a meeting if done in writing and signed by all of the
directors or committee members, unless the articles of incorporation provide for
written action by fewer than all of the directors and the action need not be
approved by the shareholders.
Section 3.13. COMPENSATION. Directors who are not salaried officers
of this corporation shall receive such fixed sum per meeting attended or such
fixed annual sum as shall be determined, from time to time, by resolution of the
board of directors. The board of directors may, by resolution, provide that all
directors shall receive their expenses, if any, of attendance at meetings of the
board of directors or any committee thereof. Nothing herein contained shall be
construed to preclude any director from serving this corporation in any other
capacity and receiving proper compensation therefor.
ARTICLE 4.
OFFICERS
Section 4.01. NUMBER. The officers of the corporation shall consist
of a chairman of the board (if one is elected by the board), the president, one
or more vice presidents (if desired by the board), a treasurer, a secretary (if
one is elected by the board) and such other officers and agents as may, from
time to time, be elected by the board of directors. Any number of offices may
be held by the same person.
-6-
<PAGE>
Section 4.02. ELECTION, TERM OF OFFICE AND QUALIFICATIONS. The board
of directors shall elect or appoint, by resolution approved by the affirmative
vote of a majority of the directors present, from within or without their
number, the president, treasurer and such other officers as may be deemed
advisable, each of whom shall have the powers, rights, duties, responsibilities,
and terms of office provided for in these bylaws or a resolution of the board of
directors not inconsistent therewith. The president and all other officers who
may be directors shall continue to hold office until the election and
qualification of their successors, notwithstanding an earlier termination of
their directorship.
Section 4.03. REMOVAL AND VACANCIES. Any officer may be removed from
his office by the board of directors at any time, with or without cause. Such
removal, however, shall be without prejudice to the contract rights of the
person so removed. If there be a vacancy in an office of the corporation by
reason of death, resignation or otherwise, such vacancy shall be filled for the
unexpired term by the board of directors.
Section 4.04. CHAIRMAN OF THE BOARD. The chairman of the board, if
one is elected, shall preside at all meetings of the shareholders and directors
and shall have such other duties as may be prescribed, from time to time, by the
board of directors.
Section 4.05. PRESIDENT. The president shall be the chief executive
officer and shall have general active management of the business of the
corporation. In the absence of the chairman of the board, he shall preside at
all meetings of the shareholders and directors. The president shall see that
all orders and resolutions of the board of directors are carried into effect.
The president shall execute and deliver, in the name of the corporation, any
deeds, mortgages, bonds, contracts or other instruments pertaining to the
business of the corporation unless the authority to execute and deliver is
required by law to be exercised by another person or is expressly delegated by
the articles or bylaws or by the board of directors to some other officer or
agent of the corporation. The president shall maintain records of and, whenever
necessary, certify all proceedings of the board of directors and the
shareholders, and in general, shall perform all duties usually incident to the
office of the president. The president shall have such other duties as may,
from time to time, be prescribed by the board of directors.
Section 4.06. VICE PRESIDENT. Each vice president, if one or more is
elected, shall have such powers and shall perform such duties as prescribed by
the board of directors or by the president. In the event of the absence or
disability of the president, the vice president(s) shall succeed to the
president's power and duties in the order designated by the board of directors.
-7-
<PAGE>
Section 4.07. SECRETARY. The secretary, if one is elected, shall be
secretary of and shall attend all meetings of the shareholders and board of
directors and shall record all proceedings of such meetings in the minute book
of the corporation. The secretary shall give proper notice of meetings of
shareholders and directors. The secretary shall perform such other duties as
may, from time to time, be prescribed by the board of directors or by the
president.
Section 4.08. TREASURER. The treasurer shall be the chief financial
officer and shall keep accurate financial records for the corporation. The
treasurer shall deposit all moneys, drafts and checks in the name of, and to the
credit of, the corporation in such banks and depositories as the board of
directors shall, from time to time, designate. The treasurer shall have power
to endorse, for deposit, all notes, checks and drafts received by the
corporation. The treasurer shall disburse the funds of the corporation, as
ordered by the board of directors, making proper vouchers therefor. The
treasurer shall render to the president and the directors, whenever requested,
an account of all his transactions entered into as treasurer and of the
financial condition of the corporation, and shall perform such other duties as
may, from time to time, be prescribed by the board of directors or by the
president.
Section 4.09. COMPENSATION. The officers of the corporation shall
receive such compensation for their services as may be determined, from time to
time, by resolution of the board of directors.
ARTICLE 5.
SHARES AND THEIR TRANSFER
Section 5.01. CERTIFICATES FOR SHARES. All shares of the corporation
shall be certificated shares. Every owner of shares of the corporation shall be
entitled to a certificate, to be in such form as shall be prescribed by the
board of directors, certifying the number of shares of the corporation owned by
such shareholder. The certificates for such shares shall be numbered in the
order in which they shall be issued and shall be signed, in the name of the
corporation, by the president and by the secretary or an assistant secretary, or
by such officers as the board of directors may designate. If the certificate is
signed by a transfer agent or registrar, such signatures of the corporate
officers may be by facsimile if authorized by the board of directors. Every
certificate surrendered to the corporation for exchange or transfer shall be
canceled, and no new certificate or certificates shall be issued in exchange for
any existing certificate until such existing certificate shall have been so
canceled, except in cases provided for in section 5.04.
Section 5.02. ISSUANCE OF SHARES. The board of directors is
authorized to cause to be issued shares of the corporation up to the full amount
authorized by the articles of incorporation in such amounts as may be determined
by the board of directors and as may be permitted by law. Shares may be issued
for any
-8-
<PAGE>
consideration, including, without limitation, in consideration of cash or other
property, tangible or intangible, received or to be received by the corporation
under a written agreement, of services rendered or to be rendered to the
corporation under a written agreement, or of an amount transferred from surplus
to stated capital upon a share dividend. At the time of approval of the
issuance of shares, the board of directors shall state, by resolution, its
determination of the fair value to the corporation in monetary terms of any
consideration other than cash for which shares are to be issued.
Section 5.03. TRANSFER OF SHARES. Transfer of shares on the books of
the corporation may be authorized only by the shareholder named in the
certificate, or the shareholder's legal representative, or the shareholder's
duly authorized attorney-in-fact, and upon surrender of the certificate or the
certificates for such shares. The corporation may treat as the absolute owner
of shares of the corporation, the person or persons in whose name shares are
registered on the books of the corporation.
Section 5.04. LOSS OF CERTIFICATES. Except as otherwise provided by
the Minnesota Business Corporation Act, section 302A.419, any shareholder
claiming a certificate for shares to be lost, stolen, or destroyed shall make an
affidavit of that fact in such form as the board of directors shall require and
shall, if the board of directors so requires, give the corporation a bond of
indemnity in form, in an amount, and with one or more sureties satisfactory to
the board of directors, to indemnify the corporation against any claim which may
be made against it on account of the reissue of such certificate, whereupon a
new certificate may be issued in the same tenor and for the same number of
shares as the one alleged to have been lost, stolen or destroyed.
ARTICLE 6.
DISTRIBUTIONS, RECORD DATE
Section 6.01. DISTRIBUTIONS. Subject to the provisions of the
articles of incorporation, of these bylaws, and of law, the board of directors
may authorize and cause the corporation to make distributions whenever, and in
such amounts or forms as, in its opinion, are deemed advisable.
Section 6.02. RECORD DATE. Subject to any provisions of the articles
of incorporation, the board of directors may fix a date not exceeding 120 days
preceding the date fixed for the payment of any distribution as the record date
for the determination of the shareholders entitled to receive payment of the
distribution and, in such case, only shareholders of record on the date so fixed
shall be entitled to receive payment of such distribution notwithstanding any
transfer of shares on the books of the corporation after the record date.
-9-
<PAGE>
ARTICLE 7.
BOOKS AND RECORDS, FISCAL YEAR
Section 7.01. SHARE REGISTER. The board of directors of the
corporation shall cause to be kept at its principal executive office, or at
another place or places within the United States determined by the board:
(1) a share register not more than one year old, containing the names
and addresses of the shareholders and the number and classes of
shares held by each shareholder; and
(2) a record of the dates on which certificates or transaction
statements representing shares were issued.
Section 7.02. OTHER BOOKS AND RECORDS. The board of directors shall
cause to be kept at its principal executive office, or, if its principal
executive office is not in Minnesota, shall make available at its Minnesota
registered office within ten days after receipt by an officer of the corporation
of a written demand for them made by a shareholder or other person authorized by
the Minnesota Business Corporation Act, section 302A.461, originals or copies
of:
(1) records of all proceedings of shareholders for the last three
years;
(2) records of all proceedings of the board for the last three years;
(3) its articles and all amendments currently in effect;
(4) its bylaws and all amendments currently in effect;
(5) financial statements required by the Minnesota Business
Corporation Act, section 302A.463 and the financial statements
for the most recent interim period prepared in the course of the
operation of the corporation for distribution to the shareholders
or to a governmental agency as a matter of public record;
(6) reports made to shareholders generally within the last three
years;
(7) a statement of the names and usual business addresses of its
directors and principal officers; and
(8) any voting trust or shareholder control agreements of which the
corporation is aware; and
-10-
<PAGE>
(9) any agreements, contracts or other arrangements or portions
thereof that are incorporated by reference in the articles of
incorporation or board resolutions that establish the rights or
preferences of a class or series of shares of the corporation.
Section 7.03. FISCAL YEAR. The fiscal year of the corporation shall
be determined by the board of directors.
ARTICLE 8.
LOANS, GUARANTEES, SURETYSHIP
Section 8.01. The corporation may lend money to, guarantee an
obligation of, become a surety for, or otherwise financially assist a person if
the transaction, or a class of transactions to which the transaction belongs, is
approved by the affirmative vote of a majority of the directors present, and:
(1) is in the usual and regular course of business of the
corporation;
(2) is with, or for the benefit of, a related organization, an
organization in which the corporation has a financial interest,
an organization with which the corporation has a business
relationship, or an organization to which the corporation has the
power to make donations, any of which relationships constitute
consideration sufficient to make the loan/guarantee, suretyship,
or other financial assistance so approved enforceable against the
corporation;
(3) is with, or for the benefit of, an officer or other employee of
the corporation or a subsidiary, including an officer or employee
who is a director of the corporation or a subsidiary, and may
reasonably be expected, in the judgment of the board, to benefit
the corporation; or
(4) whether or not any separate consideration has been paid or
promised to the corporation, has been approved by (a) the holders
of two-thirds of the voting power of the shares entitled to vote
which are owned by persons other than the interested person or
persons, or (b) the unanimous affirmative vote of the holders of
all outstanding shares whether or not entitled to vote.
Such loan, guarantee, surety contract or other financial assistance may be with
or without interest, and may be unsecured, or may be secured in the manner as a
majority of the directors present approve, including, without limitation, a
pledge of or other security interest in shares of the corporation. Nothing in
this section shall
-11-
<PAGE>
be deemed to deny, limit or restrict the powers of guaranty, surety or warranty
of the corporation at common law or under a statute of the state of Minnesota.
ARTICLE 9.
INDEMNIFICATION OF CERTAIN PERSONS
Section 9.01. The corporation shall indemnify all officers and directors
of the corporation, for such expenses and liabilities, in such manner, under
such circumstances and to such extent as permitted by section 302A.521 of the
Minnesota Business Corporation Act, as now enacted or hereafter amended. Unless
otherwise approved by the board of directors, the corporation shall not
indemnify any employee of the corporation who is not otherwise entitled to
indemnification pursuant to this section 9.01. The Board of Directors may
authorize the purchase and maintenance of insurance and/or the execution of
individual agreements for the purpose of such indemnification, and the
corporation shall advance all reasonable costs and expenses (including
attorneys' fees) incurred in defending any action, suit or proceeding to all
persons entitled to indemnification under this section 9.01, all in the manner,
under the circumstances and to the extent permitted by Section 302A.521 of the
Minnesota Business Corporation Act, as now enacted or hereafter amended.
ARTICLE 10.
AMENDMENTS
Section 10.01. These bylaws may be amended or altered by a vote of
the majority of the whole board of directors at any meeting. Such authority of
the board of directors is subject to the power of the shareholders, exercisable
in the manner provided in the Minnesota Business Corporation Act, section
302A.181, subd. 3, to adopt, amend, or repeal bylaws adopted, amended, or
repealed by the board of directors. After the adoption of the initial bylaws,
the board of directors shall not adopt, amend or repeal any bylaws fixing a
quorum for meetings of shareholders, prescribing procedures for removing
directors or filling vacancies in the board of directors, or fixing the number
of directors or their classifications, qualifications, or terms of office,
except that the board of directors may adopt or amend any bylaw to increase
their number.
ARTICLE 11.
SECURITIES OF OTHER CORPORATIONS
Section 11.01. VOTING SECURITIES HELD BY THE CORPORATION. Unless
otherwise ordered by the board of directors, the president shall have full power
and authority on behalf of the corporation (a) to attend any meeting of security
holders of other corporations in which the corporation may hold securities and
to vote such securities on behalf of this corporation; (b) to execute any proxy
for such meeting on
-12-
<PAGE>
behalf of the corporation; or (c) to execute a written action in lieu of a
meeting of such other corporation on behalf of this corporation. At such
meeting, the president shall possess and may exercise any and all rights and
powers incident to the ownership of such securities that the corporation
possesses. The board of directors may, from time to time, grant such power and
authority to one or more other persons and may remove such power and authority
from the president or any other person or persons.
Section 11.02. PURCHASE AND SALE OF SECURITIES. Unless otherwise
ordered by the board of directors, the president shall have full power and
authority on behalf of the corporation to purchase, sell, transfer or encumber
any and all securities of any other corporation owned by the corporation, and
may execute and deliver such documents as may be necessary to effectuate such
purchase, sale, transfer or encumbrance. The board of directors may, from time
to time, confer like powers upon any other person or persons.
-13-
<PAGE>
EXHIBIT 11
COMPUTATION OF LOSS PER SHARE
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------- -------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
PRIMARY AND FULLY DILUTED:
Average shares outstanding 3,155,524 2,067,469 3,130,661 1,707,405
SAB No. 83 - for stock issued and options or
warrants granted at exercise prices less than
the initial public offering price during the 12
months preceding the initial public offering,
using the treasury method 1,115,019 1,115,019 1,115,019 1,115,019
---------- ---------- ---------- ----------
Total 4,270,543 3,182,488 4,245,680 2,822,424
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Net loss $ (175,779) $ (256,123) $ (429,194) $ (665,390)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Net loss per share $ (.04) $ (.08) $ (.10) $ (.24)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEETS OF NUTRITION MEDICAL, INC. AS OF SEPTEMBER 30, 1996 AND 1995, AND THE
RELATED STATEMENTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
AND 1995, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1995
<PERIOD-START> JAN-01-1996 JAN-01-1995
<PERIOD-END> SEP-30-1996 SEP-30-1995
<CASH> 512,473 1,455,535
<SECURITIES> 0 0
<RECEIVABLES> 332,069 89,105
<ALLOWANCES> 15,000 0
<INVENTORY> 325,773 142,023
<CURRENT-ASSETS> 1,450,552 1,694,302
<PP&E> 120,927 97,521
<DEPRECIATION> 42,171 24,034
<TOTAL-ASSETS> 1,529,308 1,767,789
<CURRENT-LIABILITIES> 737,304 291,858
<BONDS> 0 100,000
0 0
0 0
<COMMON> 31,555 31,055
<OTHER-SE> 760,449 1,344,876
<TOTAL-LIABILITY-AND-EQUITY> 1,529,308 1,767,789
<SALES> 1,731,257 489,897
<TOTAL-REVENUES> 1,731,257 489,897
<CGS> 1,082,487 228,632
<TOTAL-COSTS> 1,082,487 228,632
<OTHER-EXPENSES> 1,086,593 924,350
<LOSS-PROVISION> 15,000 0
<INTEREST-EXPENSE> 3,458 3,799
<INCOME-PRETAX> (429,194) (665,390)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (429,194) (665,390)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (429,194) (665,390)
<EPS-PRIMARY> (.10) (.24)
<EPS-DILUTED> (.10) (.24)
</TABLE>
<PAGE>
EXHIBIT 99.1
CAUTIONARY STATEMENT
Nutrition Medical, Inc. (the "Company"), or persons acting on behalf of
the Company, or outside reviewers retained by the Company making statements
on behalf of the Company, or underwriters, from time to time may make, in
writing or orally, "forward-looking statements" as defined under the Private
Securities Litigation Reform Act of 1996 (the "Act"). This Cautionary
Statement is for the purpose of qualifying for the "safe harbor" provisions
of the Act and is intended to be a readily available written document that
contains factors any one of which may cause actual results to differ from
those which might be projected, forecast, estimated or budgeted in such
forward-looking statement. The factors set forth below are in addition to
any other cautionary statements, written or oral, which may be made or
referred to in connection with any such forward-looking statement.
The following matters, among others, may have a material adverse effect on
the business, financial condition, liquidity, results of operations or
prospects, financial or otherwise, of the Company:
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 accumulated substantial losses to date. No assurance
can be given that the Company will 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
<PAGE>
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, and 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. The Company is 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 competitive products. The Company believes that these selective price
reductions resulted in indeterminable lost sales of the Company's competing
products, and that this competitor has begun to use this form of price
competition more frequently. This competitor may decide to consistently lower
its prices to the Company's level, and other competitors may adopt the same
strategy. The Company has also encountered price competition from other
suppliers of adult nutrition supplements. Because the Company's marketing
strategy is focused on the price advantage of its products, if a competitor
selling competitive 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.
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 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.
<PAGE>
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.
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.
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. There can
be no assurance that such retail orders will continue or that its future orders
will not significantly decline.
FUTURE CAPITAL REQUIREMENTS; NO ASSURANCE FUTURE CAPITAL WILL BE AVAILABLE
Although 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 debt financing, if available, may
<PAGE>
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.
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 September 30, 1999. 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.
<PAGE>
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 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.
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
labeling 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
<PAGE>
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 relabeling, 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
Directors, officers and principal shareholders of the Company own
beneficially approximately 30% of the outstanding Common Stock. As a result,
such shareholders may have the ability to effectively control the election of
the Company's entire 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.
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 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.
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. The Company has no outstanding
shares of preferred stock, and there are no current plans 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
<PAGE>
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.
